Finance Minister P Chidambaram on Wednesday said his ministry will take up with Reserve Bank of India, the issue of resuming licensing of Local Area Banks(LABs) that were started to meet credit needs in rural and semi-urban areas.

Mr Chidambaram, who was addressing the consultative committee attached to the Finance Ministry, had conceived LABs as a means to providing an organised source of finance for rural India in place of the traditional and unorganised funding sources.

He had announced setting up of LABs in his Budget during the United Front government rule over a decade ago.
RBI in August 1996 allowed the establishment of new local banks in the private sector to encourage rural and semi-urban savings, and to provide institutional credit for viable economic activities in local areas. Five LABs were established since then.

RBI stopped giving new licenses to Local Area Banks in 2003 on the basis of recommendations by its group which said there were structural infirmities in the concept. The group had pointed out several weaknesses in the concept of the Local Area Bank model, particularly in regard to size, capital base and inherent inability to absorb the losses in the course of business.

Financial inclusion

The group has also suggested certain measures to enable LABs to grow on healthy lines. These measures include strengthening of capital base, increase in the capital adequacy requirement and prohibition of engagements of agents for achieving business outreach.  The consultative committee meeting discussed the C Rangarajan committee report on financial inclusion. Mr Chidambaram said as in the case of most other indicators of development, there are regional variations observed in the level of financial inclusion across regions, occupational and social groups.

The southern region has registered far higher level of financial inclusion followed by the West, North and North-eastern regions of the country, he said.

While Puducherry is the first Union Territory to achieve full financial inclusion, Palakkad of Kerala is the first district in the country to attain that status.