This paper addresses two main questions: Are the Regional Rural Banks (RRBs) and non-banking institutions of West Bengal performing well in the remotest part of rural areas? If so, how pervasive are they in priority sector lending? To address these questions, a study was undertaken by selecting a sample of 125 respondents from different remotest rural areas of West Bengal and the responses collected for each of the five different priority sectors, viz., agriculture, micro and small-scale enterprises, education, housing and others (includes Self-Help Groups (SHGs), joint liability groups, other backward classes, women, etc.), were analyzed. The study involved a two-step empirical procedure: exploratory factor analysis and Structural Equation Modeling (SEM). The findings of this study provide that apart from ‘others’ sector, none of the remaining priority sectors gives a positive indication about the effect of the performance of RRBs and non-banking institutions in priority sector lending. Due to the rising cost of Non-Performing Assets (NPAs), in the near future, operations of RRBs can only be improved if they are merged with sponsor banks or by going through the privatization route.

The policy with respect to rural credit since 1951 is to widen the role of the institutional credit agencies to replace non-institutional credit agencies, specially the private money lenders as far as possible. The rate of interest charged by the moneylenders is exorbitant. The poor villagers are permanently tied to the moneylenders by perpetual poverty, in which their expenses exceed their income every year, compelling them to take loans. On an examination of the strengths and weaknesses of the rural credit system dominated by the non-institutional credit agencies, the All India Rural Credit Survey Committee recommended that organizing multipurpose cooperatives providing integrated credit facilities, linking production with marketing of inputs and outputs, processing and warehousing activities offered the only viable remedy to the credit problems of the Indian villages.

The commercial banks in India had usually been lending a negligible portion of their funds to the rural areas. In view of the large gap between the credit needs of the modern agriculture and supply of credit for this sector, the Government of India has accepted the idea of multiagency approach to the development of credit institutions. 97% of the Indian villages were covered by cooperatives, i.e., Primary Agriculture Cooperative Societies (PACS) at the grassroots level. The number of rural branches of scheduled commercial banks rose from 1,832 in June 1969 to 9,146 in April 1977, representing an increase of 400% in a period of eight years. Both the commercial banks and cooperatives have made substantial progress over the years which have been classified as priority sector under the credit policy of Reserve Bank of India (RBI), but in spite of the tremendous growth of cooperatives and commercial banks following bank nationalization, institutional credit was felt to be beyond the vast majority of the institutional borrowers.