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Abstract
Local Area Banks (LABs) are a small but a vital component of the banking system in India. The Local Area Bank Scheme was introduced inAugust 1996 with the objective of bridging gaps in credit availability and enhancing the institutional credit framework to provide efficient and competitive financial intermediation with a specialized local focus in rural and semi-urban areas. The Idea of Local Area Bank is to encourage the participation of private sector in small bank. There are only four LABs are working in Indian banking industry. Their contribution to entire banking system may be less but these banks within their constrains playing vital role in providing credit to rural people. In order to know profitability of these banks, this study has been undertaken. To assess the profitability of LABS descriptive statistics like mean, co-efficient of variation, compound annual growth rate have been used.
Keywords: Reserve Bank of India, Local Area Banks (LABs), profitability, Cost Efficiency, Spread, Burden, Operating Expenses, Profit, Interest Earned
Introduction
The Reserve Bank of India released a set of guidelines for setting up local area banks in the private sector in August 1996. Local area banks are set up in private sector to cater to the credit needs of the local people and to deliver efficient and competitive financial intermediation services in their area of operation. After issue of guideline for setting up LABs, six banks came into being since 1196. Out of six banks RBI cancelled the licence issued to the Vinayak LAB in Rajasthan because of major irregularities in its operations and South Gujarat LAB was found to be unviable, in June 2004, all its branches were converted to function as branches of the Bank of Baroda. These are the Krishna Bhima Samruddhi LAB, Coastal LAB in Andhra Pradesh, the Capital LAB in Punjab and the Subhadra LAB in Maharashtra. After the initial grant of licenses to Local Area Banks no further licences were issued.1
Structure & Functioning of LABs
The primary objective of the LABs was to mobilize rural savings and make them available for investment in the local area of operation of such banks. The LABs were expected to bridge the gap in credit availability and strengthen the institutional credit framework in the rural and...