The rural banking system has played a significant role in India's rural development, though with mixed outcomes.

The institutional structure of rural banking consists of multi-agency institutions including commercial banks, regional rural banks (RRBs), cooperatives, and land development banks. These institutions are expected to dispense adequate credit at cheaper rates to farmers. After 1969, India adopted social banking and a multi-agency approach to meet rural credit needs, replacing the exploitative practices of moneylenders who trapped farmers in debt through high interest rates and manipulated accounts.

The rapid expansion of the banking system had positive effects on rural farm and non-farm output, income, and employment, especially after the green revolution. Farmers could avail credit facilities and loans for production needs. Consequently, famines became events of the past, and India achieved food security, reflected in abundant buffer stocks of grains.

However, all is not well with the banking system. With the possible exception of commercial banks, other formal institutions have failed to develop a culture of deposit mobilisation, lending to worthwhile borrowers, and effective loan recovery. Agriculture loan default rates have been chronically high, and the formal credit delivery mechanism remains inadequate and not fully integrated into rural community development. Since collateral is required, a vast proportion of poor rural households remain outside the credit network.

To address these gaps, Self-Help Groups (SHGs) have emerged. They promote thrift through minimum contributions from members and provide credit to needy members at reasonable interest rates, repayable in small instalments. Thus, while rural banking has contributed significantly to development, substantial challenges persist.