The Changing Face of RRBs

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INDIA'S BEST BANKSFocus / Rural Banking

The changing face of RRBs

OP Thomas

Posted: 2008-04-09 03:23:02+05:30 IST

Updated: Apr 09, 2008 at 0347 hrs IST

Regional Rural Banks (RRBs) have evolved since their inception in 1975, when the sole purposewas to cater to rural needs.

The Narsimham committee recommended the creation of RRBs to offset regional imbalances

due to a lack of professionalism and resources that possibly could be best tackled by scheduled

commercial banks (SCBs), if they became the sponsors with government participation.

Subsequently, RRBs were set up through the promulgation of the RRB Act of 1976. The equity

holding pattern of RRBs evolved in the ratio of 50:15:35, with the Central government holding

the majority share, the sponsored bank holding the second highest stake, and the rest by the

respective state governments that housed the RRB.

RRBs, were originally conceived as low-cost institutions with a rural flavour and the primary

role was akin to that of commercial banks, as in raising deposits and lending onwards for a

profit. Except that, these banks targeted rural and semi-urban areas for deposit mobilisation andlent primarily small loans to marginal farmers.

However, somewhere down the line, RRBs lost sight of their purpose and began incurring heavylosses. To add to their woes, roles were duplicated by SCBs and RRB- sponsor banks that either

had rural branches or began penetrating rural destinations under their expansion drives.

As time went by, trade unions found a new axe to grind and demanded wages at par withemployees of their sponsor banks and sought cross-border transfers, while sponsor bank

managements began using rural postings as a weapon to punish their employees. Duplication of

branches in many cases were so obvious that it wasnt surprising to witness the same premiseshaving a SCB branch and its sponsored RRB branch. Goals took a back seat and many RRBs

ended up with irrecoverable loans. In 1990, a major blow, by way of an award, brought RRB pay

scales at par with SCBs and the new scales were effective retrospectively from 1987.

This added to the woes of RRBs that were already burdened with heavy losses due to theirnarrow banking and low return on business. The heavy salaries and concurrent losses, now, made

the management of banks rethink ways to turn around. In 1994-95 the first dose of

recapitalisation-Rs 2,188 crorewas administered in the ratio of ownership, i.e. 50% by theCentral government, 35% by the sponsor bank, and 15 % by the state government where the

bank had its presence.


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A few state governments delayed in their recapitalisation commitment and that was the end of

round one. In the second round of recapitalisation, the money assessed was Rs 1,796 crore. The

recapitalisation drive was completed by March 31, 2007. Of the total 196 RRBs, only 92 remain,after a post-merger exercise last year with unviable ones. Of the 92 RRBs now, post merger and

consolidation, only 27 would get recapitalisation, implying that 65 RRBs were in profit.

They are now profit-driven and compete in the same space with SCBs on feeor commission-

based incomes like issuances of drafts, selling of insurance products, and mutual fund schemes,in addition to commercial banking like agriculture project funding. They have given convenience

banking a shot through the use of information technology and ATMs. Within their primary role

of catering to rural society, RRBs now have a better understanding of commercial bankingbusinesses as well.

RRBs covered 525 of the 625 districts as of March 31, 2006.

The Rangarajan Committee, in its January 2008 report, has also recommended a Rs 500-crore

technology fund for upgradation. The increased coverage of districts makes them an importantsegment of Rural Financial Institutions for financial inclusion, the Rangarajan Committee had

noted in its report this year.

In the last few years, the National Bank for Rural Development (Nabard) has also increased its

role in the deployment of human resources in RRBs. Today, Nabard screens top-level candidateslike the chairman, even though the short-listing of such officers is done by the sponsor bank.

RRB chairmen are usually in the scale-IV to scale VI cadre of the sponsor SCBs.

For example, in Manipur, of the 23 branches, nine were closed down due to insurgency. The

challenge that lies before RRB chairmen today, is to tackle the issue of financial exclusion.

Inclusion is now possible, where earlier banks have ignored certain sections of society, perhapsdue to the less profitability or no profitability of that segment.

The commitment by the government to ensure that every citizen in the country be included by

banks, has also made banks think out of the box.

In terrain that does not facilitate the use of vehicles, financial inclusion of one set of thepopulation could have been easily overlooked had it not been for the government and regulators

breathing down their necks. There are locations that take as much as three-days to travel one-

way, yet financial inclusion is nearly 100%.

For example, in Arunachal Pradesh, which is rich in natural resources, the hilly terrains makesapproach a tougher task for bankers, as the population is not just concentrated at one place but on

many such hills. There are hordes of such terrain with limited population. RRBs therefore have

entered into informal tie-ups with local tribal heads that act as business correspondents for thebanks, collect, and disburse funds within the community. The banks on their part have entered

into a profit-sharing arrangement with such local heads-promoting entrepreneurial skills in the

bargain.


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This apart, RRBs have also entered into tie-ups with local shopkeepers and government post

offices. RRBs have, therefore, travelled the extra mile to include as many of them into the fold.

The role of self-help groups has therefore gained prominence as they bring about self-disciplineand narrow the scope of defaults.

The Rangarajan committee in its 2008 report has urged the government to ensure that RRBscover 87 un-banked districts identified by it. For SCBs and RRBs, they have to ensure that at

least 250 new bank (small) accounts per annum were opened in their semi-urban and rural bankbranches.

The committee findings said financial exclusion was as high as 78.2% among non-cultivator

households, which comprise of agricultural labourer households, artisans and other rural

households. There was no data to show the position of finance extended exclusively to marginalfarmers, though small farmers were given credit from institutions. Exclusion was most acute in

the central, eastern, and north-eastern regions.

If the ongoing support by SHGs and banks are sustained and in line with the recommendations ofthe Rangarajan Committee findings, the country will win hands down in removing poverty from

the map of India. After all, where there is a government will, there is a way!

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The Changing Face of RRBs