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Review of Local Area Banks and Policy Implications for Narrow Banks in India
In the recent past there has been renewed discussion on the possibility of setting up narrow banks to focus on including the population left out of the formal financial sector. Reviewing the experience of local area banks and the landscape of financial inclusion, this paper identifies internal contradictions in the approach to narrow banks -- primary objectives, structures, limitation of size and geography, mainstream banking standards, evaluation of performance. Despite these issues, the existing banks are indeed performing (under severe constraints), and do not give cause for anxiety on solvency and stability.
The field research for this paper was funded by Access–Assist, New Delhi under the aegis of the Department for International Development, Government of the United Kingdom, Poorest States Inclusive Growth programme implemented by Small Industries Development Bank of India. The authors are thankful to Vipin Sharma, Radhika Agashe for commissioning the research. Shubhangi Jaiswal of Access–Assist provided assistance in field research. We are thankful to Y V Reddy, Y S P Thorat, Usha Thorat, A V Sardesai, Shyamala Gopinath, Vijay Nadkarni and Sarvjit Samra for sharing their perspectives and experiences in dealing with Local Area Banks in their professional capacities. We are also thankful to Vijay Mahajan, N Srinivasan, Y C Nanda, Pallavi Chavan and the DFID for useful and insightful comments on an earlier version of the paper. The usual disclaimers apply.
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