Chapter 2 RURAL BANKING: A THEORETICAL REVIEWshodhganga.inflibnet.ac.in/bitstream/10603/26012/13/13_chapter2.pdf · Chapter 2 RURAL BANKING: A THEORETICAL REVIEW ... obsolete technology,

Chapter 2

RURAL BANKING: A THEORETICAL REVIEW

Rural populace around the world is almost always in the clutches of

poverty, and is invariably deprived of all the amenities enjoyed by the urban

inhabitant. Rural populace around the world is not famous for their prolonged

poverty. It is estimated that not less than 70 per cent of the world’s poor are

living in the rural areas and in the developing world, around 55 per cent of their

total population are in the rural area (IFAD, 2010). Poor education, health and

sanitation, lack of social assets, limited economic opportunities and social

inequalities are the causes and manifestations of poverty. Despite intensive

poverty eradication measures among countries, the menace is actively present

among many Asian and Sub-Saharan countries.

Lack of infrastructure and utilities such as road, electricity, drinking

water, schools, hospitals, communication systems etc. in rural areas lead most

of the heavy industries and non-farm job avenues to urban areas, and this has

forced the majority of countrymen to depend mainly on agriculture for their

livelihood.

Seasonal rainfall, obsolete technology, inadequate support such as

transport, storage, processing and marketing; and lack of market information

lead to underemployment in agriculture. Added to this, the exploitation of

money lenders due to the absence of formal financial institutions and also the

reluctance of these financial institutions to lend money to the rural farmers

aggravated the situation further. Thus, these severe problems lead the rural

inhabitants to their migration which ultimately ends up in city slums and adds

to urban poverty. To improve the economic and social conditions of the rural

mass, there have been many policy and administrative initiatives called “rural

development programme” in both developed and developing countries.

Recently, there has been a shift of focus in rural development programmes

The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala

32

from providing direct employment to empowering people by providing with

low cost credit in order to assist them in creating employment and wealth. In

fact rural people are not less intelligent, less hard working or less ambitious,

but lack of capital resources and information in rural areas lead to low

productivity, low income, low savings, and resultant poverty. To help people to

come out of this vicious circle, the need of capital infusion and availability of

information and market intelligence to ambitious rural individuals and groups

cannot be over emphasized. Today banks can act as a vehicle to carry,

distribute and administer this most essential ingredient of rural development.

Even though banking as an industry has grown to sky heights in the

world, in no country their doors are open impartially to all. Due to economic,

social and geographical reasons, vast majority of the rural poor have not

received much attention and care of the formal banking sector until recently.

Now even in developed countries there is a greater awareness as to the role

which financial institutions can play in empowering the low income groups.

With this end in view, United Kingdom has constituted a Financial Inclusion

Fund in 2004 and banks and credit unions have been given responsibilities of

specific areas. Similarly United States of America has Community

Reinvestment Act (CRA) and Home Mortgage Disclosure Act (HMDA).

Though both these Acts are comparatively older, a recent amendment to these

Acts made them some more strong. As per the provisions of these Acts, banks

are prohibited from discriminating against low and moderate income

communities and further the banks are obliged to disclose the details as to

whom the services are offered. Now Philippines, Brazil, Indonesia, China,

Thailand, Nigeria, Bangladesh, Pakistan, Ghana apart from India are some of

the other countries focusing on rural banking in this manner.

2.1 Concept of Rural Banks

Banking in its most simple form is as old as authentic history of human

being. As early as in 2000 BC, Babylonians had a system of banking which

was the oldest trace of banking. It was done by private individuals in the early


33

years; later on they established public banks to facilitate commercial activities

and to serve the governments. The Bank of Venice (1157) is considered to be

the first ancient bank followed by Bank of Barcelona (1401) and Bank of

Genoa (1407) (Vaish, 2002). In the initial period, the activities of these banks

were confined to satisfying of the individual needs of a few influential people;

but later on, through various stages, it developed in to the present state.

Presently, banking industry hand in hand with Information and Communication

Technology (ICT) has grown to the length and breadth of the world.

Banks worldwide are broadly classified as Central banks, Commercial

banks, Development banks, Co-operative banks and Specialized banks. With

regard to the importance, the share of Commercial banks is so large that the

term bank itself is to mean a commercial bank unless otherwise specifically

stated. Despite the physical presence of banks of varied nature in the rural,

semi urban and urban areas; their urban origin, commercial orientation, pro-

rich policies and profit motivation have marginalized a greater portion of the

population, i.e., the rural poor, from accessing the banking services. Though

the reasons like economic, financial, geographical conditions and lack of

awareness can also be pointed out, the lukewarm attitude of the banks mainly

force the marginalized people to source their credit needs from informal,

indigenous, exploitative sources which made them more and more

marginalized.

To address the pressing need of providing formal credit to rural people,

another form of banking “Rural Banking” came into being across the world

(Shekhar and Shekhar, 1998). These were public or private, commercial or co

operative banks, regionally based, and rural oriented with specially designed

service schemes to suit the needs of agriculture, micro and small industries,

petty and small traders, artisans, and even landless labourers in the rural areas.

At the beginning, these banks were organized in co-operative sector and

later on spread to the public sector also. As regards the functions, these banks


34

were expected to cover not only agricultural needs, but all aspects of rural life

such as trade, small manufacturing, retailing, and other self employment

initiatives. Apart from providing credit and collecting savings, these were also

envisaged to take up the task of implementing poverty alleviation programmes

of the governments, ancillary banking services such as supplying inputs and

providing assistance in marketing and thus generally helping the overall

development of the area of operation. The idea of rural banks was found

appealing to the governments as well as the rural people despite many practical

difficulties in the beginning, and eventually it helped rural banking to get wider

acceptance across the length and breadth of the globe (Shekhar and Shekhar,

1998).

2.2 Rural Banking in India

Despite a long tradition of banking there is no satisfactory history that

goes back beyond the Mughal period and covers all of India (India

Infrastructure Data Base, 2005). The evidences that are available suggest that

there were money lending operations in India during Vedic period (2000-1400

BC) and the importance of interest rate was recognized by all Hindu law givers

such as Manu, Vasishta, Yajnavalkya, Gautama etc. (Indian Central Banking

Enquiry Committee, 1931 and Reddy, 1999).

The developments during the early 18th Century laid the foundations for

the Indian Banking System (RBI, 2006), and the western type joint stock

banking was brought to India by English Agency Houses of Calcutta and

Bombay (Mumbai). Further The Bank of Bombay (1720) was the first joint

stock bank in India, established in Mumbai (Bombay). Besides, during the

early nineteenth Century, East India Company’s trade was concentrated in

Calcutta, and there was a growing need for uniform currency to finance foreign

trade and remittances by British Army and civil servants. This led to the

establishment of the first Presidency Bank, The Bank of Bengal in 1806. The

Bank was given powers to issue notes in 1823. Following this, the Bank of

Bombay (1840) and the Bank of Madras (1843) were also set up as Presidency


35

Banks. They were known as Presidency Banks as they were set up in the three

Presidencies that were the units of administrative jurisdiction in the country for

the East India Company and these banks were governed by the Royal Charters

of the British.

During the same period, the Swadeshi Movement (1906) in the country

gave a call for the Indian owned joint stock banks and also for setting up of co-

operative societies to cater to the needs of rural people. In response to the call,

many commercial banks of Indian ownership like Punjab National Bank

(1895), Bank of India (1906), Indian Bank Ltd (1907), Bank of Baroda (1908),

Central bank of India (1911), Canara Bank etc. were set up in a row.

A major development in Indian banking that happened during the

period was the formation of the Imperial Bank of India in 1921 merging the

three Presidency Banks to act as banker’s bank, banker to the Government and

as a commercial bank. Simultaneously during the same period, co-operative

movements also began to grow, initially in the urban areas and then in to rural

areas as well. In 1913 the number of reporting banks had raised to 56 (Report

on Currency and Finance, RB, 2006) and by 1915, there were 602 urban co

operative credit societies and 13745 agricultural credit societies in India. The

history of modern banking, from a rural perspective can be summed into two

broad time spans: Pre-independence period and Post-independence period.

2.2.1 Pre-independence Phase

The pre-independence period was characterized by the existence of large

number of money lenders and small private banks, organized as joint stock

companies. They were largely localized and were maintaining their own credit

instruments (RBI, 2006). As there was no ceiling on interest rates, usurious

money lending practices were rampant. The Central Banking Enquiry

Committee Report (1929) and it’s associated Provincial Reports like Madras

Provincial Banking Enquiry Committee Report (MPBEC, 1930), explain the

then practices:


36

“Frequently the debt is not repaid in full and a part of the loan persists

and becomes a pro-note debt. In the course of time, it may with a lucky year be

paid off or it may become a mortgage debt. By the existence of this heavy

persisting debt the creditor takes the bulk of the produce and leaves the debtor

unable to repay short term loans. But equally the short term loans have

produced long term debts and there is a vicious cycle. The farmers cannot clear

his short term debt because of the mortgage creditor and he cannot cultivate

without borrowing because his crops goes largely to the long term creditor. If

he pays his long term creditor his current debts swell and overwhelm him.”

The MPBEC found that repayment of prior debt was by far the single

most significant reason for borrowing in 1929. The mechanism of mortgage

was very beneficial to the landlords, by which they got control over large tracts

of land (MPBEC, 1930). Grain loan was another form of loan which was

commonly repayable in kind at harvest season. Rates of interest on these were

generally twice compared to cash loans. When cash loans cost between 12 and

24 per cent, grain loans costs between 24 and 48 per cent and further there were

no transparency in keeping the accounts by the lenders. For tenant farmers, in

addition to the loans and interest, they had to pay the rent also on land. If the

rents were not paid in time the crops would be withheld in the field until the

rent was cleared and high rate of interest would be charged on the unpaid

balance (MPBEC, 1930).

a) Major Legislations on Rural Banking

The colonial government brought about much legislation to tackle the

serious situation prevailed among the rural agrarians. The enactment of

Deccan Agricultural Debt Relief Act (1879), and similar Acts in Punjab, Berar

(also known as Hyderabad Assigned Districts) and Central Provinces

empowered the courts to stop usurious interest and resultant land grab by

money lenders. Coming up of Land Mortgage Banks and enactment of two

legislations such as Land Improvement Loans Act 1883, (for long term loans),

and Agriculturists Loans Act 1884, (for short term loans) for providing low


37

interest loans for agriculture were the major interference by the legislature. But

these laws did not help to mitigate the situation (Chandavarkar, 1984).

The enactment of the Co-operative Societies Act 1904, and of 1912,

enabled the entry and regulation of co-operative credit in India. By 1930,

Provincial Co-operative Banks were set up in all provinces. But the severe

socio economic divisions that existed in the society disappointed the

visionaries. Most of the banks were run by the high caste landlords and money

lenders. Outcaste men found it impossible to get a loan from a co-operative

bank unless he promises his labour to the landlords at a low wage (Royal

Commission on Agriculture, 1929).

The introduction of Usurious Loans Act (1918) was indented to apply

the damdupat principle (interest never exceed principal) to debts. Between

1933 and 1936 there were a number of Debt Conciliation Acts in central

provinces of Berar, Punjab, Assam, Bengal and Madras. These Acts were to

deal with the wave of legal suits against debtors for land attachments following

the situation emerged out of the Great Depression of thirties. Debt

Reconciliation Boards stemmed out of these laws, were abolished after a few

years finding that they lack any coercive powers (Naidu, 1946).

To regulate the money lenders, The Punjab Regulation of Accounts Act

1930, and Debtors Protection Act 1935 were passed which made licensing,

registration and proper accounting of transactions compulsory to money

lenders. But these laws were also ineffective due to the reluctance of the

debtors to sue the money lenders being their sole source of funds in

emergencies (Chandavarkar, 1984). But the Madras Agriculturists Debt Relief

Act 1938 attracted the hostility of creditors, leading to many instances of

litigation (Naidu, 1946).

Despite all these regulations, the money market continued to be deeply

imperfect. The fixing of interest rate, fixing of price for the produce, fixing of


38

time of its sale, were beyond the discretion of debtors, added with this is the

oppressive caste system, asymmetrical power balance among different castes

and occasional drought led to the pauperization of peasantry in colonial India.

b) Reserve Bank of India

During the early twentieth Century, major socio economic events like

First World War (1914-1918) Great Depression (1930) and World War II

(1939-1945) etc. led to continuous bank failures in India (India Infrastructure

Database, 2005). The high mortality rate among Indian banks and low support

to agriculture and rural credit by them felt the need for a central bank to the

country. The Indian Central Banking Enquiry Committee (ICBEC, 1929),

appointed to study the problems in the Indian banking sector recommended that

a central bank be established for the country and a special legislation be made

to regulate banks by amending the existing Companies Act (1913).

The Reserve Bank of India Act, 1934 brought the RBI in to existence.

The issue of bank failures and need to support to agriculture were the two

prime reasons for the emergence of RBI (RBI, 2006). Almost the entire finance

required by agriculture and rural sectors were provided by the money lenders at

that time, and also, the role of co-operatives and other agencies were

negligible. The legislation made agriculture credit a special responsibility of

RBI. During the period from 1935 to 1950, RBI continued to focus on

agriculture and rural finance by encouraging co-operative societies through the

provision of financial accommodation to them. Besides, RBI played a central

role in building a well differentiated structure of co-operative credit institutions

for catering, both short term and long term needs of agriculture and allied

activities (Mohan, 2004).

2.2.2 Post-independence Period

Independence brought big changes in many spheres of economic

activity, and banking was one of the crucial areas where a phenomenal

transformation took place. Following the partition and related turmoil, bank


39

failures became common and started to cause hardships to the savers. Among

many administrative and legislative measures to curb this, the enactment of

Banking Companies Act (1949), the first legislation on banking in free India,

and an amendment to it in 1961 were made to check the troubles in the banking

sector.

When the country attained independence, Indian banking industry was

entirely under private sector, which had neither penetrated in to rural and semi

urban areas and nor had any interest too. Further, most of the bank credit went

to industry and commerce and very little to agriculture, regardless of its huge

(55%) contribution to the nation’s GDP (RBI, 1952). Since the rural credit

markets were isolated and rather unregulated, the money lenders, who were

also the buyers of agricultural produce most often, acted as monopolists and

charged exorbitantly high rate of interest. To have a ground report of the rural

credit situation, RBI constituted a committee, The All India Rural Credit

Survey Committee (AIRCSC) in 1951, which rendered its report in 1954. As

per its report, the total debt of the farmers in India was estimated to be around

Rs.750 crore during the period of study, out of which the commercial banks’

share was 0.9 per cent. While the share of the informal sources, such as

agricultural money lenders and professional money lenders were 24.9 and 44.8

percent respectively (AIRCSC, 1954 and RBI, 2006). In relation to this, the

committee also observed that, there were 551 commercial banks, the bank

office to population ratio was at a staggering one branch for 136000 persons

and the savings rate of the country was at 10 per cent of national income (RBI,

1998). Another observation was that the co-operatives, though they lack

facilities and guidance, are the best suited to the rural needs. To this end, the

amalgamation of imperial banks and major state associated banks were thus

recommended to have a nationwide machinery to assist and control the co-

operatives credit institutions. Accordingly Imperial banks were amalgamated,

nationalized and converted in to State Bank of India in 1955 with an objective


40

of spreading banking facilities on a large scale to rural and semi urban areas.

With this a large number of branches were opened in hitherto unbanked areas.

Despite an increase in the number of rural branches of commercial

banks, the quantum of rural credit was inadequate throughout the 1950s and

1960s (Mohan, 2004). Further, the setting up of Agricultural Refinance

Corporation (1963), indented to provide funds by way of agricultural refinance

to commercial and co-operative banks also failed to achieve the desired results

(Mohan, 2004). The other important movements in this direction include bank

nationalization and the adoption of a series of other social banking strategies.

a) Bank Nationalization

Despite the AIRCS Committee’s insistence, the commercial banks role

in rural credit remained minimal and indirect all through 1950’ and 60s. Even

after the RBI directive to commercial banks to open one rural branch for every

branch in the banked urban and semi-urban area, the number of rural branches

remained very few in number (Meyer and Nagarajan, 2000) and the situation

did not improve even up to 1971, when the percentage of rural credit to total

bank credit stood at 2.4 per cent, most of which were given to plantations.

Further, to achieve rural credit target, the main strategy of banks of those days

was to finance agro-processing firms and purchase of bonds floated by land

development banks.

Until the end of 1960s, the majority share in the total bank credit was

enjoyed by industries, especially large ones (62%) followed by trade and

commerce (26%), (Sen and Vaidya, 1997). It has also been alleged that

advances by private banks were diverted to sister companies of the banks or to

companies in which their directors had an interest (Chandrasekhar and Ray,

2005).

Thus, twenty years after independence, the co-operatives functioning in

the rural regions were dominated by the rural elite and commercial banks were


41

under strong urban bias which drove 50 per cent of India’s town and all of its

villages without a bank branch (India Population Census, 1961). Thus, in 1969,

the National Credit Council was instituted to guide the branch expansion

programme of banks; meanwhile it also found that, not even one percent of

India’s villages served by bank branches. Further, bank credit to agriculture,

which contributes 50 per cent to GDP, was negligible while industry which

contributes only 15 per cent of GDP had cornered 67 per cent of total bank

credit. Consequently to acquire a more direct and activist role to RBI in

deciding banking policies, 14 largest commercial banks were nationalized in

1969. The Banking Companies (Acquisition and Transfer of Undertakings)

Act, 1969 that empowered the state to nationalize the banks, emphasized the

need to preserve national priorities and objectives such as rapid growth of

agriculture, small industries, and exports, rising of employment levels,

encouragement of new entrepreneurs and development of backward areas.

After nationalization the branch expansion was deliberately focused on the

previously unbanked rural and semi urban locations.

b) Social Banking Strategies

There were many efforts by the RBI and GoI., to widen and to make

effective the banking services in India. Important among them having a bearing

on the rural banking include Lead Bank Scheme, branch licensing policy of

RBI, formulation of priority sector, setting up of National Bank for Agriculture

and Rural Development (NABARD) and adoption of Service Area Approach

(SAA).

Adoption of Lead Bank Scheme (LBS) mooted by Gadgil Study Group,

in December, 1969 as part of “Area Approach” by RBI, enabled banks to

assume leadership of districts in bringing about banking developments

especially, branch expansion and credit planning in the respective districts. The

Lead bank has no monopoly of banking in the district but to lead other banks in

the district. The main theme of the scheme was to familiarize the banks with


42

the district economy so as to identify the banking and credit gaps and to

mobilize savings to bridge such gap.

The credit planning exercise under this scheme primarily aims at the

overall development of the districts by the coordinated efforts of the banks

acting in unison with the developmental organs of the state government at the

district level. To co-ordinate all banks and financial institutions in the district

and government departments, District Consultative Committees (DCCs) have

been formed. With the help of the representatives of DCCs, commercial banks

having wide network of branches in the district, and of district planning

officials of the government, lead bank prepares the District Credit Plan (DCP).

Further, for effective implementation of DCP, Annual Action Plans are

formulated as a separate document since 1980. It is considered that the lead

bank scheme was successful in branch expansion and in providing access to

credit to farmers and small enterprises (Thingalaya, 2010), and need to be

continued for taking the challenges of financial inclusion (Usha Thorat, 2009).

The branch licensing policy of RBI adopted in 1970 was the first major

step towards social banking since nationalization. As per which, for every new

branch in an already banked area, the commercial banks would have to open at

least 3 branches in unbanked rural and semi urban areas. Again, this ratio was

further revised to 1:4 in 1976. Following this movement, the bank branches in

unbanked locations really exploded especially between 1977 and 1990 when

around 80 per cent of all new bank branches were in rural unbanked areas

(Burgess and Pandey, 2002).

Priority sector lending was another measure adopted to further the

banking services to the countrymen. A target of 33 per cent lending to the

priority sector was set in 1975, the target was then raised to 40 per cent in 1979

and again in 1980 sub targets for agriculture (16%), and weaker sections (10%)

were also set in. As a result, until 1990, there has been manifold increase in the


43

priority sector lending both in terms of amount and the number of accounts

(Chavan, 2005 and Narayana, 2000).

Setting up of National Bank for Agriculture and Rural Development

(NABARD) in 1982 by taking over the Agricultural Credit Department (ACD)

and Rural Planning and Credit Cell (RPCC) of RBI and Agricultural Refinance

and Development Corporation (ARDC) was another important step to improve

rural outreach of formal finance. It aims to promote sustainable agriculture and

rural prosperity through effective credit support, institutional development,

supervision, capacity building and training of personnel. Within a short span of

time, NABARD occupied an indisputable position among the country’s

development finance providers. Now it is widely considered as the engine

puller of rural development.

Adoption of Service Area Approach (SAA) based on the

recommendation of Ojha Committee (1989) was to close the loopholes of LBS.

As per SAA, each bank branch was allocated 15 to 25 villages around it. On

the basis of an elaborate survey of the area, the bank will prepare a credit plan

and such plans were discussed at the Block Level Bankers Committee (BLBC)

before finalization. The annual credit plans prepared by all branches in the

block are then consolidated to form the block credit plan. The various credit

plans from the district are then consolidated to form the Annual Credit Plan of

the District. Again, the district credit plans will be aggregated in to state credit

plans. In the light of the above information the branch will prepare separate

credit plans for each village allotted to it and then combine all those plans to

prepare the credit plan for the service area. In 2004, the RBI relaxed the area

restrictions and now a rural or semi urban branch can lend to non-service areas

also, except for government sponsored schemes.

2.3 Rural Banking in Kerala

The history of Kerala’s banking development is different from the rest

of the country. Unlike other parts of the country where initial banking activities


44

thrived in port towns, banks in ancient Kerala started in rural agrarian

heartlands and eventually spread to other urban areas. Further, the available

literature suggests that the region was devoid of caste based money lenders like

Chettiars and Banias found in some other parts of the country (Government of

Travancore, 1930). The places of agrarian centers like Thiruvalla, Thalavadi,

Chengannur, Kozhanchery, Kottayam, Palai etc. are deemed to be the cradle of

banking in Kerala (Oommen, 1976).

Until 1947, the Princely States of Travancore and Cochin and the

Malabar District of the erstwhile Madras Presidency of British India were the

three political entities in the region. When princely states abolished,

Travancore and Cochin were merged to form a single state and later on in

1956, when the linguistic states were formed, Malabar was added to form

unified Kerala. Despite separate political identity, the banking system was

identical and integrated to the all India system prevailed at that time.

In Kerala, in the absence of professional money lenders, lending

business was done by landlords and rich peasants of Kerala and also by hundi

merchants of thirunelveli (Nagam Aiyah, 1906 and Velu Pillai, 1940). It has

been estimated that there were 264 money lenders operating in the region in

twenties (Government of Travancore 1930). Chit funds, commonly known as

Chitti or Kuri, a deposit-advance-lottery combine-was prevalent around the

same period among agriculturists, small traders and salary earners. Initially

they were grain chitties, eventfully they became money chits (Nayar, 1973).

The amount collected from subscribers in one installment is the capital.

Depending upon the amount of capital, it may be registered or unregistered.

There were innumerable small unregistered chitties with capital less than

Rs.100, distributing silver vessels, ornaments, furniture etc. as prize money

(Government of Travancore, 1930). The chitties are still popular and the

refined versions of the chitties have become a big business in Kerala involving

even government and corporate firms.


45

2.3.1 Commercial Banks in the Rural Sector of Kerala

Commercial banking in Kerala was started in the last quarter of

nineteenth Century. Most of the first banks were either a growth or a

transformation of the erstwhile chit funds. Compared to Malabar, Travancore-

Cochin was far ahead for intensity and density of banks, though most of the

early banks were short lived. The occurrence of bank formation and failure

were very common in the initial years.

Table 2.1: Number of Bank Offices in Kerala (1916-1952)Years Travancore Cochin Malabar Total1916 2 2 4 81921 5 7 6 181926 9 9 5 231931 23 14 9 461936 96 32 45 1761941 55 51 55 1611946 250 124 89 4641947 279 141 87 5071948 301 162 87 5501949 300 161 82 5431950 335 176 80 6161951 363 180 81 6261952 353 184 79 616

Source: RBI 1954b.Online data base. Note: (1) Up to 1936, only offices of class A and Class B banks were considered. There after

Offices of class C banks are also considered (2) Offices situated at places with population less than 50000 are not considered.

(3) Banks with capital and reserves of Rs.5 lakh or above are class A; between 1 and 5 lakh are class B banks, and between 50000 and one Lakh is class C. banks

The Travancore Bank started in 1883, with a capital of Rs.15000, in

Central Travancore by Eapen, a Pleader by profession, is considered to be the

first organized banking institution in Kerala (Oommen, 1976). In 1900, the

bank went in to liquidation. Around in the same period, T.C. Poonen started a

bank at Kottayam, that also failed after a short period. The Thiruvalla bank

founded in 1900 was the first joint-stock bank in Travancore and Cochin area,

which also failed after 12 years (Jeffry, 1976). While in Malabar region, The

Nedungadi Bank, started by Appu Nedungadi in1899 was the earliest bank.

Perhaps this would be the only bank in its genre that survived twentieth


46

Century. Later recently, Nedungadi bank caught in a financial crisis and

following the Government intervention, the bank was taken over by Punjab

National Bank in 2003.

In short, the growth in bank registration was remarkably slow until the

first word War (1914-1918). Since then, in Travancore-Cochin and also in

Malabar it increased, especially between 1927 and 1933. But, following the

Great Depression, a high percentage of these banks, particularly small ones,

went in to liquidation (GoI, 1956). At the same time, the surviving banks

expanded their business by adding new branches.

The falling trend in bank registration started in 1952 continued through

the thirties and early forties. The survey by TCBIC in 1956 found that there

were 163 banks in Travancore–Cochin region in total and 136 out of these were

small ones set up in hamlet and infested with the problem (poor level of

reserves, working capital, and high per cent of unsecured loans). The

committee found that some banks are beyond repair and 18 banks were refused

license. Notably, at all India level there were only 21 such cases during that

period. Even some bigger banks like Palai bank were also failed (1960) during

the period (RBI, 2006). In the wake of these developments, amalgamation was

seen as a solution. The moratorium and consequent amalgamation of the Kerala

banks brought in a new era of rapid consolidation of the Indian banking system.

Accordingly, Banking Companies (Amendment) Act, 1961 was passed, which

enabled compulsory amalgamation of ailing banks with the State Bank of India.

Consequent on this, in the following decade, there has been a big wave of

amalgamations and acquisition.

Nationalization of leading commercial banks in 1969 and 1980 also had

their impact on Kerala’s rural banking. Both total number of bank branches and

rural branches improved considerably though not proportionately. As a

common knowledge, since 1990, there has been a decline in the number of


47

rural bank branches. Table 2.2 portrays the development of the banks since

nationalisation.

Table 2.2: Number of Bank Offices in Rural Areas since NationalisationMonth &

YearIndia Kerala

Total Rural Per cent Total Rural Per centJune 1969 8262 1833 22.18 601 157 26.12 June 1975 18730 6807 36.34 1306 446 34.15 June 1980 32419 15105 46.59 2152 843 39.17 Mar.1985 51385 30185 58.74 2741 N/A - Mar. 1990 59752 34791 58.22 2906 573 19.71 Mar. 1995 62367 33004 52.91 3108 550 17.60 Mar. 2000 65412 32734 50.04 3318 347 10.45 Mar.2005 68355 32082 46.93 3609 347 9.60 Mar.2010 87768 32528 37.06 4390 342 7.79

Source: Basic statistical returns RBI, various issues Note: Includes administrative Offices also.

At the time of nationalisation of banks 26.12 per cent of the bank

branches were in rural Kerala, which increased to 39.17 per cent by the next

decade and then, by the next two decades, declined to 19.71 per cent. This

falling trend was somewhat opposite to the national figures up to the year 1990,

since then both national and state figures have been declining fast. Presently

Kerala’s rural branches are only 7.79 per cent of the total bank branches. It is

partly due to increased urbanization and the general trend of retreat of banks to

their urban home lands.

This improvement after bank nationalization in branch expansion was

truly reflected in the rural deposit mobilization also. The share of rural deposit

increased manifold. It is observed that (Table 2.3) the trend of rural deposit in

the country was in a rising mode though at a decreasing rate. While in Kerala,

though the total deposit has been increasing, the percentage of rural deposit to

total deposit was sharply declining from 8.55 per cent in 1969 to touch 4.6 per

cent in 2010.


48

Table 2.3: Deposit of Scheduled Commercial Banks from Rural Kerala

Month and Year

India Kerala Rural

deposit (Rs. Cr.)

% to Total deposit

Rural deposit (rs. Cr.)

% to Total deposit

% to all India rural deposits

June 1969 145 3.1 13 8.55 8.97June 1975 1029 8.1 71. 16.3 6.08June 1980 3975 11.9 228 17.7 5.70Mar. 1985 11722 13.6 249 7.27 2.12Mar. 1990 26234 15.3 526 8.02 2.00Mar. 1995 51820 13.7 1403 8.06 2.44Mar. 2000 120539 14.6 1994 5.1 1.65Mar. 2005 213104 12.2 3475 5.03 1.63Mar. 2010 423502 9.2 6187 4.60 1.47

Source: Basic Statistical Return of Banks in India (Various issues), RBI.

a) Rural Lending

The share of rural lending of scheduled commercial banks at all India

level was very meager (1.50%) during the period of the nationalization of

banks (Table 2.4). Since then, by four decades, it has increased around 4500

times from 54 crore in 1969 to 249277 crore in the year 2010. The percentage

of rural lending to total credit has also been increasing since nationalization.

Table 2.4: Lending of Scheduled Commercial Banks to Rural Kerala

Month & Year

India Kerala Rural

lending ( Rs.crore)

% to Total lending

Rural lending

( Rs.crore)

% to Total lending to

Kerala

% of All India rural

lending June 1969 54 1.5 4 4.04 7.41Dec.1975 535 5.9 47 14.83 7.73Dec.1980 2165 9.7 147 14.95 5.56Dec.1985 7277 13.8 190 8.96 2.54Mar.1990 16068 15.4 380 9.18 2.36Mar.1995 25174 11.9 750 9.79 2.66Mar. 2000 48753 10.5 1093 6.74 2.24Mar. 2005 109976 9.5 2440 6.46 2.21Mar. 2010 249277 7.68 4546 4.7 1.82

Source: Basic Statistical Return of Banks in India (Various issues), RBI.


49

However, the trend was broken in the year 1990 and since then, a steady

fall has been observed. It is true to Kerala also and now both the state level and

the all India level ratio of rural lending to total credit is the all-time low.

2.4 Regional Rural Banks

Regional Rural Banks are small, region based; rural development

oriented public sector commercial banks. They mainly lend to small and

marginal farmers, agricultural labourers, artisans, small traders and

entrepreneurs in the rural area to generate income, employment and

development. It is a part of the national rural financial infrastructure created

with an explicit intention of extending formal prudent banking services to rural

people at minimum cost. The sources of funds of RRBs comprise of owned

fund, deposits, borrowings from NABARD, sponsor banks and other sources

including SIDBI and National Housing Bank. NABARD also gives refinance

for short term loans for crop and other farm related activities and also refinance

to term loans for investment purpose.

There were 196 RRBs sponsored by 27 scheduled commercial banks

and one state co-operative bank with a network of 14484 branches spread over

523 districts operating in the country as on 31 March 2005. Then, to make them

financially viable, the process of sponsor bank-wise amalgamation of RRBs

was initiated by the GoI in a phased manner in September, 2005. Consequent

on amalgamation, the number of RRBs declined from 196 in 2005 to 82 as on

31st March 2010, spreading across 26 States and in one Union Territory,

covering 619 districts with a network of 15475 branches.

2.4.1 Origin of RRBs

As stated earlier in this chapter, in pre-independent India, despite its

being an agricultural country, there were few commercial bank branches in the

rural areas. The All India Rural Credit Survey Committee (1952) observed that

there were no formal sources of finance in the rural areas apart from a few co-

operatives banks located in the villages. Therefore most of the financial needs


50

of the rural folk were met from the informal traditional sources such as

relatives, traders, landlords and money lenders. As the co-operative banks were

offering only short term credit, the committee recommended setting up

Agricultural Refinances Corporation to grant term loans to rural people,

especially farmers. Further, in the mid-sixties, with plan support to agriculture,

the credit needs of the rural farm sector exceeded the capacity of co operatives.

To support the rural economy, 14 major commercial banks were nationalized in

1969, and they were called upon to open branches in the rural areas and

directed to extend agriculture credit on a priority basis. However, in 1972,

despite the massive branch expansion to rural areas, the Banking Commission

observed that a vast segment of the rural population comprising of weaker

sections and economically backward classes was deprived of banking facilities

as their requirements were insignificant in size to entertain by commercial

banks. To come out of the situation, the banking commission indicated the

formation of a specialized institution to cater to the needs of rural population.

With the above objectives in view, Government of India constituted a

Working Group on Rural Banks in 1972, (popularly known as Narasimham

Committee) which submitted its report in 1975, that paved the way for the

formation of Regional rural Banks in 1975, and in the following year, Regional

Rural Banks Act 1976 was enacted to govern the functioning of RRBs.

2.4.2 Nature of RRB

According to the Regional Rural Banks Act 1976, they can transact the

business of ‘banking’ as defined in the Banking Regulations Act 1949.

However, the Act also entrusted RRBs with the special responsibility of

lending, to small and marginal farmers, agricultural labourers, artisans, small

entrepreneurs, persons of small means engaged in trade, commerce or industry;

and also to co-operative societies engaged in agricultural credit, processing,

marketing and farmers service. However, since 1992, this ‘target group’ thrust

has been lifted in a phased manner. Now RRBs can lend to any person in their


51

area of operation provided, not less than 60 per cent of such lending should be

to the priority sector.

2.4.3 Growth of RRB

The growth and performance of RRBs during the last three and a half

decades can be summarized in to four phases as follows:

Expansion Phase - 1975 -1986

Declining Phase - 1986 -1997

Turnaround Phase - 1997 - 2005

Consolidation Phase - From 2005

Based on the recommendations of Narasimham Committee, the first five

RRBs were set up on 2nd October, 1975 by a Presidential Ordinance. Then in

1978, Committee on Rural Banks (Dantwala Committee) observed a gap in

rural credit beyond the capacity of commercial banks and co-operative banks

and emphasized the need for the expansion and extension RRBs. Following this

85 RRBs with a network of 3279 branches were set up by the end of December

1980 (Thingalaya, 2001). In the following years, the report of CRAFICARD

1981, setting up of NABARD (1982), and the observations of the Working

Group on RRBs (Khelkar Committee, 1984) acted as the drive behind the

quantum leap of RRBs that resulted in the rise of their number from 85 to 196

with a network of 13353 branches, by the end of 1986. However, obviously, no

new bank has been added since then (Alamelu, 2010).

Since the beginning of the RRBs, the clientele base of them has been

restricted to small and marginal farmers, agricultural labourers, artisans and

small entrepreneurs and they were mandated to extend credit at concessional

interest rates. The obsession with target group lending has precluded these

banks from exploring all avenues locally available for lending. Further, the

small size of their advances led to low recovery and high transaction cost

(Thingalaya, 2001).


52

Added to this was the Service Area Approach introduced in the year

1989 as a refinement of the Lead Bank Scheme limited the area of jurisdiction

of many RRBs, leading to shrinkage of business. Further, the implementation

of the National Industrial Tribunal award on wages of RRB employees at par

with those of the sponsoring bank staff was another jolt on RRBs (Deepali Pant

Joshi, 2001), which eventually led to the erosion of assets, their capital, and in

many cases, even the depositors’ funds .

Meanwhile, the financial backwardness of RRBs had been a matter of

concern of policy makers since the early eighties. Many committees appointed

to look in to it, came out with various suggestions to address the problem of

financial viability. Working Group on RRBs (Khelkar Committee) in 1984

recommended merging small and uneconomical RRBs. In 1989, Khusro

Committee suggested the merger of RRBs with the sponsor banks. Further in

1994 (Bhandari Committee), in 1996 (Basu Committee) and in 1997

(Thingalaya Committee) made similar suggestions on the issue. Considering

these and similar other opinions, GoI came forward with a revitalization

package which combines a financial and non financial interference.

As per the revitalization package, between 1994 and 2000, an amount of

Rs. 2188 crore were granted to 187 RRBs to clean their balance sheet. Further,

some important non-financial measures such as allowing the RRBs to finance

non-target groups, to buy tier II bonds of sponsor banks or other financial

institutions, to grant housing and education loans and rationalization of

investment pattern etc. were also implemented.

The revitalization process brought amazing result in terms of

profitability and financial viability. The number of loss making RRBs

decreased from 164 in 2004 to 30 by 2005; also, RRBs as a group, attained a

total business of Rs. 112274 crore, and earned a net profit of Rs.709 crore

during 2005. Similar changes were there in recovery performance also. NPA

management and productivity per branch and staff improved (NABARD,


53

2006), but the dismal fact that a continuous decline in agricultural credit

remained unresolved.

2.4.4 Financial Resources of RRB

The main source of financial resources of RRBs includes share capital,

share capital deposit, public deposit and refinance from NABARD and sponsor

banks. The owned funds comprise of capital, share capital deposit and reserves

of profit making RRBs. As per the provisions of the RRBs Act 1976, the

authorized capital of a Regional Rural Bank is limited to Rs. 5 crore, with

provision to increase or decrease by the GoI in consultation with NABARD

and the sponsor bank, but in no case should it be less than 25 lakh. The issued

capital must be in between 25 lakh and 1 crore, which should be contributed

jointly by the Government of India, State Government concerned and the

sponsoring bank in the ratio of 50:15:35.

In addition to the initial capital contribution, the stake holders have

made infusion of additional funds. By this way, RRBs have collectively

received an amount of Rs. 3984.90 crore as part of the comprehensive financial

restructuring and recapitalization process initiated during 1994-95, 2000-01

and 2006-07 (NABARD, 2012). As the issued capital of RRBs is limited to

Rs.1 crore by the RRBs Act, 1976 these amounts are kept as capital deposit in

the RRBs’ balance sheets, pending an amendment in the Act.

In a further effort to make the RRBs Basel II norm compatible,

especially in relation to Capital Adequacy Ratio, GoI constituted a committee

in September, 2009 (Chakrabarthy Committee, 2010), which submitted its

report in 2010; and this committee recommended an infusion of 2200 crore as

additional capital to 40 out of the 82 RRBs so as to enable them to maintain the

stipulated CRAR (RBI, 2010). As it appears, the net worth of the RRBs as a

group has been increasing since the amalgamation in the year 2005. Again the

net worth reported showed a marked increase in the year 2009-10 (Table 2.5).


54

Table 2.5: Share Capital of RRBs in India (Rs. in crore)

Years Equity capital

Share capital deposit Reserve Net worth

2001 195.66 2054 1271 -2002 195.81 2081 1782 -2003 195.85 2113 2357 -2004 195.85 2135 3107 -2005 196 2167 3819 -2006 196 2180 4271 40102007 196 2188 4902 45262008 197 2833 5703 61072009 197 3972 6150 67502010 197 3960 7912 10256Source: Annual Report, NABARD (Various issues).

2.5 Amalgamation of RRBs

In view of the decline in agricultural credit and increasing transaction

cost of RRBs, GoI, decided to reposition RRBs as an effective instrument for

the delivery of rural credit and to enjoy the economies of scale. Based on the

recommendations of the Committee on Flow of Credit to Agriculture and

Related Activities from the Banking System (Vyas Committee, 2004), and in

consultations with the other stake holders, GoI began to amalgamate RRBs on

a phased manner. The First phase of sponsor bank wise amalgamation of RRBs

in the same state started in the year 2005 and continued up to 2010. The second

phase of amalgamation of RRBs in the same state but under different sponsor

banks is expected to start in the near future.

As on 31st March 2005, 196 RRBs with a net work of 14484 branches

in 26 states across 523 districts were operating in the country. While by

May 31, 2008, the number of RRBs came down to 88 and further to 82 in

March 2010 (46 amalgamated and 36 stand alone, including one RRB newly

started in Puduchery). The amalgamation resulted in making RRBs large banks

in the sense of area of operation and branch net work. Further, the number of

RRBs under a single sponsor bank also has come down considerably.


55

2.6 RBI Policy Support to RRBs

With a view to make the RRBs more effective in rural credit delivery,

the RBI offered a special support package to them, in 2005. The package

advises the sponsor bank to provide credit to RRBs at a reasonably low rate of

interest. Other important privileges include, permission for availing inter RRB

borrowings, for setting up of off-site ATMs, issue of debit/credit card and to

act as sub agent to other banks in doing government business. Further, RBI also

expressed their willingness to entertain the application from RRBs to open

‘Currency Chest’ and to allow them to undertake non-trade related foreign

exchange transactions, provided that financial position of the RRB permits.

In the year 2007, after reviewing the performance of RRBs, RBI issued

a notification as per which RRBs were prompted to exploit the non-priority

sector boom and to improve their CD ratio. In addition to this some other

encouragements were also offered, which include treating RRB as ‘Bank’ for

the purpose of Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002). Further,

RRBs with a positive net worth, with less than 10 per cent NPA, and in profit

for a period of three years, to start insurance business as corporate agents

without risk participation. As it is perceived, the process of revitalizing RRBs

has been an ongoing process since 2005, to reaffirm their objective of being

rural commercial and professionally managed banks. Owing to their uniqueness

in the field of rural financial inter-mediation, the committee on financial

inclusion, (NABARD, 2006) recognized and recommended RRBs as the most

suited and reliable agency for achieving hundred per cent financial inclusion

(Thingalaya, 2011).

2.7 Recapitalisation Support

The Finance Minister in the Union Budget had announced the

recapitalisation support to RRBs with negative net worth. The performance

review of all RRBs undertaken in July 2007 revealed that out of the 96 RRBs

(46 amalgamated and 50 stand alone), 29 (11 amalgamated and 18 stand alone)


56

had negative net worth amounting to Rs.1857 crore (NABARD, 2008). The

entire amount required for recapitalization (Rs.1795.97 crore) has been

released by 31 March 2010.

2.8 Financial Performance of RRB

Restructuring, recapitalisation and amalgamation of RRBs implemented

as part of banking sector reforms have brought about quantitative as well as

qualitative improvements in the financial performance of RRBs (NABARD,

2005 to 2010). The policy measures undertaken in respect of RRBs, viz.,

permission to relocate loss making branches, conversion of loss making

branches into satellite/mobile offices without impairing the performance of

branches in service area had commendable impact in terms of profitability,

recovery and NPA management. The significant improvements in the

performance of RRB were witnessed during the period of the study. The

variables like owned funds, capital employed, Net Profit, accumulated loss and

recovery and movements of NPA have been examined to have an idea about

the financial performance of RRBs.

a) Owned Funds

Owned funds constitute share capital, share capital deposit and

undistributed profit or reserves. The share capital is limited to rupees one crore

for each RRBs. There were 196 RRBs until September, 2005 when the

amalgamation process was initiated. A decline from 196 crore indicates the

erosion of capital of RRBs due to the prolonged accumulated loss and a small

increase denotes the amounts pending appropriation.

As indicated earlier in this chapter, share capital deposit is the additional

capital infused by the stake holders to make good the losses and thereby to

make the RRBs viable. It has increased from 2054 on March 2001 to rupees

3885 crore on March 2010, an increase of 51 per cent. It was during these

periods that all that RRBs received major financial contribution from its stake

holders. The reserves also have witnessed an increase of around 6 times during


57

the period. Total owned funds of RRBs have increased from Rs.3521 crore in

2001 to 12247 crore in 2010, i.e., an increase of 247 per cent. The highest

increase has occurred after 2005-06, the amalgamation period. The average

owned funds during the period is Rs.6908 crore and its average increase is 96.2

per cent.

Table 2.6: Changes in Owned Funds of RRBs in India (Rs. in crore)

Years No. of RRBs

Share capital

Share cap.

deposit Reserves

Total owned funds

% Increase

2001 196 195.66 2054 1271 3521 0.00 2002 196 195.81 2081 1782 4059 15.29 2003 196 195.85 2113 2357 4666 32.53 2004 196 195.85 2135 3107 5438 54.46 2005 196 196.00 2167 3819 6182 75.59 2006 133 196.00 2180 4271 6647 88.80 2007 96 196.00 2188 4901 7285 106.92 2008 91 197.00 2833 5703 8733 148.05 2009 86 197.00 3959 6150 10306 192.73 2010 82 197.00 3985 8065 12247 247.86

Average - 196.27 2569 4142.6 6908 96.2 CAGR - - 6.85 20.29 13.28 -

Source: Annual Report, NABARD, 2001-2010.

b) Capital Employed

All funds employed in the business on a long term basis, are taken as the

capital employed. Due to increase in owned funds and also of borrowings, the

capital employed has increased three times from Rs. 7585 cores in 2001 to

31017 crore in 2010. The highest increase has occurred in the year 2006-07.

The average borrowings of the period is Rs. 8309 crore, average capital

employed is Rs. 15218 crore and the average percentage increase is 100.6.

Borrowings of the bank include borrowings from NABARD, sponsoring bank

and other institutions. It is worth to note that the amount of borrowings exceeds

the owned funds thus the bank group as a whole is trading on equity.


58

Table 2.7: Changes in Capital Employed of RRBs in India (Rs. in crore)

Source: Annual Report, NABARD 2001-2010.

c) Profitability

The profitability position of RRBs has improved considerably during the

period. Though in the background of amalgamation, the number of loss making

RRBs have come down considerably. There are corresponding increase in the

amount of profit and decrease in the amount of loss.

Table 2.8: Net Profit Position of RRBs in India (Rs. in crore)

Years No. of RRBs

RRBs in Profit

Amount of profit

RRBs in loss

Amount of loss

Net profit

% increase

2001 196 170 676 26 76 600 0.00 2002 196 167 700 29 92 602 0.33 2003 196 156 734 40 215 519 -13.50 2004 196 163 952 33 184 768 28.00 2005 196 166 903 30 154 748 24.67 2006 133 111 808 22 191 617 2.83 2007 96 81 926 15 301 625 4.17 2008 91 82 1384 8 56 1328 121.33 2009 86 81 1746 5 34 1712 185.33

2010 82 79 2515 3 5.65 2509 318.17

Avg. - - 1134.4 - 130.8 1002.8 67.3

CAGR - - 14.04 - -22.89 15.38 - Source: Annual Report, NABARD, 2001-2010.

Years Owned funds Borrowings Capital

employed % Increase

2001 3521 4064 7585 0.00 2002 4059 4524 8583 13.16 2003 4666 4799 9465 24.79 2004 5438 4595 10033 32.27 2005 6182 5524 11706 54.33 2006 6647 7303 13950 83.92 2007 7285 9776 17061 124.93 2008 8733 11494 20227 166.67 2009 10306 12250 22556 197.38 2010 12247 18770 31017 308.93

Average 6908 8309 15218 100.6 CAGR 13.28 16.53 15.12 -


59

The net profit of the bank group has also increased around 4 times

during the period. Also, the cumulative increase in the net profit of RRBs

during the period is 318 per cent compared to the year 2001. The average profit

of the group as a whole is Rs.1134 crore while the average loss is Rs. 130.8.

The highest increase in net profit is in the year 2008 and the average percentage

increase in profit of the period is 63.7 percentages.

d) Accumulated Loss

Accumulated loss has been a troublemaker since long for RRBs. There

have been many efforts to wipeout or to reduce it, by all stakeholders from time

to time. The bank wise and branch wise strategies like introduction of

provisioning norms, asset classification, NPA management guidelines, letting

of non-priority sector lending, allowing of investments in non-government

securities, shifting of branches, etc. are some of the strategies to name hare. It

is observed that the accumulated loss of RRBs as a group has come down from

Rs. 2793 crore in 2001 to Rs. 1775 crore in 2010 (Table 2.9). The average

percentage increase is (-) 6.7 per cent. Another feature of the period is that, the

growth in investment has exceeded the growth in advances.

Table 2.9: Accumulated Loss of RRBs in India. (Rs. in crore)

Years Deposits Advances Investments Accumulated loss

% Increase

2001 38272 15816 27636 2793 0.00 2002 44539 18629 30531 2694 -3.54 2003 50098 22158 33063 2752 -1.47 2004 56350 26114 36135 2725 -2.43 2005 62143 32870 36768 2715 -2.79 2006 71329 39713 41182 2637 -5.59 2007 83144 48493 45666 2759 -1.22 2008 99093 58984 48560 2624 -6.05 2009 120190 67802 51159 2574 -7.84 2010 142980 82222 79379 1775 -36.45

Average 76813.0 33056 43008 2604 -6.7 CAGR 14.09 17.92 11.13 -4.43 -



60

The average of advances outstanding during the period is Rs.33056

crore, while that of investments is Rs.43008 crore. It suggests that RRBs in

general has begun to give more attention in making prudent investments than

making risky advances.

e) Recovery

As these banks are dealing with rural poor, who depend on unstable

income, the low recovery of advances is quiet common among RRBs.

Whatever be the reason for low recovery, it is deemed as the major factor

behind the viability problems which the RRBs faced since its inception.

It is observed that the recovery has improved from 70.59 per cent in

2001 to 77.24 per cent in 2010 (Table 2.10). The average recovery of the

period is 77.24 per cent. Related to this is the disproportionate presence of non-

performing assets in the balance sheets of RRBs. The common measure of its

intensity, the ratio of NPA to advances outstanding shows that there has been

considerable decrease in the magnitude of NPA. It has come down from 18.84

per cent in 2001 to 3.72 per cent by 2010. The average ratio of the period is

9.74 per cent.

Table 2.10: Recovery and NPA of RRBs in India (Rs. in crore)

Years Advances % of Recovery GNPA GNPA to

advances O/s. %

Increase 2001 15816 70.59 2979.73 18.84 0.00 2002 18629 71.52 2572.66 13.81 -26.70 2003 22158 73.49 3199.75 14.44 -23.35 2004 26114 77.67 3298.83 12.63 -32.96 2005 32870 79.85 2803.81 8.53 -54.72 2006 39713 79.80 2891.00 7.28 -61.36 2007 48493 80.49 3178.03 6.55 -65.23 2008 58984 81.00 3566.34 6.00 -68.15 2009 67802 78.00 2807.00 5.68 -69.85 2010 82222 80.00 3080.82 3.72 -80.25

Average 33056 77.24 3038.00 9.74 -48.57 CAGR 17.92 - 0.33 - -



61

Thus, it is clearly observed that the financial position of RRBs in

general has improved during the period under review. At the same time the

increase in the share capital deposit should not be overlooked as it signifies the

infusion of capital to RRBs by the stake holders.

2.9 Governance Structure of RRBs

As per Section 6 of the RRBs Act, 1976 the Central Government, the

sponsor banks and the State governments have subscribed to the share capital

of RRBs in the ratio of 50:35:15. The governance is done by the stake holders

with the expertise of NABARD and RBI.

2.9.1 Role of the Government of India

The Central Government has absolute powers right from incorporation

of an RRB, subscribing to its capital, appointing two non-official directors on

the board, appointment and promotion of staff, determining remuneration and

service conditions of the staff. Further they have the authority to give

instruction to RRBs in public interest, amalgamation and notification there off

and placing the financial results of RRBs in both the houses of Parliament.

While exercising such powers, GoI seeks the help of NABARD.

2.9.2 Role of Reserve Bank of India

RRBs being part of Indian banking system are regulated by RBI in

matters related with opening of branches, collection of deposits, lending to

various sectors, rate of interest, investments and maintenance of SLR and CLR.

Presently the RBI has created state wise empowered committees to look after

the matters related with RRBs. However, according to provisions of Banking

Regulation Act, 1949 the supervision is vested with NABARD, and presently

NABARD makes on-site inspection and off-site monitoring.


62

2.9.3 Role of Sponsor Bank

As per Section 2(g) of the RRB Act, 1976, a sponsoring bank is a bank

in India. Besides promoting and subscribing 35 per cent to the equity of RRB,

the other roles played by a sponsoring bank are:

(a) Deciding the place of Head office.

(b) Extending managerial and financial support and training to the personnel.

(c) Appointing the Chairman, General Manager and other top officials.

(d) Nomination of two official directors to the board.

(e) Sponsoring nominee directors for Government of India.

(f) Providing refinance and helping to maintain liquidity.

(g) Assisting assessment of manpower, creation of vacancy, recruitment and

promotion.

(h) Extension of area of operation.

(i) Entering in to Memorandum of Understanding, preparation of DAP and

review and monitoring of performance.

(j) Guidance in administrative matters, recovery, credit dispensation and legal

advice.

(k) Liaison with GoI, RBI and NABARD.

(l) Approval of branch categorization.

2.9.4 Role of the State Government

The State Governments plays a vital role in the functioning of the RRBs,

though they have only 15 per cent stake in the equity. They are entitled to

nominate two officers as directors of RRB. In addition to that, they have to

assist the RRB in building up of infrastructural facilities and adequate security

to the bank.


63

2.9.5 Role of NABARD

Even though NABARD is not a contributor to the equity of RRBs, it has

been entrusted with many duties and privileges relating to the RRBs. In

addition to the power to nominate a director to the board, it has much

supervisory and advisory authority. In the event of change of place of head

office, amalgamation of RRBs, appointment of Chairman, recruitment of

personnel, and preparation of model staff regulation, NABARD has a

recommendatory role. In the same way, according to NABARD Act, 1981

also, it has to provide short term credit, investment credit, long term credit and

rescheduling of loans, to the RRBs. Above all NABARD is the custodian of the

data base relating to RRBs.

2.10 Organization Structure of RRBs

Organization structure has a very important role in determining the

success or failure of an entity. The organization structure prevalent in RRBs

consists of Chairman (H.O) at the top, followed by General Manager (H.O),

Senior Manager (H.O), Area Manager (Area Office), Branch Manager, Officer,

Cashier/Clerk and at the bottom subordinate staff (Peon, Driver/Messenger).

CHAIRMAN

SENIOR MANAGER (H.O)/AREA/REGIONAL MANAGER (AREA/CONTROLLING/REGIONAL

OFFICE)

OFFICER

Figure 2.1: Management Hierarchy of RRBs.

GENERAL MANAGER

BRANCH MANAGER

CLERKS/CASHIERS

SUBORDINATE STAFF


64

Board of directors consists of nine members (Table 2.11) out of which

seven are official directors and the remaining is non-official. The term of office

is two years or as determined by the appointing authority, and are eligible for

re-nomination. The general superintendence, direction and management of the

affairs of the bank are vested in the board. Further, the chairman is appointed

by the sponsoring bank in consultation with NABARD. The appointment is for

a period of three years and could be re-appointed if necessary. The chairman

will be a fulltime director of the bank, and he has to preside over the board

meetings and oversee the affairs of the bank. To facilitate easy governance,

various committees and sub committee’s viz., Executive Committee, Audit

Committee, Risk Management Committee etc. consisting of directors or non

directors or both are constituted.

Table 2.11: Composition and Types of Directors Sl.No Type Designation Nominated by Number

1. Official Chairman Sponsor Bank with NABARD 1 2. Official Director State Government 2 3. Official Director Sponsor Bank 2 4. Official Director RBI 1 5. Official Director NABARD 1 6. Non-Official Director Government of India 2

TOTAL 9 Source:Annual Report, NABARD.

2.10.1 Staff Norms

The staff norms for RRBs are formulated by the Central Government.

As per the existing staff norms, at head office there can be 13 to 40 persons

including the Chairman, General Manager and others. As per the existing

branch licensing policy of RRBs, there could be one area office for every 25

branches. The area office is generally attached to one of the main branches.

The Area manager is in the rank of a scale III officer.

After the amalgamation of RRBs in 2006, the controlling offices also

have started to function. As per the existing norms one controlling office is


65

operated (for the first 75 branches), and thereafter, one controlling office for

every additional 50 branches.

The permissible staff strength of an RRB including officers, clerks and

messenger, is 4.00 per unit, which includes Head office, Area office and branch

excluding the extension centers and satellite centers. The RRBs with CD ratio

above 60 per cent are allowed to have additional officers at the rate of

0.1 staff per 10 per cent increase in CD ratio.

2.10.2 Branch Classification

The branches of RRBs are classified according to volume of business as

small branch, medium branch and large branch. A small branch is one with a

business of up to one crore, for a medium branch, there should be a business

between one crore and 12.5 crore and for a large branch it must be above 12, 5

crore. A small branch will be under the charge of a scale one officer, a medium

branch under a scale two officer and a large branch will be taken care of by

scale III officer.

2.11 Activities of RRB

The Regional Rural Banks Act, 1976 allows RRBs to transact any

business which a commercial bank is allowed to carry on. However the Act

entrust with them the special responsibility of lending to small and marginal

farmers, agricultural laboures, artisans, small entrepreneurs, agricultural

marketing and processing societies, primary agricultural credit societies and to

persons engaged in small scale commercial activities within the area of

operation of the bank. In fact, they can lend to anybody provided that the

priority sector advance should not be less than 60 per cent.

a) Branch Expansion

Over the years, RRBs have taken deep roots and have become an

inseparable part of the rural credit system. They have been playing a key role in

rural institutional financing in terms of geographical coverage, clientele,


66

outreach and thus contributing to the development of rural economy. A

remarkable feature of their performance over the past years has been the

massive expansion of their retail network in rural areas. Moreover the GoI have

fixed a target for RRBs that at least 2000 new branches should be opened by

March 31, 2011 (NABARD, 2010).

Table2.12: Branch Expansion of RRBs

Year No. banks No. of branches*

% Increase

Rural branches

% of Total branches

2001 196 14311 423.25 12106 84.592002 196 14390 0.55 12041 83.682003 196 14433 0.30 11989 83.072004 196 14446 0.09 11914 82.472005 196 14484 0.26 11824 81.632006 133 14494 0.07 11393 78.602007 96 14520 0.18 11348 78.152008 91 14761 1.66 11374 77.052009 86 15181 2.85 11538 76.002010 82 15444 1.73 11629 75.30

*Branches Exclude Administrative Offices. Source: (1) Annual Report of NABARD, Various issues. (2) Basic Statistical Returns of Scheduled Commercial Banks in India, Various Years.

It is observed that the number of RRBs have remained constant from

2001 to 2005, and thereafter as a result of the sponsor bank wise amalgamation,

it started to decline (Table 2.12). Despite a standstill or decline in number of

banks, the number of branches kept increasing though at a slow pace. At the

same time, during the period of 2008-09, there has been a remarkable increase

in the number of branches. Further, an unbroken and continuing decline of 10

per cent in the number of rural branches is also visible during the period. In the

year 1993, RBI had given permission to RRBs to relocate those rural branches,

which were consistently in loss for more than three years, to more

commercially promising areas. This, coupled with the restructuring and

consolidation process in the RRBs, has led to the fall in the number of rural

branches. However, it can be said that the decline in the number of rural

branches shows a shift from the rural orientation of RRBs (Table 2.12).


67

b) Deposits

There is no restriction in respect of avenues for mobilization of deposits

by RRBs. Also, the interest rates are to be fixed by the bank itself. But the cost

of getting term deposit is higher hence it focuses on demand and savings bank

deposits, which are less costly but seldom sufficient. Being in rural area, small

deposits dominate the portfolio.

Table 2.13: Deposit of RRBs in India (Rs. in crore)

Years Deposits Rural deposit

% of Total deposit

Rural dep. of SCBs*

% of Total deposit of SCBs

2001 38272 26312 68.75 139431 14.692002 44539 30154 67.70 159424 14.1912003 50098 33745 67.36 176505 13.832004 56350 37712 66.92 195082 12.912005 62143 40957 65.91 213104 12.202006 71329 44360 62.19 226061 10.812007 83144 50914 61.24 253014 9.742008 99093 59661 60.21 303423 9.342009 120190 71647 59.61 363910 9.282010 142980 84116 58.83 420338 9.22

CAGR 14.03 12.32 - 11.67 - Source: (1) Annual Report, NABARD, Various issues. (2) Basic Statistical Returns of Scheduled Commercial Banks in India, Various issues. * Scheduled Commercial Banks.

Compared to scheduled commercial banks, the share of rural deposits is

much higher in RRBs but as it appears, there is a decrease of 10 per cent in the

rural deposit of these banks during the last ten years. In the case of scheduled

commercial banks, the percentage of rural deposit is comparatively less, and

that too have come down to a further low of 9.22 per cent during the period. In

both cases a withdrawal from rural area is obvious (Table 2.13).

c) Loans and Advances

Lending of RRBs was initially restricted to priority sector and it was in

1991 that this restriction had been lifted. Since then, RRBs have diversified

into a wide range of non priority sector advances including jewel, consumer

loans, deposit linked loans and housing loans (Now education and housing

loans also fall in priority sector). Still a target of 60 per cent of total credit has


68

been fixed for the priority sector and 15 per cent for the weaker sections of the

society.

Each bank may have a lending policy taking into account the thrust area,

the lending norms including the rate of interest, margin money, security norms,

the type of loan to be granted and the follow-up and recovery measures. One of

the peculiar features of the loan policy and portfolio of RRBs is the intensity of

small borrower accounts.

Table 2.14: Loans and Advances Outstanding of RRBs in India (Rs. in crore)

Years Advances O/s

Rural loans

% of Rural loans of RRBs

Loan to small

borrowers

Small loans to rural loans of

RRBs in %

Small loans to

rural loan of SCBs %

2001 15816 11826 74.77 10655 90.10 66.232002 18629 13509 72.52 12123 89.74 65.212003 22158 16177 73.01 14548 89.93 65.542004 26114 18265 69.94 16231 88.86 65.312005 32870 23017 70.02 20331 88.33 62.802006 39713 24454 61.58 20780 84.98 60.112007 48493 32226 66.45 25789 80.03 56.602008 58984 38736 65.67 31735 81.93 56.632009 67802 44247 65.26 35334 79.86 54.332010 82222 53623 65.22 41278 76.98 52.16

Average 41280 27608 68.44 22880 85.07 60.49CAGR 17.92 16.32 - 14.50 - -

Source: (1) Annual Report, NABARD, Various issues. (2) Basic Statistical Returns of Scheduled Commercial Banks in India, Various issues.

It is observed that the advances outstanding (O/s) for RRBs have

increased around six times during the period of study (Table 2.14). Further,

majority of such loans are in the rural areas, mainly issued to small borrowers.

In spite of an increase in total credit of RRBs, the share of rural credit and also

that of small borrowers have decreased considerably during the period of study.

In the case of SCBs also the percentage of rural credit and that of small loans

have decreased during the period.


69

Despite the said decrease of rural loans, RRBs have a major role in

credit disbursement of the country side, as is evident from Table 2.15. As on

March 2010, of the total rural bank branches of SCBs, 36 per cent was operated

by RRBs and 21.5 per cent of the total rural bank credit was also disbursed by

RRBs. Most of the advances of RRBs are small and without collateral. As part

of village adoption scheme, they had been given the target of adopting at least

one village per branch to help indebted farmers to come out of the debt trap of

money lenders. As on 31 December, 2009, exceeding the target, 24531 villages

were adopted and 13221 villages were freed from the money lenders (Table

2.15).

Table 2.15: Contribution to Rural Credit (Rs. in crore)

Years Total rural bank offices

Rural offices of

RRBs

% of RRBs to

SCBs

Total rural credit of

SCBs

Rural credit by

RRB % of Rural

credit

2001 32640 12106 37.09 54434 11826 21.732002 32443 12041 37.11 66682 13509 20.262003 32283 11989 37.14 77153 16177 20.972004 32107 11914 37.11 85021 18265 21.482005 31967 11824 36.99 109976 23017 20.932006 30610 11393 37.22 126078 24454 19.402007 30393 11348 37.34 154898 32226 20.802008 30898 11374 36.81 183107 38736 21.152009 31549 11538 36.57 207926 44247 21.282010 32320 11629 35.98 249277 53623 21.51

CAGR -0.1 -0.4 - 16.43 -0.15 - Source: (1) Annual Report, NABARD, Various issues.

(2) Basic Statistical Returns of Scheduled Commercial Banks in India, Various issues.

d) Recovery Performance

The problem of non-recovery of loans in time, resulting in non-

performing assets has been a major problem in RRBs as they are operating on a

thin resource base. A low recovery hinders the operation of the bank and

recycling of resource. Therefore, RRBs are taking cohesive effort to increase

recovery.


70

As a result of the efforts to expedite the recovery, it has improved from

70.59 per cent in 2000 to 79.12 per cent in the year 2010 (Table 2.16). Still, the

ratio of net NPA to loans outstanding of RRBs is much higher than the

nationalised banks, during the period.

Table 2.16: Net NPA to Loans Outstanding of RRBs in India

Years Advances O/s Recovery in % NPA to Loans outstanding RRBs Nationalized banks

2001 15816 70.59 18.84 6.172002 18629 71.52 12.63 5.472003 22158 73.49 14.44 4.172004 26114 77.67 12.6 2.842005 32870 79.85 8.53 2.012006 39713 79.8 7.28 1.222007 48493 80.49 6.55 1.022008 58984 80.84 6.05 .772009 67802 77.85 4.14 .682010 82222 79.12 3.66 .91

Average 41280 77.12 9.4 2.56 CAGR 17.92 - - -

Source: (1) Annual Report, NABARD, Various issues. (2) Basic Statistical Returns of Scheduled Commercial Banks in India, Various issues. (3) Compiled from Statistical Tables Relating to Banks in India.

2.12 RRBs in Kerala

In Kerala, there are two RRBs, South Malabar Brahmin Bank (SMGB)

and North Malabar Gramin Bank (NMGB). Both were established in the year

1976. Today, the combine covers the entire state of Kerala. With 229 branches,

SMGB operates in eight districts while NMGB with 205 branches covers the

remaining six districts.

Over the last ten years RRBs in Kerala have issued a credit of 23650

crore (Table 2.17). On a sector basis, the finance for agriculture has registered

an increase of 4 per cent from 48 to 52 per cent during the period between 2001

and 10. While the share of industry and service sectors have decreased from

5.96 per cent to 3.21 per cent and from 4.2 per cent to 3.23 per cent

respectively. Further the finance for other purposes like personal loan for

housing, consumer durables, vehicles, education and retail trade have


71

increased. The average of advances outstanding during the period is Rs. 2365

crore out of which 52.11 per cent is for agriculture, 5.37 per cent for industry,

3.46 per cent is for services and 39.06 per cent is for other category of loans.

Table 2.17: Advances of RRBs to Different Sectors (Rs. in crore)

Years Total loans

% to Agriculture

% to Industry

% to Service % to Others

2001 973 48.20 5.96 4.21 41.62 2002 1084 49.35 7.66 3.97 39.02 2003 1191 53.15 5.96 4.53 36.36 2004 1457 53.05 5.90 4.39 36.65 2005 1886 53.76 6.63 2.65 36.96 2006 2287 53.04 5.25 2.54 39.18 2007 2889 55.52 5.43 2.87 36.17 2008 3405 53.72 4.23 2.64 39.41 2009 3784 48.57 3.44 3.57 44.42 2010 4699 52.76 3.21 3.23 41.62

Average 2365 52.11 5.37 3.46 39.06 CAGR 17.05 - - - -

Source: Compiled from the Statistical Tables relating to Scheduled Commercial Banks in India, Various Years.

2.12.1 Deposits

Table 2.18: Deposits of RRBs in Kerala (Rs. in crore)Years Current Savings Term Total % Increase 2001 35 252 509 797 0.00 2002 36 308 650 993 24.59 2003 39 412 818 1268 59.10 2004 126 1189 2167 3482 336.89 2005 195 1627 2280 4103 414.81 2006 72 753 1205 2030 154.71 2007 90 868 1458 2416 203.14 2008 105 976 1963 3044 281.93 2009 122 1229 2295 3646 357.47 2010 222 1524 2647 4393 451.19 Total 1042 9138 15992 26172 2283.8

Average 104.2 913.8 1599.2 2617.2 228.3 CAGR 40.4 43.2 41.16 41.79 -

Source: Compiled from the Statistical Tables relating to Scheduled Commercial Banks in India, Various issues.


72

During the last ten years since 2001, the deposits of the RRBs in Kerala

have increased 5 times from 797 to 4393 crore. When compared to the total

bank deposit in Kerala, it comes only less than three per cent (Table 2.18).

Table 2.19: Share of Advances and Deposits of RRBs in Kerala (Rs. in crore)

Years Advances Deposits

SCBs RRBs % of RRBs SCBs RRBs %

of RRBs 2001 18697 973 5.20 44178 797 1.802002 22575 1084 4.80 51667 993 1.922003 25942 1191 4.59 59522 1268 2.132004 32537 1457 4.48 68122 3482 5.112005 39715 1886 4.75 69058 4103 5.942006 51730 2287 4.42 80435 2030 2.522007 61067 2889 4.73 95657 2416 2.532008 72945 3405 4.67 109919 3044 2.772009 83356 3784 4.54 135119 3646 2.702010 98138 4699 4.79 152097 4393 2.89

Average 50670 2365 4.67 86577 2617 3.03

CAGR 18.03 17.05 - 13.16 18.61 - Source: Compiled from the Statistical Sables relating to Scheduled Commercial Banks in India, Various issues.

It also appears that, more than 60 per cent of the deposits of RRBs are

term deposits that have increased the cost of funds of RRBs. Again, the total

credit of RRBs in Kerala as percentage of total bank credit is only less than 5

per cent (Table 2.19). Same is almost true for deposits also, where the share of

RRBs is on an average, 3.03 per cent.

2.12.2 CD Ratio

Compared to other bank groups, the CD ratio of RRBs has always been

hundred per cent or much higher than that of other banks in the state

(Table 2.20). The CD ratio of state bank group has increased from 44.39 to

64.78 per cent and that of nationalized banks, from 38.67 to 72.06 per cent and

such slight increases are there in the case of private banks and foreign banks.

At the same time, like RRBs, co-operative banks also have a higher ratio. Also,


73

the average CD ratio of RRBs in the state for the period is 107.2 per cent and

that of the entire SCBs in the state is 58.58 per cent.

Table 2.20: CD Ratio of RRBs and Other SCBs in Kerala (Rs. in crore)Y

EAR

S

CD RATIOS St

ate

bank

gr

oup

Nat

iona

lized

ba

nks

RR

Bs

Tota

l Pub

lic

sect

or

Co-

op.

B

anks

Priv

ate

Ban

k

Fore

ign

Ban

ks

Gra

nd T

otal

2001 44.39 38.67 121.37 43.56 n/a 41.46 25.83 42.772002 45.34 40.82 108.65 44.94 n/a 38.33 24.67 42.712003 46.33 43.84 94.59 46.62 n/a 43.05 37.97 45.472004 49.10 49.36 96.33 50.82 n/a 42.99 45.35 48.312005 56.64 59.27 106.25 59.50 133.91 57.50 56.83 61.232006 64.29 66.40 109.30 67.10 119.64 66.53 53.53 68.702007 68.65 65.27 118.30 69.10 143.05 72.51 54.14 72.262008 71.01 66.76 108.34 70.70 106.92 73.02 60.99 72.612009 60.49 63.64 99.34 63.55 90.54 63.27 76.79 64.472010 64.78 72.06 110.20 69.94 60.5 62.59 66.04 67.32

Average 57.1 56.60 107.2 58.58 109.09 56.1 50.21 58.58Source: Banking Statistics of Kerala, SLBC, Various issues.

2.13 South Malabar Gramin Bank

South Malabar Gramin Bank (SMGB) is one of the two RRBs

functioning in Kerala, sponsored by the Canera Bank, with its head quarters at

Malappuram. As on 31 March 2010, the bank has presence in 8 districts with

228 branches and 1555 permanent employees. With a clientele base of 2

million customers, the total business has touched Rs. 5000 crore, and is rated as

one of the World’s largest fifty Micro Credit Institutions (www.smgbank.com).

By the year 2007 the bank completed computerization of all its branches and

offices, and today the bank has completely acclimatized to core banking.

The SMGB was established in 11th December 1976. With an authorized

capital of rupees one crore and paid up capital of Rs.25 lakh divided among the

Government of India, Government of Kerala and the sponsoring bank (Canara

Bank) in the ratio of 50:15:35. Initially, Malappuram, Kozhikode and a part of

Waynad district were the area of operation and Thirunavaya, Karuvarakundu


74

and Pulamanthole of Malappuram and Atholi and Kozhikode city in Kozhikode

districts were the branches. Twenty employees deputed from the sponsoring

bank comprised the first team that started the bank. In the second year it

opened 2 branches in Waynad district. The table below reveals a rough idea

about the growth of the bank up to the year 2000 (Table 2.21).

Table 2.21: SMGB over the Years (Rs.in Crore)Years No. Branches Employees Deposit Advances1980 94 605 6.68 15.441984 134 1033 21.61 28.951990 147 1579 55.23 69.461995 147 1582 162 1822000 170 1596 353.53 406.50

Source: Annual Report of SMGB, Various issues.

The year 2001 marked the 25th year of the bank’s operation, and by then

the area of operation had expanded to five districts including Palakkad and

Thrissur in addition. In the year 2001, the bank stood first in advances

outstanding and disbursement in all 196 RRBs in the country. In the following

year, the bank moved on to the number two position in total business among all

RRBs, and in the year 2003, the bank ranked as the largest RRB in India in

total business and continued in the same status, all through the years up to the

financial year 2005-06. In the year 2004, the bank embarked on

computerization of its branches, area offices and head office to make it the

common man’s hi-tech bank and the endeavor completed as planned by the

year 2007.

In 2006 the bank had obtained permission to expand to Patanamthitta

district and in 2007 to Idukki and Thiruvananthapuram Districts. Further,

during 2007-08 bank received recognition from the NABARD for SHGSs

finance. A novel project under the aegis of NABARD called snehagramam was

launched which aimed to speed up the financial inclusion and also to free the

villages from the clutches of money lenders; Village knowledge centers/Kiosks


75

for information dissemination were also set up in Waynad, Kozhikode and

Palakkad districts.

Table 2.22: District-wise Distribution of Branches of SMGB

Districts Branches as on 31-03-2010Rural Semi-urban Urban Total

Malappuram 0 80 0 80 Kozhikode 0 60 8 68 Waynad 2 17 0 19 Thrissur 0 19 5 24 Palakkad 0 14 0 14 Patanamthitta 0 15 0 15 Trivandrum 0 3 2 5 Idukki 0 3 0 3

Total 2 211 15 228 Source: SMGB Annual Report, 2010.

Thus as on March 31, 2010, the bank operates in 8 districts with a

network of 228 branches, viz.,. 15 urban branches, 211 semi urban branches

and 2 rural branches. Malappuram district has the highest number of branches

followed by Kozhikode, Thrissur Waynad and Palakkad. Compared to the other

four main districts, Thrissur district is new to the bank. It is worth to note that

81 per cent of the branches of SMGB are in the four northern, initial districts.

One wonderful fact about SMGB is that the number of rural branches is only

two while RRBs in India in general, have nearly 76 per cent of their total

branches in rural areas (Table 2.22).

a) Advances Outstanding

With regard to the amount of advances outstanding, number of accounts

and the amount of average loan, there has been a remarkable growth during the

period. The amount of loan has increased around 5 times, number of accounts

by 55 per cent and the amount of average loan size by three times. It is also

observed that, the percentage of priority sector advance has also increased from

85 per cent in 2001 to 90 per cent in 2010 (Table 2.23). In this regard, it is

worth mentioning that recently education and housing loans have been included

in the priority sector.


76

Table 2.23: Advances Outstanding of SMGB

Years Total (Rs. Crore) No. Accounts Average loan

size Rs. Priority sector

Rs. in crore % of total

2001 532.12 450130 11820 455.49 85.60 2002 640.00 492902 12980 542.3 84.73 2003 754.42 501917 15030 650.42 86.21 2004 911.65 509653 17890 778.32 85.37 2005 1139.54 589852 19320 999.2 87.68 2006 1377.31 680865 20230 1239.94 90.03 2007 1735.77 683735 25390 1577.93 90.91 2008 2040.17 707262 28850 1845.9 90.48 2009 2372.01 681344 34810 2105.29 88.76 2010 2724.67 704020 38700 2463.16 90.40

Average 1422.02 - 22502 1265.13 88.01 CAGR 17.74 4.57 12.59 18.39 -

Source: SMGB Annual Reports, 2010.

Even though the average loan size has increased around three times, the

pace of increase is very slow which denotes the lenience of the bank towards

small borrowers. Out of the loans to priority sector, majority is to the

agriculture and allied activities followed by service sector and industrial sector.

Table 2.24: Priority Sector Advance of SMGB (Rs. in crore)

Years Priority sector Agriculture % of

Total Industry % of Total

Service sectors

% of Total

2001 455.49 269.06 59.07 23.29 5.11 163.13 35.81 2002 542.3 315.12 58.11 27.87 5.14 199.31 36.75 2003 650.42 381.45 58.65 31.75 4.88 237.21 36.47 2004 778.32 456.12 58.60 35.43 4.55 286.76 36.84 2005 999.2 642.159 64.27 43.15 4.32 313.9 31.42 2006 1239.94 810.62 65.38 45.83 3.70 380.77 30.71 2007 1577.93 1080.56 68.48 54.56 3.46 442.8 28.06 2008 1845.9 1278.2 69.25 57.11 3.09 510.58 27.66 2009 2105.29 1396.61 66.34 275.36 13.08 433.31 20.58 2010 2463.16 1710.78 69.45 521.41 21.17 230.97 9.38

Average 1265.79 834.06 63.76 111.57 6.85 319.84 29.36 CAGR 18.39 20.32 - 36.46 - 3.54 -

Source: SMGB Annual Reports, 2010.

In the priority sector, the share of agricultural loans has registered a 10

per cent growth during the period of the study. Industrial loans have grown


77

from 5.11 to 21 per cent and the service sector loans fallen from 35.81 to 9.38

per cent. This sudden fall or rise in the industry and service sector loans is due

to the reason that in the MSMED Act, 2006 which enlisted all small trades or

retailing in to service sectors (Table 2.24).

b) Loans under Special Schemes

There are special schemes offered to socially disadvantaged groups by

the government of India. A certain percentage of loans outstanding have been

earmarked for these classes. Accordingly, 10 per cent of the adjusted net bank

credit or equivalent amount of off balance sheet exposure, whichever is higher

should be given to weaker sections of the society. Again 1 per cent of the total

advances outstanding at the end of the previous year should be given under

Differential Rate of Interest (DRI). Again, 40 per cent of such DRI advances

should be given to SC/STs. In the case of SMGB it is clear that all stipulations

except the target for DRI have been fulfilled (Table 2.25).

Table 2.25: Special Scheme Loans (Rs. in Crore)Years Total credit IRDP/SGSY DRI SC/ST Women Minority2001 532.12 3.72 0.44 13.42 104.96 291.192002 640.00 2.25 0.19 16.49 127.16 320.302003 754.42 1.51 0.14 18.27 150.16 336.652004 911.65 1.56 0.13 28.17 158.41 416.062005 1139.54 1.56 0.09 28.20 161.20 444.602006 1377.31 4.15 0.85 29.72 165.10 502.802007 1735.77 4.10 0.31 31.60 376.80 930.002008 2040.17 5.30 0.26 91.80 674.20 1082.802009 2372.01 8.39 0.57 109.40 798.90 1373.602010 2724.67 - - 17.63 1026.73 1675.59

CAGR 17.74 9.46 2.92 26.26 25.62 19.12 Source: SMGB Annual Report, 2010.

For the year 2009-10, the details as to Integrated Rural Development

Programme/SwarnaJayanthi Swarozgar Yojana (IRDP/SGSY) have not been

published.


78

c) Management

The organization and management structure of SMGB is not different

from the rest of RRBs in India. GoI, government of Kerala and Canara Bank

(The sponsoring bank) are the stakeholders. For the management of the affairs

of the bank, there is Chairman and Board of Directors.

In the Board of Directors, in addition to the chairman of the bank, there

are eight directors. Two directors nominated by the GoI, one on behalf of the

RBI, two by government of Kerala, one by NABARD and two by Canara bank.

To look after the day-to-day management affairs of the bank there are two

General Managers. The Chairman and General Managers are stationed at the

head office at Malappuram.

For a close supervision of the activities of the branch, there are five

regional offices, each under the charge of a senior manager. Below the regional

office, there are branches. The branches are under the charge of branch

managers. Depending up on the size of the branch, there may be one branch

manager or one senior manager and a manager. At present, there are 1555 staff

members, consisting of 710 officers of different cadre, 641 clerks and 204 other

category of employees.

Documents

Chapter 2 RURAL BANKING: A THEORETICAL REVIEWshodhganga.inflibnet.ac.in/bitstream/10603/26012/13/13_chapter2.pdf · Chapter 2 RURAL BANKING: A THEORETICAL REVIEW ... obsolete technology,