Local Area Banks

Local Area Banks were an experimental category of private banks introduced in 1996. The RBI allowed LABs as small banks to operate in limited geographic areas with the objective of mobilizing rural savings and investing them in the local region. Each LAB was restricted to operation in a maximum of three contiguous districts.

LABs were conceived to provide an institutional mechanism in rural and semi-urban areas that fell between large commercial banks and tiny cooperatives – essentially to bridge the gap in credit availability for local small enterprises, traders, and farmers. Initially, RBI granted licenses to only a few entities to test this model.

Number and Current Status

In the late 1990s, RBI issued licenses for 6 Local Area Banks, of which 4 actually commenced operations. These were:

• Coastal Local Area Bank Ltd., Vijayawada (Andhra Pradesh)
• Capital Local Area Bank Ltd., Jalandhar (Punjab)
• Krishna Bhima Samruddhi LAB Ltd., Mahbubnagar (Telangana region)
• Subhadra Local Area Bank Ltd., Kolhapur (Maharashtra)

LABs were set up as private banks under the Companies Act and governed by the Banking Regulation Act. They had much smaller capital requirements than other banks (initial minimum capital was ₹5 crores in 1996) and a mandate to focus on local customers. However, over time, the LAB experiment did not scale up. No new LAB licenses have been given beyond those initial ones.

In fact, the number of functioning LABs has diminished:

• Capital Local Area Bank transitioned into Capital Small Finance Bank in 2016 (after RBI created the Small Finance Bank category, Capital LAB was allowed to convert due to its good track record). It ceased to be a LAB and is now an SFB.
• Subhadra Local Area Bank’s license was cancelled by RBI in 2020 due to governance and financial issues. This bank was closed for conducting business in a manner detrimental to depositors.
• That leaves Coastal LAB and Krishna Bhima Samruddhi (KBS) LAB as the only two LABs currently operating (as of 2025). Both continue to function under RBI supervision in their respective local areas.

Thus, only 2 Local Area Banks remain in India. They too are relatively small in size. For example, Coastal LAB serves parts of Andhra Pradesh, and KBS LAB serves certain districts in Telangana; each with a few branches and a limited asset base.

Limitations and Performance

LABs faced several challenges. Their restricted area of operation limited growth opportunities and risk diversification. Many LABs found it hard to raise additional capital to expand or to invest in technology due to their small scale, which in turn affected their ability to compete with larger banks. Regulatory constraints (they were not allowed to operate beyond a few districts) meant if a local economy was weak, the LAB’s fortunes suffered.

Additionally, LABs did not have the same refinancing support that RRBs or cooperatives received from NABARD or others. As a result, RBI was cautious with this sector and eventually shifted focus to new categories like Small Finance Banks which had a wider operational scope.

Regulation

LABs are under RBI’s direct regulation as non-scheduled banks (most LABs were not given scheduled status). They must maintain capital adequacy and adhere to RBI norms like any commercial bank. Over the years, RBI had put these banks under close watch; for instance, prior to cancellation, Subhadra LAB was under RBI Directions barring certain activities. The remaining LABs are required to submit regular reports and cannot expand branches freely without approval.

Outcome

The Local Area Bank experiment can be considered only a partial success. It demonstrated that small private banks can serve local needs effectively if governed well (Capital LAB was an example of success, later becoming Capital SFB). However, the inherent weaknesses (low capital, geographic concentration) made LABs vulnerable. Recognizing this, RBI in 2014 introduced Small Finance Banks (SFBs) which essentially took forward the idea of small, localized banks but with a larger scope and stronger capitalization. Existing LABs were given an opportunity to convert to SFBs; one did (Capital), others did not meet criteria or chose to continue as they are.