An Exercise In Redundancy

During his maiden Budget speech, P.Chidambaram, union finance minister, introduced the concept of private local area banks (PLABs) to the country. These banks would primarily perform the twin tasks of tapping and mobilising savings potential and improving the effectiveness of credit delivery in rural areas. Each of such banks will have a limited geographical area of operations restricted to two or three contiguous districts.

At present, we have branches of public sector banks, private banks, regional rural banks, co-operative banks (both scheduled and non-scheduled) and state land development banks functioning in rural areas. The introduction of the concept of PLABs is in a sense, a summary writing off of all these existing institutions, at least so far as their performance in the sphere of rural credit is concerned. What are the reasons which have led to the failure of these institutions and will these factors be addressed in the revised PLAB set-up?

The reasons why

The major reasons for failure of the existing institutions have been:

nFrequent changes in government policies affecting adversely the recovery efforts of the lending institutions - for example, the loan repayment waiver schemes announced for political reasons.

nAn increasing feeling among the rural borrowers that loans from these institutions need not be repaid.

Interference from local bureaucracy.

Most of the operational staff in these institutions are urban based who see their tenure at the rural centre as transitional, and