L A B S and THEIR FUTURE

Local Area Banks[ LABs] were conceived by sri Chidambaram the then Finance Minister in united front government. Under this scheme LABs were allowed to be set up in various states at the rate of one LAB for one or a few contiguous districts.Private commercial banks operate as parallels to public sector banks competing with one another.On identical lines LABs were conceived as local banks to compete with Regional Rural Banks and co-operative banks thereby ensuring a competitive set up.The RBI issued detailed guidelines for establishing LABs.These guidelines contained licensing procedure,capital required and other details.
As many as 227 applications were received by RBI seeking licence to set up LABs.Out of them 214 applications were rejected on initial scrutiny itself.Only 10 applications were found suitable for in-principle clearance.But all ten applicants could not fulfill the requirements and conditions stipulated by RBI.Finally only five licences were issued by RBI for establishing LABs.out of them only four applicants utilised their licences and established LABs in India.The fifth bank viz Subhadra Local Area Bank has also come in to existence.But number of LABs got reduced to original 4 consequent on the merger of South Gujarat Local Area Bank with Bank of Baroda in June 2004 Other banks could not come in to being at alland the licences given for their establishment expired..
The four LABs that are in existence in India are the following-
!.Coastal Local Area Bank Ltd Vijayawada.
2..Coastal Local Area Bank Ltd Pagwara.
3Subhadra local Area Bank,Kolhapur.

4..Krishna Bheema Samridhi Local Area Bank Ltd,Mehboobnagar.
Local area banks established so far have not made adequate progress on any front. The existing LABs have about 35 branches with asset base of Rs 425 crores They have deposits and advances of Rs 330 crores and Rs 220 crores respectively.These banks are making moderate profits which are not adequate..They have not been able not create a niche for themselves so far.The main reasons for the inadequate progres of Labs is absence of long range plans and long range strategic vision.Also LAB concept could not get required support in India.Regionnal Rural Banks,sponsor banks,bank unions etc opposed the establishment of LABs.Because of wide spread opposition many promoters abandoned the idea of setting up their LABs.
The Ramachandran Study Group which examined the issue indicated that each LAB once it completes five years of operatin would require net owned funds of Rs.25 crores.It would be doubtful whether all promoters of LABs will be able to bring additionnal equity to augment NOF to that level.The Ramachandran Committee also recommended that no new licence for establishment of new LABs be given till existing LABs make adequate progress.
The LAB concept has thus failed to create any impact in India.Lack of encouragement ,lack of vision on the part of promoters,non-avilability of dynamic leaders to head the LABs etc were the reasons for the failure of LABs.Given the necessary support ,encouragement and dynamism of promoters and top management of LABs they would have surely made their mark as efiicient and performing banking entities in private sector.They would have effectively competed with RRBs and co-operative banks.The concept should have been given full trial instead of discarding it on the basis of half -hearted experiment.Now it is suggested that small finance banks be set up.It is better to give a full trial to LAB concept before venturing into the concept of small finance bank.