The nationalization of the banks in 1969 boosted the confidence of the public in the Banking system of the country. However, in the early 1970s, there was a feeling that even after nationalization, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers. This issue was taken up by the government and it set up Narasimham Working Group in 1975. On the basis of this committee’s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
Genesis of Regional Rural Banks
Regional Rural Banks came into existence on Gandhi Jayanti in 1975 with the formation of a Prathama Grameen Bank. The rural banks had the legislative backing of the Regional Rural Banks Act 1976 . This act allowed the government to set up banks from time to time wherever it considered necessary.
The RRBs were owned by three entities with their respective shares as follows:
- Central Government → 50%
- State government → 15%
- Sponsor bank → 35%
Regional Rural Banks were conceived as low cost institutions having a rural ethos, local feel and pro poor focus. Every bank was to be sponsored by a “Public Sector Bank”, however, they were planned as the self sustaining credit institution which were able to refinance their internal resources in themselves and were excepted from the statutory pre-emptions.
Problems with Regional Rural Banks
But the original assumptions were belied as within a very short time, most banks were making losses. The RRB concept was based upon the policy that they would lend only to the weaker sections of rural society, charging lower interest rates, opening branches in remote and rural areas and keep a low cost profile. But the commercial motivation was absent.
Initially the banks expanded and by the end of year 1985 RRBS had opened 12606 branches. During this period their credit deposit Ratio (C.D.R) expanded very fast. In 1976 it was 165% and gradually declined to 104 % in December 1986. The Credit Deposit Ratio continuously declined thereafter.
Later, the questions started being raised about the viability of these banks. The Khusrau Committee of 1989, noted that the weaknesses of RRBs are endemic to the system and non-viability is built into it, and the only option was to merge the RRBs with the sponsor banks. The objective of serving the weaker sections effectively could be achieved only by self-sustaining credit institutions. RRBs were finding themselves unable to sustain because of the mounting losses due to imprudent commercial policy. Thus, Khusrau Committee (aka Agricultural Credit Review Committee) said that the RRBs have no justifiable cause for continuance and recommended their mergers with sponsor banks.
But by that time, the branch network had expanded so large that it would be political unwise for the government to merge the RRBs with sponsor Banks.
Recommendations of Narsimham Committee on RRBs
The Narsimham Committee in 1990s also reiterated that the RRBs should be merged with the sponsor banks. By 1993, 172 of the 196 RRBs were recorded unprofitable. The paid up capital which was ` 25 Lakh at that time was not able to absorb the loan losses of most of the RRBs. The loan recovery was around 40%. The First Narasimham Committee recommended that the RRBs should also be permitted to engage in all types of banking business and should not be forced to restrict their operations to the target groups. The Narasimham committee also recommended that there should be mergers of the RRBs with their sponsor bank, BUT the “sponsor banks might decide whether to retain the identities of sponsored RRBs or to merge them with rural subsidiaries of commercial banks to be set up on the recommendation of the committee”. The first recommendation of letting the RRBs do all businesses was accepted by the government.
Some measures were taken by the Reserve Bank of India also. It allowed the RRBs to relocate their branches if they were making losses at one location for more than 3 years. They were also allowed to finance the 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
Some efforts were done by NABARD with funding support of the Swiss Development Corporation (SDC). It took a number of HR and Organizational Development in these banks.
Turnaround of RRBs
The above discussion makes it clear that most RRB were making loss and had deviated from the original idea that had created them. But there were some profit making RRBs also. Some reforms led the rise in the number of the profit making RRBs but most of them 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 RRBs NPA level was high. 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. However, the major reform was to merge the RRBs with the sponsor banks.
Number of Regional Rural Banks in India
There were 196 RRBs sponsored by 27 SCBs and one State Cooperative Bank were operating in the country with a network of 14,484 branches spread over 523 districts as on March 31, 2005. The government started the process of consolidation and amalgamation in 2005, bringing the number down to 82 in 2010.
As of March-end, 2011, the total number of RRBs stood at 82. This number fell to 64 in March 2013. As of March 2014, the number of RRBs has been reduced to 57. After the 2014 elections, the new NDA government has put hold on further amalgamation of the Regional Rural Banks. The focus of the new government is to improve their performance and exploring new avenues of investments in the same. Currently, there is a bill pending to amend the RRB Act which aims at increasing the pool of investors to tap capital for RRBs.
Regulation of RRBs
Regional Rural Banks are regulated by National Bank for Agriculture and Rural Development (NABARD). Please note that currently seven states viz. Tripura, Nagaland, Manipur, Mizoram, Arunachal Pradesh Meghalaya and Puducherry, have state-level RRBs. Gujarat and Karnataka too have demanded formation of state level RRB. In case of West Bengal, the state Assembly took unanimous resolution in favour of State level RRB in the year 2004.