Banking in rural areas

Learning about financial institutions

The rural banking system was introduced in the early 1950s to serve the credit needs of the poor consumers and small producers, mostly farmers and fishermen. It was organized primarily to attain the goal of the national government - to improve the social and economic conditions of the rural areas. Through the rural banks, the government has channeled many of its various financial assistance programs to the countryside development.

In view of the importance of rural banking in rural and agricultural development, central government banks granted incentives to organizers of rural banks. Such incentives include tax exemptions and nominal interest rates. These incentives are intended to encourage the formation of more rural banks in the areas where credit facilities have been inadequate. It has been noted that with the absence of banks in these areas the poor consumers and small producers have been forced to patronize the unlicensed money lenders who are mostly usurers.

However, the perfromance of many rural banks in the past was not impressive. They failed to achieve viability because many farmers failed to pay their debts. In recent years, rural banks have entered the age of innovation in order to compete with the other financial institutions in their areas of operation. Several consolidations and mergers of rural banks have already taken place to fortify their resources and be able to attain economies of scale, such as better management, lower unit cost of operation, etc.

Nature of Rural Banking

Rural banking has been designed to supply the credit needs of the rural areas. It has been used as an instrument for rural development which is now a top priority in the national development objectives. Just like the big banks in the cities, rural banks have to undergo structural and economic changes to be more responsive to the needs of the ruralpoor and to the changing financial world.

Basically, a rural bank is a unit-type, community-oriented banking structure. To make it competitive in a rapidly changing financial system, mergers, consolidations, and affiliations through equity in investments appear to be the better options. Rural banks, subject to certain conditions, may now open banking offices, including branches, agencies, extension offices and even money shops. Moreover, rural banks may establish, correspondent banking relations with other financial institutions, thus increasing the scope of their financial services.

Functions of a Rural Bank

A rural bank may offer or perform any or all of the following services:

1) Grant loans and make investments in accordance with existing rules and regulations.

2) Accept savings and time deposits.

3) Sell domestic drafts.

4) Act as correspondent for other financial institutions.

5) Receive in custody funds, documents, and other valuable objects, and rent safety deposit boxes for the safeguarding of such objects.

6) Act as financial agent, buy and sell, by order of and for the account of its customers, shares, evidences of indebtedness and all types of securities.

7) Make collections and payments for the account of others and perform such other services for its customers as are not incompatible with banking business.