Regional Rural Banks

Regional Rural Banks are a unique category of banks set up to combine the local feel of cooperatives with the professionalism of commercial banks. They were established under the Regional Rural Banks Act, 1976 (after an ordinance in 1975) on the recommendations of the Narasimham Committee on Rural Credit.

The first RRB (Prathama Bank in Uttar Pradesh) started on 2nd October 1975. RRBs were created to serve rural areas with basic banking and credit services while being financially sustainable. The aim was to enlarge institutional credit for the rural and agriculture sector, particularly to small and marginal farmers, agricultural laborers, artisans, and small entrepreneurs.

Structure and Ownership

RRBs are jointly owned by three entities – the Central Government, the concerned State Government, and a sponsor bank (which is usually a public sector bank). The shareholding ratio is fixed at 50:15:35 respectively. For example, Gramin Banks sponsored by SBI will have SBI owning 35%, Government of India 50%, and the state government 15%. The sponsor bank not only contributes capital but also provides managerial and financial mentorship (initial staff training, technology, procedures) to the RRB. Each RRB is a scheduled commercial bank (included in the Second Schedule of RBI Act) and enjoys the same depositor insurance and refinancing facilities as other commercial banks.

RRBs are region-specific – each is authorized to operate in a notified geographical area, usually one or a few contiguous districts in a state. Initially, 5 RRBs were launched in 1975; over the next decade, the number grew to 196 RRBs across India by mid-1980s. Each RRB was relatively small, serving limited areas with a few branches, typically headquartered in a rural district town.

Consolidation and Number of RRBs

Over time, the viability of many tiny RRBs became a concern. Reforms were undertaken to consolidate them for better scale and efficiency. There have been four phases of amalgamation:

• Phase I (2005–2010): RRBs were merged within the same sponsor bank in a state, reducing the number from 196 to 82.
• Phase II (2012–2014): Reduced further from 82 to 56.
• Phase III (2019–2021): Mergers brought them down from 56 to 43.
• Phase IV (2025): A major “One State, One RRB” drive merged 26 RRBs into 11, effective May 2025, bringing the total count to 28 RRBs operating in 26 states and 2 UTs. After this, generally each state has one RRB (some larger states may have two, depending on sponsor banks).

Thus, as of late 2025, 28 Regional Rural Banks are functioning across India. Each of these RRBs has a fairly wide network in its region – collectively, RRBs have over 22,000 branches (92% in rural/semi-urban areas) covering approximately 700 districts. Examples include Andhra Pradesh Grameena Bank (sponsored by State Bank of India in AP), Baroda UP Bank (sponsored by Bank of Baroda in Uttar Pradesh), Kerala Gramin Bank (sponsored by Canara Bank in Kerala), etc.

Functions and Role in Rural Credit

The mandate of RRBs is to develop the rural economy by providing credit and other facilities to small farmers, agricultural laborers, artisans, and small entrepreneurs. They lend for agriculture (crop loans, farm equipment, irrigation, etc.), allied activities (dairy, poultry, fishery), rural housing, trade, and small industries. RRBs also perform government operations like disbursement of MNREGA wages and pension payments in rural areas, and they offer basic deposit services, insurance and remittance facilities to rural customers. A notable requirement is that RRBs must direct 75% of their total credit to the Priority Sector (a target higher than other commercial banks), reflecting their development role. They also generally focus on small-sized loans; many RRB loans are below ₹2 lakh catering to marginal clients.

Initially, RRBs had a limited area and restrictions on lending (they were to lend only to target sectors). These constraints were lifted over time – now RRBs can lend to non-target groups as well, and since 2013 they have been allowed to operate in urban areas to a limited extent (many RRBs have one or two urban branches). This has diversified their portfolio, though rural and agri lending remains core.

Recapitalization and Support

RRBs, due to their rural focus, sometimes face capital adequacy issues (credit defaults from monsoon failure, etc.). To ensure they maintain the minimum CRAR of 9%, the government has a scheme of periodic recapitalization of RRBs. For instance, a recapitalization drive was approved in 2011 (₹2,200 crore infusion) and extended through 2020.

In March 2020, the government approved ₹1,340 crore (₹670 crore as central share) to recapitalize weak RRBs through 2020–21, with proportional capital from sponsor banks and state governments. This support has strengthened RRBs’ financial base. Moreover, RRBs enjoy refinancing from NABARD and sponsor bank support for technology (many RRBs use their sponsor bank’s core banking platforms).

Significance

RRBs act as a critical link in the rural credit chain, sitting between cooperative credit societies and commercial banks. They have a deeper penetration into remote rural areas than most commercial banks, thanks to local staffing and mandate. By design, an RRB’s board includes the sponsor bank’s nominee and NABARD’s nominee to guide operations. Over the years, RRBs have helped wean rural borrowers away from moneylenders, by offering accessible banking in villages.

They have also been key in implementing government initiatives like Kisan Credit Cards, financing Self-Help Groups, and the recent financial inclusion (Jan Dhan) push – many rural Jan Dhan accounts are with RRBs. While some RRBs struggled with losses historically, consolidation and capital support have improved their health; today many are profitable and compete with other banks in their service areas. For example, Prathama UP Gramin Bank and Ellaquai Dehati Bank (J&K) have shown robust growth post-mergers.