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The Local Area Banks (LABs) are small private banks, conceived as low cost structures which would provide efficient and competitive financial intermediation services in a limited area of operation, i.e., primarily in rural and semi-urban areas, comprising three contiguous districts.
LABs were set up to enable the mobilization of rural savings by local institutions and, at the same time, to make them available for investments in the local areas.
LABs were created following an announcement made by the then Finance Minister in the Union Budget in August 1996. RBI issued guidelines for setting up of Local Area Banks (LABs) vide its Press Release dated August 24, 1996.
LABs were required to have a minimum capital of Rs. 5 crore.
The promoters of the bank may comprise of private individuals, corporate entities, trusts and societies with a minimum capital contribution of Rs. 2 crore.
The area of operation of LAB is limited to a maximum of three geographically contiguous districts and are allowed to open branches only in its area of operation.
Since LABs are being set up in district towns, their activities are focused on the local customers with lending primarily to agriculture and allied activities, small scale industries, agro-industrial activities, trading activities and the non-farm sector. LABs are also required to observe the priority sector lending targets at 40% of net bank credit (NBC) as applicable to other domestic banks. Within the above target, these banks will adhere to the requirement of lending at least 25% of their priority sector deployments (10% of NBC) to the weaker sections.
Around 5 LABs were licensed by 2002 under Section 22 of the Banking Regulation Act 1949 from amongst hundreds of applicants. Presently, four LABs are functioning satisfactorily. (See the Report of The Review Group on The Working of The Local Area Bank Scheme)
In 2014, RBI has permitted LABs to be converted into small finance banks subject to them meeting the prescribed eligibility criteria.


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