Local Area Banks were set up as per a Government of India Scheme announced in August 1996. The intention of the government was to set up new private local banks with jurisdiction over two or three contiguous districts. The objective of establishing the local area banks was to enable to mobilization of the rural savings by local institutions and make them available for investments in local areas. Thus, the overall idea was to bridge the gaps in the credit availability in the rural and semi-urban areas, thereby strengthening the institutional credit mechanism in such areas.
Pursuant to announcement of this scheme, RBI received some 227 applications, but most of them were rejected. RBI approved established of only 10 Local Area Banks but out of them only 4 are into existence as of 2015.
Key Features of the Local Area Banks
Each local Area bank is registered as a public limited company under the Companies Act, 1956. However, they are licensed under the Banking Regulation Act, 1949.
The Local Area Banks are the only type of Non-scheduled Banks of India. However, they are eligible to be included in the Second Schedule of the RBI Act 1934 subject to eligibility criteria of RBI.
Local Area Banks have jurisdiction over a maximum of three contiguous districts, and their basic function is to mobilise funds in rural and semi-urban areas.
The minimum start-up capital of a LAB was fixed at Rs.5 crore and the promoters were asked to bring entire minimum share capital up-front. The promoters could be individuals, firms or societies. The family of the individual promoters was not allowed to keep more than 40% of the equity capital of the banks. The NRI promoters could not exceed more than 20% of total number of promoters.
The Local Area banks are subject to prudential norms, accounting policies and other policies as stipulated by the RBI. Such a bank has to maintain capital adequacy at 8% of risk weighted assets and comply with the norms of income recognition, asset classification and provisioning since inception.
Each Local Area Bank is allowed to open branch in only one urban centre per District and rest of the branches were allowed to be opened in the rural and semi urban centers subject to requisite clearance in respect of rural branches from the District Consultative Committee.
Functions of Local Area Banks
The Local Area Banks can do all normal banking business but their major function was to finance agriculture and allied activities, small scale industries, agro-industries and trading / non-farm activities in the rural and semi-urban areas.
These banks had to give out 40% of total credit to priority sector, of which 10% is to be given to weaker sections of the society.
Current Functioning Local Area Banks in India
There are only four Local Area Banks (LAB) in India, which exist in the form of Non-scheduled banks. They are as follows:
1. Coastal Local Area Bank Ltd
This bank was established on 27th December 1999. Its area of operation includes three contiguous districts viz. Krishna, Guntur and West Godavari. Its head office is located at Vijayawada in Andhra Pradesh.
2. Capital Local Area Bank Ltd
This bank was established on 14th January 2000. Its area of operation includes three districts viz. Jalandhar, Kapurthala and Hoshiarpur in Punjab. The head office is at Phagwara (Punjab).
3. Krishna Bhima Samruddhi Local Area Bank Ltd
This bank was established on 28th February 2001 with an area of operation comprising three contiguous districts of Mahbubnagar in Andhra Pradesh and Raichur and Gulbarga in the state of Karnataka with its head office at Mahbubnagar(Andhra Pradesh).
4. Subhadra Local Area Bank Ltd., Kolhapur
This is smallest Local Area Bank with only 8 branches. Its head office is in Kolhapur.
Dysfunctional Local Area Banks
Further, a South Gujarat Local Area Bank Ltd was established in 2000 with headquarters at Navsari in Gujarat. This bank failed to maintain CRR and SLR and suffered net losses in consecutive years. Its promoters were found to be involved in scams. Consequently, this bank was merged with Bank of Baroda in 2004. Further, one more local area bank viz. Vinayak Local Area Bank Ltd., Sikar in Rajasthan was established on 21st October 2000. But RBI cancelled its license in 2002 due to major irregularities.