f the heavy burden of rural indebtedness is to be lifted, and the grip of moneylenders and the informal sector on the rural poor to be a thing of the past, the formal sector of banking must expand. This is a truth well recognized in the scholarly literature, and in the sphere of policy.

Over the last fifty years, we can identify three phases of rural credit policy. The first phase, from 1969 through the mid-1970s, immediately following nationalisation of 14 major banks, was also the early phase of the “green revolution” in rural India. This phase of rural banking, known as “social and development banking,” was one in which the reach and coverage of rural banking was extended in order to “gain access to new liquidity” in the rural areas.1

The second phase, which began in the late 1970s and early 1980s, was a period when the major instruments of official anti-poverty policy were credit-based programmes for the creation of employment. This was a phase of “consolidation of the institutional infrastructure of rural banking,” and a period of directed credit, during which credit was directed towards “the weaker sections” of society.

The third phase, which began in 1991, is that of liberalisation. In this phase, emphasis shifted from redistributive objectives to profitability of banks. The recommendations of the Narasimham Committee were that interest rates be deregulated, that capital adequacy norms be changed (to “compete with banks globally”), that branch licensing policy be revoked, that a new institutional structure that is “market-driven and based on profitability” be created, and that the part played by private Indian and foreign banks be enlarged (RBI 1991). This was also a period when micro-credit was given a free hand.