Social Banking

Social Banking refers to a system of banking that aims not only at profit-making but also at achieving broader social and developmental objectives. It focuses on providing financial services to underprivileged, rural, and economically weaker sections of society to promote inclusive growth, poverty alleviation, and balanced regional development.
In India, social banking emerged as a key policy initiative after nationalisation of banks in 1969, when the government sought to transform the banking sector into an instrument of social and economic change rather than a purely commercial enterprise.

Meaning and Concept

Social banking is based on the idea that banks, as vital financial institutions, have a responsibility towards society. It ensures that banking services reach people who are traditionally excluded from the formal financial system, such as small farmers, rural artisans, landless labourers, and small entrepreneurs.
Unlike traditional banking, which is profit-centric, social banking emphasises the welfare-oriented allocation of credit and financial inclusion for equitable development.
In essence, social banking = commercial banking + social responsibility.

Objectives of Social Banking

1. Financial Inclusion: To extend banking facilities to rural and unbanked areas.
2. Poverty Alleviation: To provide financial support to weaker sections of society.
3. Balanced Regional Development: To reduce disparities between urban and rural areas.
4. Support to Agriculture and Small Industries: To ensure adequate credit flow to priority sectors.
5. Employment Generation: To encourage self-employment and small enterprises through financial assistance.
6. Mobilisation of Rural Savings: To channel idle rural savings into productive investments.
7. Social Justice: To promote equitable access to credit among all social groups.

Origin and Development of Social Banking in India

The concept of social banking took shape through several banking reforms and policy initiatives after independence.
1. Bank Nationalisation (1969 and 1980):

• In 1969, 14 major commercial banks were nationalised; 6 more followed in 1980.
• The objective was to align banking policies with national development goals and to ensure that banking services reached rural and semi-urban areas.

2. Lead Bank Scheme (1969):

• Each district was assigned to a specific bank (Lead Bank) responsible for assessing credit needs and coordinating economic development programmes.

3. Priority Sector Lending (PSL):

• Introduced to ensure that a portion of bank credit is compulsorily directed to sectors like agriculture, small industries, and weaker sections.
• Presently, 40% of Adjusted Net Bank Credit (ANBC) of commercial banks must go to the priority sector.

4. Regional Rural Banks (RRBs) (1975):

• Established to provide credit and banking facilities in rural areas, combining the local knowledge of cooperatives with the professional management of commercial banks.

5. Integrated Rural Development Programme (IRDP) (1980s):

• Aimed at providing subsidised loans to rural poor for self-employment.

6. Self Help Groups (SHGs) and Microfinance (1990s onwards):

• The SHG–Bank Linkage Programme initiated by NABARD (1992) connected informal self-help groups to formal banking institutions.

7. Financial Inclusion Drive (2000s onwards):

• Launch of Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2014 to ensure every household had a bank account.
• Use of technology and digital banking to reach remote areas.

Features of Social Banking

• Developmental Orientation: Focuses on developmental and welfare goals rather than just profit.
• Credit Planning: Credit allocation is based on developmental priorities (district and sector-wise).
• Rural Outreach: Expansion of branch network in rural and semi-urban areas.
• Targeted Programmes: Implementation of schemes for weaker and marginalised sections.
• Government–Bank Collaboration: Banks work with government agencies to deliver social and welfare schemes.
• Subsidised and Concessional Credit: Loans are often provided at lower interest rates to priority groups.

Instruments and Components of Social Banking

1. Lead Bank Scheme: Encourages banks to take leadership in coordinating economic development in assigned districts.
2. Regional Rural Banks (RRBs): Serve the rural population with affordable credit facilities.
3. Cooperative Banks: Provide grassroots-level credit to farmers and small entrepreneurs through Primary Agricultural Credit Societies (PACS).
4. Priority Sector Lending: Ensures mandatory lending to agriculture, small enterprises, education, housing, and weaker sections.
5. Differential Rate of Interest (DRI) Scheme: Introduced in 1972, under which banks lend to the poorest sections of society at a concessional interest rate of 4% per annum.
6. Self Help Groups (SHGs): Promote group-based microcredit, especially for rural women, for income-generating activities.
7. Microfinance Institutions (MFIs): Provide small loans to low-income individuals who lack access to traditional banking.
8. Financial Inclusion Schemes: Initiatives like PMJDY, PMMY (MUDRA Loans), Stand Up India, and Digital Banking aim to ensure access to financial services for all citizens.

Advantages of Social Banking

1. Inclusive Economic Growth: Brings previously unbanked populations into the formal financial system.
2. Development of Rural Economy: Strengthens agriculture and rural industries through affordable credit.
3. Poverty Reduction: Enables low-income households to access financial resources for livelihood improvement.
4. Employment Creation: Encourages self-employment and small-scale entrepreneurship.
5. Mobilisation of Savings: Converts rural savings into productive capital.
6. Reduction in Exploitation: Provides alternatives to informal moneylenders who often charge exorbitant interest rates.
7. Balanced Regional Development: Promotes equitable growth across regions by focusing on underdeveloped areas.

Challenges and Limitations of Social Banking

1. High Operational Costs: Maintaining rural branches and small accounts increases administrative expenses.
2. Loan Defaults and NPAs: Poor recovery rates and misuse of subsidised credit lead to rising Non-Performing Assets (NPAs).
3. Lack of Financial Literacy: Beneficiaries often lack awareness about banking procedures and repayment responsibilities.
4. Political Interference: Credit disbursement in social schemes may be influenced by political motives rather than economic merit.
5. Insufficient Infrastructure: In many rural areas, inadequate infrastructure and poor connectivity hinder effective banking operations.
6. Limited Technological Penetration: Digital banking adoption remains slow in remote and illiterate populations.

Role of Institutions in Social Banking

• Reserve Bank of India (RBI): Regulates and monitors social banking initiatives, including priority sector lending norms.
• NABARD (National Bank for Agriculture and Rural Development): Coordinates and supports rural development and refinancing activities.
• SIDBI (Small Industries Development Bank of India): Promotes and finances small and medium enterprises.
• Commercial Banks and RRBs: Implement social credit and financial inclusion programmes.

Examples of Social Banking Initiatives in India

• Pradhan Mantri Jan Dhan Yojana (PMJDY) – Universal access to bank accounts.
• MUDRA Yojana (Micro Units Development and Refinance Agency) – Microcredit to small entrepreneurs.
• Stand Up India Scheme – Loans for women and SC/ST entrepreneurs.
• Kisan Credit Card Scheme (KCC) – Easy and flexible credit to farmers.
• SHG–Bank Linkage Programme – Empowering women through group-based microfinance.

Importance of Social Banking in Indian Economy

• Acts as a tool for social justice by reducing inequality.
• Promotes financial inclusion, which is essential for sustainable development.
• Strengthens the agriculture and rural economy, the backbone of India.
• Ensures that economic growth is inclusive and equitable, not confined to urban areas.
• Supports the government’s mission of “Sabka Saath, Sabka Vikas” (collective development).