Differential Rate of Interest (DRI) Scheme

The Differential Rate of Interest (DRI) Scheme represents a significant policy instrument in India’s developmental banking framework, aimed at promoting social justice and financial inclusion. Introduced as part of the broader strategy to align banking with socio-economic objectives, the scheme seeks to provide concessional credit to the weakest sections of society. In the context of banking, finance, and the Indian economy, the DRI Scheme reflects the role of banks as agents of inclusive growth rather than purely profit-oriented institutions.

Concept and Meaning of the DRI Scheme

The Differential Rate of Interest Scheme refers to a targeted credit programme under which banks provide loans to economically weaker sections at interest rates substantially lower than prevailing market rates. The “differential” aspect lies in the deliberate pricing of credit below commercial rates to make borrowing affordable for low-income households.
The scheme is based on the principle that access to credit is essential for poverty alleviation, self-employment, and economic empowerment. By reducing the cost of borrowing, the DRI Scheme enables marginalised individuals to engage in productive activities and improve their livelihoods.

Historical Background and Introduction

The DRI Scheme was introduced in 1972, following the nationalisation of major commercial banks in 1969. Bank nationalisation marked a turning point in Indian banking policy, with a strong emphasis on social control and developmental objectives.
The scheme was conceived at a time when a large segment of the population depended on informal moneylenders who charged exorbitant interest rates. Formal banking institutions had limited outreach among the poor, necessitating a policy-driven intervention to ensure equitable access to institutional credit.

Objectives of the DRI Scheme

The primary objective of the DRI Scheme is to provide affordable credit to the poorest sections of society. It aims to support income-generating activities, promote self-employment, and reduce dependence on exploitative informal credit sources.
Another important objective is to integrate economically weaker sections into the formal financial system. By establishing a banking relationship, the scheme contributes to long-term financial inclusion and social empowerment.

Eligibility and Target Beneficiaries

The DRI Scheme is targeted at individuals and families with very low income levels. Beneficiaries typically include landless agricultural labourers, marginal farmers, artisans, small entrepreneurs, and persons engaged in traditional occupations.
Preference is given to borrowers from socially and economically disadvantaged groups, including scheduled castes, scheduled tribes, and other vulnerable sections. The scheme ensures that credit reaches those who are most in need but least able to access conventional bank finance.

Lending Conditions and Interest Rate Structure

Under the DRI Scheme, loans are provided at a highly concessional rate of interest, traditionally fixed at a nominal level compared to market rates. The low interest burden significantly reduces repayment pressure on borrowers.
The loan amount is generally small and is intended for productive purposes such as agriculture, cottage industries, petty trade, and other self-employment activities. Repayment schedules are designed to be flexible, taking into account the income patterns of low-income borrowers.

Role of Banks and the Reserve Bank of India

Commercial banks are the primary implementing agencies of the DRI Scheme. They are required to allocate a specified proportion of their lending to this scheme as part of their social and developmental obligations.
The Reserve Bank of India (RBI) provides policy guidance, regulatory oversight, and monitoring support to ensure effective implementation. By integrating the DRI Scheme within the broader priority sector lending framework, the RBI reinforces the developmental role of the banking system.

Contribution to Financial Inclusion

The DRI Scheme has played a meaningful role in advancing financial inclusion in India. By extending formal credit to first-time borrowers, it has helped bring marginalised populations into the banking network.
Access to affordable institutional credit under the scheme reduces reliance on informal lenders and promotes savings habits, financial literacy, and long-term engagement with the financial system. This inclusionary impact has broader implications for economic participation and social stability.

Economic and Social Significance

From an economic perspective, the DRI Scheme supports grassroots entrepreneurship and micro-level income generation. Although the loan sizes are small, their cumulative impact contributes to employment creation and poverty reduction.
Socially, the scheme reflects the commitment of the Indian banking system to equity and distributive justice. It reinforces the idea that finance is not merely a commercial activity but also a tool for social transformation and inclusive development.