Introduction

Rural India has historically lacked the financial services commonly available in urban areas, making the problem of indebtedness and seasonal cash-flow shortages associated with agriculture one of the most pervasive features of rural Indian life. These areas have suffered from an inadequate supply of formal sector credit, imperfect and fragmented rural credit markets, inequitable distribution of credit based on caste, class, region or gender, and the high cost of informal sector loans. From 1969 to 1990, the government of India attempted to alleviate some of these issues by nationalizing India's banking system.

Government Regulation 1969-1990

• The Bank Company Acquisition Act of 1969 effectively nationalized India's banking system and imposed a strong social mandate on 14 of India's largest commercial banks.



• "The Banking system touches the lives of millions and has to be inspired by a larger social purpose and has to subserve national priorities and objectives such as rapid growth of agriculture, small industries and exports, raising of employ-ment levels, encouragement of new entrepreneurs, and development of back-ward areas. For this purpose, it is necessary for the government to take direct responsibility for the extension and diversification of banking services and for the working of a substantial part of the banking system."



• Under the authority of the 1949 Banking Regulation Act, banks wishing to expand or establish new branches had to receive approval from the Indian Central Bank. In 1977, the Central Bank stipulated that no new branch applications would be approved for banks in developed areas unless four branches were constructed in undeveloped areas. Branch data from this period shows that the four to one rule was strictly enforced.



• Access to credit in rural areas also increased during the nationalization of India's financial sector. The proportion of credit dispersed in India's rural areas tripled in the 1970's and continued to increase in 1980.


Deregulation 1990 to Present


• The Indian banking system was liberalized in 1990 and the four to one rule governing bank branch expansion and other credit provisions were eliminated. As a result, 1990 marked the high point in rural deposits, credit provision, rural bank branch offices, and rural credit-deposit ratios, all of which have declined significantly since deregulation.

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