Performance of local area banks in India: an empirical study (2003-2012)

Conceived as an alternative source of innovation and credit to marginal and small agricultural farmers and retail business in remote rural areas through integrating local markets, the viability of local area banks (LABs) in the Indian banking sector has been a matter of debate ever since their inception in the late '90s. This paper undertakes the first ever comprehensive assessment of the performance of LABs tracking their origin, role and performance during the ten-year period from 2003-04 to 2012-13. Important financial performance indicators of LABs are observed vis-á-vis scheduled commercial banks (SCBs) and regional rural banks (RRBs) using ratio analysis. Data envelopment analysis (DEA) is employed to study the changes in productivity and efficiency experienced by the commercial banks during the period of study. Results show that: 1) LABs are more profitable than SCBs and RRBs; 2) LABs are less efficient than SCBs and RRBs; 3) productivity growth in SCBs, RRBs and LABs has been experiencing a downward trend. The paper also attempts to explain these results. Based on a reasonably long ten year period, the present study is expected to go a long way in determining the future viability of LABs through policy inferences derived.