Microcredit made a dramatic entry into the banking lexicon when Nobel laureate Muhammad Yunus ushered in a new era of social banking with his Grameen Bank. BASIX, the Indian replicator of the Nobel laureate's ideology, (albeit with a different methodology of livelihood promotion), had established itself as an effective microfinance institution (MFI) in India. It had successfully convinced the government of the need for, and feasibility of, setting up financial institutions such as “local banks” in rural areas to mobilize rural savings and provide meaningful livelihoods for the poor, especially women. KBSLAB, a local bank established by BASIX, had performed very well initially, but had reached a critical juncture in its journey in 2011. The Reserve Bank of India's (RBI) guidelines were similar for the commercial banks and the Local Area Banks in many aspects like the statutory liquidity ratio and the cash reserve ratio requirements. But the geographical restrictions on the local area banks were making it difficult to expand and meet the compliance and monitoring mechanisms. The case looks at the journey of this unique microfinance banking institution over a decade of its existence and contemplates its future. It raises questions about what actually plagues local area banks in general and KBS in particular, the justifiability of the RBI guidelines and the viability of microcredit banks in the future.
The case should be taught in a course on the Indian Banking or Financial system. It could also be taught in a course on Microfinance or Micro credit. The case should be taught in the light of the challenges faced by local area banks, their regulatory requirements and their objectives.