Local Area Banks in India: Local Area Banks (LABs) in India are financial institutions that have a unique and essential role in the nation’s banking sector. These banks are tailored to cater to the specific needs of local communities, particularly in rural and semi-urban areas. In this blog post, we’ll dive deep into what Local Area Banks are, how they operate, and why they are crucial for financial inclusion and community development in India.

  • Established: August , 1996
  • Paid-up Capital: 5 cr
  • CAR >= 9% (It will be 15 % in 3 to 4 years)

What Are Local Area Banks?

Local Area Banks, often abbreviated as LABs, are specialized financial institutions designed to serve a specific geographic region. Unlike large commercial banks with a nationwide presence, LABs have a limited operational area, typically focused on a specific locality, district, or region.

Features and Objective:

  1. The intention of the government was to set up new private local banks with jurisdiction over two or three contiguous districts
  2. They are licensed under the Banking Regulation Act, 1949
  3. The Local Area Banks are the only type of Non-scheduled Banks of India.they are eligible to be included in the Second Schedule of the RBI Act 1934 subject to eligibility criteria of RBI.
  4. The promoters could be individuals, firms or societies. The family of the individual promoters was not allowed to keep more than 40% of the equity capital of the banks. The NRI promoters could not exceed more than 20% of total number of promoters.
  5. Each Local Area Bank is allowed to open branch in only one urban centre per District and rest of the branches were allowed to be opened in the rural and semi urban centers subject to requisite clearance in respect of rural branches from the District Consultative Committee.

Importance of Local Area Banks:

  1. Financial Inclusion: LABs play a vital role in bringing financial services to underserved areas. They help bridge the gap between traditional banking institutions and individuals who lack access to banking facilities.
  2. Economic Development: By providing credit and financial services to local businesses and entrepreneurs, LABs contribute to the economic growth of their operational areas.
  3. Community Empowerment: These banks empower communities by offering financial education, encouraging savings, and promoting responsible financial practices.

Current Functioning Local Area Banks in India

There are 4 Local Area bank as of 2015.

There are only four Local Area Banks (LAB) in India, which exist in the form of Non-scheduled banks. They are as follows:

Coastal Local Area Bank Ltd

This bank was established on 27th December 1999. Its area of operation includes three contiguous districts viz. Krishna, Guntur and West Godavari. Its head office is located at Vijayawada in Andhra Pradesh.

Capital Local Area Bank Ltd

This bank was established on 14th January 2000. Its area of operation includes three districts viz. Jalandhar, Kapurthala and Hoshiarpur in Punjab. The head office is at Phagwara (Punjab).

Krishna Bhima Samruddhi Local Area Bank Ltd

This bank was established on 28th February 2001 with an area of operation comprising three contiguous districts of Mahbubnagar in Andhra Pradesh and Raichur and Gulbarga in the state of Karnataka with its head office at Mahbubnagar(Andhra Pradesh).

Subhadra Local Area Bank Ltd., Kolhapur

This is smallest Local Area Bank with only 8 branches. Its head office is in Kolhapur.

How Do Local Area Banks (LAB) Operate?

Local Area Banks operate under the regulatory framework of the Reserve Bank of India (RBI), ensuring that they adhere to the same financial and governance standards as other banks. However, they are required to maintain a specific geographical focus and cannot establish branches outside their designated area.

In addition to basic banking services, LABs often offer agricultural and rural development loans, microfinance, and other customized financial products designed to meet the local community’s requirements.

Local Area Banks in India serve as the financial backbone of local communities, facilitating economic growth and financial inclusion. By understanding their role and significance, individuals and businesses can take advantage of the services and opportunities these banks offer. As LABs continue to contribute to the economic well-being of their local areas, they play a crucial part in the nation’s ongoing journey towards financial empowerment and prosperity.