Rural banking: misdirected policy changes

Abstract

Three policy alternatives can be identified for improving the profitability of commercial banks' rural branches: closing loss-making rural branches, improving the interest spread for these branches and diversifying lending and deposit portfolios. The government has chosen the first two of these, which is short-sighted, means piecemeal treatment of the problem and ignores the objective of financial intermediation, whereas the third alternative deals with the problem while serving the fundamental objective of mobilising funds for agricultural and rural development.