Review of Local Area Banks and Policy Implications for Narrow Banks in India

Useful paper by Prof Sriram and Aparna Krishna on the topic.

In the recent past there has been renewed discussion on the possibility of setting up narrow banks to focus on including the population left out of the formal financial sector. Reviewing the experience of local area banks and the landscape of financial inclusion, this paper identifies internal contradictions in the approach to narrow banks — primary objectives, structures, limitation of size and geography, mainstream banking standards, evaluation of performance. Despite these issues, the existing banks are indeed performing (under severe constraints), and do not give cause for anxiety on solvency and stability.

It has an excellent summary of the perofrmance of LABs whose case has been dismissed without giving them a chance. Their performance evaluation was done with comercial banks without giving them the same flexibility. Actually, there were far more restrictions on LABs which did not allow them to perform adequately. Even then they performed reasonably well:

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