Social banking

Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Class 11, Ch 5 "Rural Development"

Meaning

Social banking is the policy, begun in 1969, of making banks serve social goals and not only profit. These goals include enough cheap credit for villages, bank branches in unbanked villages (villages with no bank branch) and loans for weaker sections.

It matters because it moved rural credit away from the moneylender and towards the formal banking system. The multi-agency approach to rural credit was built on this base.

Explanation

Why it was needed: the rural debt trap

• At independence, villages depended on informal credit (Class 11):
• Moneylenders and traders lent to small and marginal farmers and landless labourers.
• They charged very high interest and "manipulat[ed] the accounts" to keep borrowers in a debt-trap. In a debt trap, a person keeps borrowing to repay old loans and never becomes free of debt.

• Farmers lost their land, crops and bargaining power to the lender.

• Formal credit comes from banks and cooperatives, and the RBI supervises it. Informal credit comes from moneylenders, traders, landlords, relatives and friends, and nobody supervises its terms (Class 10).

• Class 11 records that a "major change occurred after 1969". That change was social banking.

The tools of social banking

• 1. Nationalisation. The government took over 14 major banks in July 1969 and 6 more in 1980.

• The RBI says the aim was that no viable productive activity should fail for lack of credit, whether the borrower was big or small [6].

• 2. Branch expansion. Banks had to open branches in rural areas, not only in profitable cities.

• 3. Directed lending. The state told banks which sectors to lend to. These sectors are called the priority sector (agriculture, small industry and weaker sections).

• In March 1980, the Union Finance Minister and the heads of public sector banks agreed that banks would raise priority-sector advances to 40% of their lending by March 1985 [5].

• 4. Area-based coordination. Under the Lead Bank Scheme (December 1969), each district gets one lead bank. It coordinates credit planning among all banks and government agencies in that district [4].

Worked example: the priority-sector target

• A bank has ₹1,000 crore of advances (loans).
• Under the 40% target, at least ₹400 crore must go to the priority sector.
• Only ₹600 crore is left for other borrowers, such as big firms in cities.
• This is the core of social banking. The state decides part of where a bank's money goes, and the bank's profit alone does not decide it.

What changed in the kind of lending

• The link with the Green Revolution:
• Rural credit moved towards production-oriented lending.
• This means loans for inputs (seeds, fertiliser), tubewells and machinery.
• Less lending went only to consumption.

In India

• The institutions behind it:
• RBI: introduced the Lead Bank Scheme in December 1969 and sets priority-sector rules [4][5].
• Multi-agency approach: rural credit comes through commercial banks, Regional Rural Banks (RRBs), cooperatives and land development banks together. Class 11 says these are "expected to dispense adequate credit at cheaper rates".

• NABARD: set up on 12 July 1982 under the NABARD Act 1981 [10]. It is the apex body for rural credit. It refinances banks, which means it gives money back to a bank that has already lent to a rural borrower so the bank can lend again. It also supervises RRBs and cooperative banks.

• Key dates:

• 1954: The AIRCS (All-India Rural Credit Survey) report said "Cooperation has failed, but cooperation must succeed". This led to the SBI (1955), formed from the Imperial Bank.
• 1969: Bank nationalisation. The ordinance was issued on 19 July, and the RBI dates it from 20 July, when it took effect [6]. The Lead Bank Scheme followed in December 1969 [4].
• 2 October 1975: The first RRBs were set up, followed by the RRB Act 1976.

• 1995-96: RIDF (Rural Infrastructure Development Fund), run by NABARD, was set up [10]. Banks that miss their priority-sector targets deposit the shortfall with NABARD. NABARD then lends this money to state governments for rural roads, irrigation and bridges.

• Latest position of RRBs:

• Under Phase IV, based on "One State, One RRB", there have been 28 RRBs since 1 May 2025 [2][3]. The number fell from 196 through earlier mergers.
• They have 22,158 branches in 26 states and 3 UTs, and their total business is more than ₹12 lakh crore (DFS Year Ender 2025) [3].

Don't confuse with

• Multi-agency approach: Social banking is the policy goal: using banks for social aims. The multi-agency approach is the delivery structure: several kinds of institutions (commercial banks, RRBs, cooperatives, land development banks) giving rural credit at the same time.
• Bank nationalisation: Nationalisation (1969, 1980) is only one tool of social banking. Branch expansion, priority-sector lending and the Lead Bank Scheme are the other tools.
• Commercial (profit-led) banking: A commercial bank lends where the return is highest. Social banking forces a share of lending (the 40% target) into sectors the bank might otherwise avoid [5].
• Informal credit: Moneylenders and traders are not supervised by anyone. Social banking aimed to replace them with formal credit supervised by the RBI.

Prelims Hooks

• Start of social banking: the nationalisation of 14 banks in July 1969. The ordinance was issued on 19 July and took effect on 20 July [6]. 6 more banks were nationalised in 1980.
• Lead Bank Scheme: introduced by the RBI in December 1969. Each district gets one lead bank to coordinate credit [4].
• Priority sector: in 1980, banks agreed to raise priority-sector advances to 40% by March 1985 [5].
• RRB shareholding: Centre 50%, sponsor bank 35%, state 15%. Trap: the state has the smallest share, not the sponsor bank.
• NABARD (12 July 1982) supervises RRBs and cooperative banks and runs RIDF (1995-96) [10]. Trap: it does not regulate commercial banks. The RBI does.
• The four agencies of the multi-agency approach: commercial banks, RRBs, cooperatives and land development banks (now SCARDBs and PCARDBs).

Mains Points

• Social goals vs commercial viability:
• After 1969, nationalisation and directed lending took formal credit into villages and weakened the moneylender.
• But forced lending, political loan waivers and weak loan recovery hurt bank balance sheets.

• The RRB mergers (196 → 28) show policy moving towards scale and viability while keeping the rural duty [2][3].

• Why the multi-agency approach is still relevant:

• Each agency covers a different gap. Cooperatives have local reach, commercial banks have money, RRBs combine the two, and NABARD refinances and supervises.
• Small and marginal farmers still borrow from informal lenders, and credit is uneven across regions.

• So making each agency stronger matters more than replacing any one of them.

• Social banking beyond credit:

• RIDF turns banks' priority-sector shortfalls into money for rural roads and irrigation [10]. Even a bank's missed target ends up paying for useful rural assets.
• The cooperative reforms since 2021 continue the same idea at the village level. These are the Ministry of Cooperation, the model bye-laws for PACS (5 January 2023) and PACS computerisation (29 June 2022) [7][8][9].
• Debate: agriculture and cooperation are State List subjects (Entries 14 and 32), so a strong central role raises questions of federalism.

Related concepts

• Multi-agency approach to rural credit
• Regional Rural Bank
• Credit cooperatives

Read more

• Building the institutions: social banking and the multi-agency approach