Brandon Lee
Local Area Banks (LABs) are non-scheduled banks introduced in 1996 as new private local banks with jurisdiction over 2 or 3 contiguous districts. They are governed by the provisions of the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, and other relevant statutes. They are registered as Public Limited Companies under the Companies Act 1956. Since they are non-scheduled banks, they cannot borrow funds from the Reserve Bank of India, unlike scheduled commercial banks. A Scheduled Commercial Bank (SCB), on the other hand, is a commercial bank included in the Second Schedule of the Reserve Bank of India Act, 1934, and enjoys principal facilities such as eligibility for debts/loans at the bank rate from the RBI and automatic acquisition of membership of the clearing house. This raises the question: are Local Area Banks considered Scheduled Commercial Banks?
| Characteristics | Values |
|---|---|
| Date of introduction | 1996 |
| Number of LABs in India | 4 |
| Type of bank | Non-scheduled bank |
| Governing body | Reserve Bank of India |
| Objective | Mobilise rural savings through local institutions |
| Area of operation | 2-3 geographically contiguous districts |
| Minimum paid-up capital | ₹50 million |
| Promoter's minimum contribution | ₹20 million |
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What You'll Learn
- Local Area Banks (LABs) are non-scheduled banks
- LABs were introduced in 1996 to promote rural savings and investments
- LABs are governed by the Reserve Bank of India Act, 1934
- LABs cannot borrow funds from the Reserve Bank of India
- LABs are eligible for insurance by the Deposit Insurance and Credit Guarantee Corporation (DICGC)
Local Area Banks (LABs) are non-scheduled banks
As non-scheduled banks, LABs cannot borrow funds from the Reserve Bank of India (RBI), unlike scheduled commercial banks. However, their activities are still regulated and controlled by the RBI. The RBI has also issued guidelines for LABs on corporate social responsibility, sustainable development, and non-financial reporting.
There are only four LABs known in India, with the Krishna Bhima Samruddhi Local Area Bank being the largest and the Subhadra Local Area Bank Limited being the smallest. These banks were established between 1999 and 2001 and have their head offices in various states, including Andhra Pradesh, Punjab, and Kolhapur.
It is important to note that the nature of LABs can change over time. For example, the first LAB was converted into a small finance bank in 2016, and the RBI has granted in-principle approval for ten other entities to make similar transitions. Additionally, the RBI has cancelled the licenses of some LABs due to non-compliance or irregularities.
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LABs were introduced in 1996 to promote rural savings and investments
Local Area Banks (LABs) were introduced in 1996 as private local banks with jurisdiction over two or three contiguous districts. LABs were established to encourage the mobilisation of rural savings and to make these savings available for local investments.
The main objective of LABs is to encourage rural savings through local institutions. They are also set up to create new investment opportunities in these local areas. LABs are non-scheduled banks, and their activities are regulated and controlled by the Reserve Bank of India.
LABs are vital to rural communities as they provide essential financial services that help individuals and businesses thrive. They offer loans for small businesses, farmers, and homebuyers, fostering economic growth in these communities. By meeting the financial needs of these areas, LABs contribute to the overall social welfare and development of rural regions.
In addition to financial products, LABs utilise technology to enhance accessibility. They employ mobile apps, digital platforms, mobile banking, and cash deposit machines to ensure that rural residents can access banking services remotely, even in areas without physical branches. This promotes financial inclusion and ensures that individuals in underserved communities are not left behind in terms of their basic banking requirements.
Through their focus on rural areas, LABs contribute to inclusive banking, promoting financial stability and growth in underserved regions.
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LABs are governed by the Reserve Bank of India Act, 1934
The Reserve Bank of India (RBI) was established in 1934 under the Reserve Bank of India Act, 1934. The RBI commenced operations on 1 April 1935 to address economic troubles after the First World War. Initially privately owned, it was nationalised in 1949 and has since been fully owned by the Ministry of Finance, Government of India. The RBI's basic functions are to regulate the issuing of banknotes, maintain reserves to ensure monetary stability in India, and generally operate the currency and credit system in the country's best interests.
Local Area Banks (LABs) are one of the types of banks in India. LABs were introduced in 1996 as new private local banks with jurisdiction over two or three geographically contiguous districts. They are governed by the provisions of the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, and other relevant statutes. LABs are registered as Public Limited Companies under the Companies Act 1956. As non-scheduled banks, they cannot borrow funds from the RBI, unlike scheduled commercial banks.
Scheduled Commercial Banks (SCBs) are commercial banks included in the Second Schedule of the RBI Act, 1934. SCBs include Public Sector Banks, Private Sector Banks, Foreign Banks, Regional Rural Banks, Scheduled Payments Banks, Scheduled Small Finance Banks, and Scheduled Co-operative Banks. Every SCB enjoys two principal facilities: they are eligible for debts/loans at the bank rate from the RBI, and they automatically acquire membership of the clearing house.
The RBI has issued guidelines for SCBs, including on Corporate Social Responsibility, Sustainable Development, and Non-Financial Reporting. Additionally, the RBI plays a central role in controlling and supporting the public banking sector in India. It regulates the issue of banknotes and keeps reserves to secure monetary stability in the country.
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LABs cannot borrow funds from the Reserve Bank of India
Local Area Banks (LABs) are private local banks that were introduced in 1996. They operate in 2-3 contiguous districts and aim to mobilise rural savings through local institutions. LABs are non-scheduled banks, and their activities are regulated and controlled by the Reserve Bank of India (RBI). However, LABs cannot borrow funds from the RBI for several reasons.
Firstly, LABs are not included in the Second Schedule of the RBI Act, 1934, which is a requirement for a bank to be eligible for loans at the bank rate from the RBI. According to Section 49 of the RBI Act of 1934, the bank rate is the "standard rate at which RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase". This means that the bank rate is the interest rate charged by the RBI when banks borrow long-term funds from them. Therefore, since LABs are not included in the Second Schedule of the RBI Act, they are not eligible to borrow funds from the RBI at this rate.
Secondly, LABs are not Regional Rural Banks (RRBs), which are owned by the Government of India, the State Government, and Sponsor Banks. RRBs have recently been allowed to access the liquidity adjustment facility (LAF), marginal standing facility (MSF), and call or notice money markets to facilitate better liquidity management. However, this permission is specifically for RRBs and does not extend to LABs.
Additionally, LABs have different objectives and operating procedures compared to RRBs. LABs focus on mobilising rural savings and creating investment opportunities in their local areas, whereas RRBs have a broader mandate to serve unserved and underserved sections, including small businesses, farmers, and micro-enterprises.
It is important to note that while LABs cannot borrow funds directly from the RBI, they may still have access to other sources of funding, such as through their own capital, investments, or borrowing from other financial institutions. However, without the ability to borrow from the RBI, LABs may face limitations in their liquidity management and access to competitive borrowing rates.
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LABs are eligible for insurance by the Deposit Insurance and Credit Guarantee Corporation (DICGC)
Local Area Banks (LABs) are eligible for insurance by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The DICGC is a specialised division of the Reserve Bank of India (RBI), established under the Deposit Insurance and Credit Guarantee Corporation Act, 1961. It provides insurance of deposits and credit facilities to banks and their customers.
DICGC insures all types of bank deposits, including savings, fixed, current, and recurring deposits, up to a limit of ₹5,00,000 per depositor in a bank. This limit was increased from ₹1,00,000 to ₹5,00,000 in February 2020 to enhance depositor protection in the wake of several high-profile bank failures. The insurance coverage is applicable to all commercial banks, including public, private, and foreign banks operating in India, as well as cooperative banks and regional rural banks.
LABs, introduced in 1996, are smaller regional banks that operate as non-scheduled banks under the jurisdiction of the RBI. Their primary objective is to mobilise rural savings and promote new investment opportunities within their local areas. Despite being non-scheduled, LABs are still eligible for DICGC insurance coverage, providing protection to their depositors in the event of bank failure.
To receive insurance coverage, banks must register with the DICGC and pay a fixed premium. This premium is not charged to depositors. In the case of a bank failure, the bank's liquidator submits claims on behalf of the depositors to the DICGC, which then releases the insured amount to the depositors. The DICGC has undertaken efforts to increase public awareness about deposit insurance, encouraging depositors to check if their bank is covered.
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Frequently asked questions
Local Area Banks (LABs) are private local banks that were introduced in 1996 to provide financial services in rural areas. They are set up as Public Limited Companies in the private sector and are promoted by individuals, corporates, trusts or societies. LABs can operate in a maximum of three geographically contiguous districts.
A Scheduled Commercial Bank (SCB) is a commercial bank that has been included in the Second Schedule of the Reserve Bank of India Act, 1934. SCBs include Public Sector Banks, Private Sector Banks, Foreign Banks, Regional Rural Banks, Scheduled Payments Banks, Scheduled Small Finance Banks and Scheduled Co-operative Banks.
No, Local Area Banks are non-scheduled banks and cannot borrow funds from the Reserve Bank of India, unlike Scheduled Commercial Banks.
There are only four Local Area Banks in India.
