Measures Taken to Revive Regional Rural Banks

Regional Rural Banks (RRBs) are financial institutions established to provide banking services to rural and semi-rural areas, particularly targeting small and marginal farmers, agricultural labourers, artisans, and rural entrepreneurs. Since their inception in 1975, RRBs have played a crucial role in promoting financial inclusion and rural development in India.
However, due to limited capital, restricted operational areas, high non-performing assets (NPAs), and poor management efficiency, many RRBs became financially weak over the years. To address these challenges, the Government of India, the Reserve Bank of India (RBI), and the National Bank for Agriculture and Rural Development (NABARD) have implemented several reform measures and revival strategies aimed at strengthening and modernising RRBs.

Background

• RRBs were established under the Regional Rural Banks Act, 1976, following the recommendations of the Narasimham Working Group (1975).
• The first RRB, Prathama Bank, was set up on 2 October 1975 in Moradabad, Uttar Pradesh.
• The ownership structure of RRBs was designed as a three-tier system:
  • Central Government – 50%
  • State Government – 15%
  • Sponsor Bank (usually a public sector bank) – 35%

Despite their social objectives, many RRBs faced financial stress due to low profitability, high cost of operations, limited product range, and regional imbalances in performance.

Major Issues Affecting RRBs

1. High levels of Non-Performing Assets (NPAs).
2. Low capital adequacy and insufficient funds for expansion.
3. Limited area of operation, restricting economies of scale.
4. Lack of professional management and skilled manpower.
5. Over-dependence on government support and sponsor banks.
6. Technological backwardness and poor customer service.
7. Inadequate risk management and internal controls.

Key Measures Taken to Revive RRBs

Over time, several committees and government initiatives have been introduced to revitalise the RRB sector and make it financially viable while retaining its social objectives.

1. Recapitalisation of RRBs (1990s onwards)

Objective: To strengthen the financial base of weak RRBs by infusing capital.

• Based on recommendations from the Narasimham Committee (1991) and the Bhandari Committee (1994), the Government of India implemented recapitalisation schemes for loss-making RRBs.
• Capital support was provided by the Central Government, State Governments, and Sponsor Banks in the same 50:15:35 ratio.
• Between 1994 and 2000, more than ₹2,000 crore was infused into RRBs to improve their capital adequacy and meet prudential norms.

2. Reform Process Initiated by the CRAFICARD and Kelkar Committees

• The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD), 1981, recommended measures to enhance credit flow to rural areas and improve RRB efficiency.
• The Kelkar Committee (1986) suggested greater autonomy, liberalisation of interest rates, and improved recovery mechanisms.

3. Strengthening and Restructuring Plan (2009–2011)

• In 2009, the Government of India launched a Comprehensive Restructuring Plan for RRBs based on the Basel Capital Adequacy Norms.
• The plan involved recapitalisation of 40 weak RRBs to ensure that each achieved a Capital to Risk-Weighted Assets Ratio (CRAR) of at least 9% by 2011.
• A total of ₹2,200 crore was released for this purpose.
• NABARD was appointed as the nodal agency for monitoring the recapitalisation process.

4. Consolidation and Amalgamation of RRBs

Objective: To improve efficiency, reduce operational costs, and achieve economies of scale.

• The Government of India initiated the amalgamation of RRBs in phases from 2005 onwards, reducing their number drastically.
• RRBs were merged based on sponsor banks and regional proximity.

• The mergers improved financial viability, capital adequacy, and geographical reach.

5. Introduction of Technology and Digitalisation

To modernise RRB operations, the government and NABARD encouraged adoption of Core Banking Solutions (CBS) and digital banking platforms.

• By 2012, all RRBs were brought under CBS, allowing customers to access services through ATMs, mobile, and internet banking.
• RRBs were integrated with national digital initiatives such as:
  • Aadhaar-enabled Payment Systems (AePS)
  • Unified Payments Interface (UPI)
  • Pradhan Mantri Jan Dhan Yojana (PMJDY)
  • Direct Benefit Transfer (DBT)

This technological upgradation improved efficiency, transparency, and outreach.

6. K.C. Chakrabarty Committee (2010)

The RBI set up a committee under Dr. K.C. Chakrabarty to examine the restructuring of RRBs.
Key Recommendations:

• Introduce a two-tier structure with strong regional banks at the state level.
• Encourage further amalgamations for stronger financial base.
• Focus on technology adoption and skill development.
• Improve credit delivery through product diversification and business correspondents.

7. Financial Inclusion and Business Correspondent Model

RRBs have been integrated into India’s financial inclusion strategy to expand banking services to unbanked rural areas.

• RRBs were authorised to appoint Business Correspondents (BCs) and Business Facilitators (BFs) for doorstep banking.
• Participated in government schemes such as:
  • PMJDY (2014) – Opening basic savings accounts for all citizens.
  • PM-KISAN, PM-SVANidhi, and Stand-Up India – Providing credit to farmers and small entrepreneurs.
• These initiatives enhanced credit delivery and expanded financial literacy.

8. Strengthening of Capital Base – Recapitalisation Drive (2019–2021)

• The Government of India launched a fresh recapitalisation scheme to ensure that RRBs complied with Basel-III norms and maintained CRAR above 9%.
• Between 2019 and 2021, over ₹6,700 crore was infused into weaker RRBs.
• This recapitalisation was jointly funded by the Centre, States, and Sponsor Banks.

9. Empowerment through Regulatory Reforms

• RBI’s Revised Guidelines (2015 & 2022):
  • Allowed RRBs to raise capital from the market (up to 49% private shareholding) with government approval.
  • Enabled greater operational autonomy and flexibility.
• Expansion of lending portfolio to include MSMEs, renewable energy, housing, and infrastructure sectors.

10. Strengthening Management and Human Resources

• The government and sponsor banks introduced capacity-building programmes for RRB staff.
• Encouraged performance-based incentives and managerial autonomy.
• Improved governance standards through board-level reforms, audit mechanisms, and risk management systems.

Outcomes of Revival Measures

The revival and reform initiatives significantly improved the overall performance of RRBs:

1. Improved Profitability:
   • Many RRBs turned profitable due to recapitalisation and operational reforms.
2. Better Capital Adequacy:
   • Almost all RRBs achieved a CRAR above 9%, complying with Basel norms.
3. Expanded Outreach:
   • Over 21,000 RRB branches now serve rural and semi-urban regions.
4. Enhanced Credit Flow:
   • RRBs have become major providers of rural credit, particularly in agriculture and microfinance.
5. Technological Modernisation:
   • Full adoption of CBS and integration with digital payment systems improved customer convenience.
6. Financial Inclusion:
   • RRBs play a crucial role in implementing government financial inclusion and welfare programmes.

Remaining Challenges

Despite progress, RRBs still face several challenges:

• High levels of NPAs in agricultural and small-scale sectors.
• Limited product diversification and competition from commercial banks.
• Uneven regional performance and dependence on sponsor banks.
• Need for further digital transformation and rural infrastructure support.