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Local Area Banks | Full Form of LAB, Features, Objectives and Functions

Last Updated : 28 Nov, 2023
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Local Area Banks are such banks that are set up for a small area and operate in that area. Local Area Banks function just like the other big banks, which means completing the financial requirements, for example, storing money, lending money, withdrawing money, etc., of the area that’s provided to each Local Area Bank. Local Area Banks are also referred to as LAB. The full form of LAB is Local Area Bank.

Local-Area-Banks-copy

Local Area Banks started in India in 1996, as a scheme of the union budget to make small private banks for people in those areas who don’t have access to banks. They are regulated by guidelines of the Reserve Bank of India, which was set up in August 1996. LABs are required to have a minimum paid-up capital of Rs. 5 crore, with 25% contributed by the promoter group and the rest by the public. The license of these banks is issued by RBI. The first four banks that were issued in 1996-1997 were Coastal Local Area Bank Ltd., Krishna Bhima Samruddhi Local Area Bank Ltd., Capital Local Area Bank Ltd., and Subhadra Local Area Bank Ltd.

Features of Local Area Banks

1. Geographic Focus: LAB operates in a particular area, which means they are providing their services to a particular region, not to a whole state or country. Because they are focusing on financial inclusion, they focus on those areas where people don’t have access to various financial benefits.

2. Financial Inclusion: One of the primary objectives of LABs is to promote financial inclusion by reaching out to unbanked or underbanked areas. They provide banking services to people who may not have easy access to traditional banks.

3. Small and Medium Enterprises (SMEs): LABs provide lending and loan facilities to the small and medium enterprises of their area. In this way, they help in the development of the country by allowing more people to open enterprises as well as boost economic growth.

4. Savings and Deposits: LABs encourage people to save money for their future use, so they allow services of depositing money and money withdrawal whenever needed.

5. Customised Services: LABs offer specialised services tailored to the needs of their local customers. These services may include agricultural loans, microfinance, and other products that will help boost the economy of that local area

Objectives of Local Area Banks

The following are some main objectives of Local Area Bank:

1. Financial Inclusion: LABs bring a formal financial system to the people of the area where the traditional banks are not set up. Their objective is to benefit people by saving their money in a safe place so that they can use it whenever they need it. In this, they create opportunities for Financial inclusion.

2. Economic Development: By providing loans and lending to small businesses in the area, LAN promotes the economic development of that area. They provide financial support to budding entrepreneurs and help existing businesses expand.

3. Savings Mobilisation: LAB promotes financial security by encouraging people to save money for better future use.

4. Credit Disbursement: They facilitate the flow of credit to sectors that are crucial for local development, such as agriculture, small industries, and rural infrastructure.

5. Community Development: LABs often engage in community development initiatives. For example, there are several initiatives taken to help poor people in education, providing benefits in health care services, etc.

Functions and Requirements of Local Area Banks

1. They are eligible for financial inclusion in the Second Schedule of the RBI Act, 1934, and thus enjoy the status of scheduled banks. They can also facilitate financial transactions for their customers.

2. They are required to maintain a minimum capital adequacy ratio of 15%, a statutory liquidity ratio of 25%, and a cash reserve ratio of 3%.

3. They are subject to supervision and inspection by the RBI and are required to submit periodic returns and reports to the RBI.

4. LABs mobilize deposits from the local community, providing a secure place for people to save their money. They are allowed to undertake all types of banking activities within their area of operation, such as accepting deposits, granting loans, issuing drafts and cheques, providing remittance facilities, etc.

5. They extend credit to individuals, businesses, and institutions within their area of operation. This includes loans for agricultural activities, small businesses, and housing. They are required to lend at least 40% of their net bank credit to the priority sector, out of which at least 25% or 10% should go to the weaker sections.

6. Many LABs engage in financial education programs to enhance the financial literacy of their customers and promote responsible financial behaviour.

7. LABs actively engage with the local community through various outreach programs, addressing their financial needs and fostering trust.

Examples of Local Area Banks in India

1. Krishna Bhima Samruddhi Local Area Bank: It was established in 1999 for the regions of Krishna and Bhima in Andhra Pradesh and Telangana. It has 50 branches and offers various products and services such as deposits, loans, remittances, insurance, etc. Because they are set up in rural areas, their main focus is on agriculture and rural finance.

2. Coastal Local Area Bank: It operates in coastal regions of Karnataka. It is mainly formed to solve the financial needs of fishing communities in coastal regions.

3. Capital Local Area Bank: This bank serves the state of Punjab. It supports agriculture and rural development, contributing to the state’s economic growth.

4. Subhadra Local Area Bank Ltd.: This bank was established on 30th March 1998. Its area of operation includes three contiguous districts viz. Kolhapur, Sangli and Satara in Maharashtra. It has 40 branches and offers various products and services such as deposits, loans, remittances, insurance, etc.


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