Measures Taken to Revive RRBs

April 23, 2011 November 22, 2013

Some of the very important measures to improve the Financial Viability of RRBs since 1990s till 2009 are as follows:

  1. In 1993, RBI gave permission to RRBs to relocate branches that were consistently making losses for more than three years.
  2. RRBs were allowed to finance non-target groups to the extent not exceeding 40 percent of their incremental lending. This limit was subsequently enhanced to 60 percent in 1994. As a result, the RRBs diversified into a range of non-priority sector (NPS) advances, including jewel and deposit-linked loans, consumer loans and home loans
  3. The lending restrictions were removed and space and options to invest their funds were expanded.
  4. NABARD with funding support of the Swiss Development Corporation (SDC) took a number of HR and Organizational Development in these banks.

This started a new thought of RRB reforms. A close look was given on the RRBs and Government of India with consultation with the RBI and NABARD started the reform process through a very comprehensive package.

Issues with the Business principles of RBI:

Though some of the reforms led the rise in the number of the profit making RRBs to certain high but they were having a low credit deposit ratio. This was coupled with the decreasing percentage of loans to small and marginal farmers out of the total loans disbursed by the RRBs. The Parliamentary Estimates Committee (2002-03 found that many of the RRBs were charging the compound interest on agricultural loans and even on subsidy part.

  • The RRBs NPA level were high which had declined only marginally from 1996-2002.
  • In the early 2000s there was no prescribed CRAR (capital to risk weighted asset ratio) for the RRBs.
  • In 2005, based upon the recommendation of an internal working group the RRBs were asked to maintain a capital to risk weighted asset ratio at 5% and over the period of time they were expected to align themselves to Basel I standards.
  • This led to turnaround in the regional Rural Banks. The RRBs got merged with the sponsor banks.
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