The Local Area Banks (LAB) guidelines, known as "Guidelines for Setting up of Local Area Banks in the Private Sector" were issued on 24th August, 1996. The stated objective of setting up the LABs was to develop an institutional mechanism for promoting rural savings as well as making available a channel for credit to viable economic activities, primarily in the rural areas. After much deliberation, RBI had issued 8 licenses and, as on date only 4 LABs remain operational and healthy.

KBS LAB was promoted by the well-known social enterprise group BASIX, based out of Hyderabad and was granted a Banking License under the said provisions on November 17, 2000. The bank commenced its operation in February 2001. As per the licensing norms, a LAB was allowed to operate in three contiguous districts. The three districts it covered were Gulbarga and Raichur in Northern Karnataka and Mahabubnagar in erstwhile Andhra Pradesh.

By the end of FY 2013-14, BASIX completely divested their holding in the Bank. The current shareholding is widely held by over 40 shareholders, of which 24 are new investors. The current shareholding group is very diversified with the lead group having extensive experience in various sectors including financial services and banking.