Limitations on the Smooth Functioning of the Rural Banks:
Rural banks may be referred to as the banks having their headquarters in the rural markets. Rural banks may or may not have branches in the urban areas. The last few years have witnessed a lot of changes in the financial system of the country.
Owing to these changes, it is being felt that the rural banks are finding it difficult to appeal to deposits. Had that been the case, these deposits could have met credit demands locally.
The pressure of funding is more in case of rural banks than the urban banks. In matters of the loans granted by the rural banks, there are three areas, which are being recognized as the main cause of concern.
In the event when the loan deposit ratios are high, this is an implication that liquidity has dropped to the minimum. Under these circumstances, the banks hesitate to approve any further loans until the time they receive enough deposits. It has been observed that loan deposit ratios showed a steep rise in the last couple of years. This is the first cause of concern.
The second cause of concern is that the rate of deposit growth in the rural banks has been very slow. Economists feel that this may be due to the fact that the mutual funds are gaining increased importance.
Finally, it has been observed that the urban banks have taken over the rural banks. These have in turn been transformed in to branches of the urban banks. However, these branches do not cater to the needs of all the customers simultaneously.
Rural Banks and Economic Development:
In the year 2005, as much as USD$78 million (as Rural Capital Advances) was raised for financing community programs. The rural community had come together to avail of the new program launched by the Federal Home Loan Bank of Des Moine. Within a span of a very short time, the members of the bank gathered USD$78 million. This money was made use of in funding housing projects and effecting economic development in the rural regions.