Regional Rural Banks

Majority of Indian population reside in rural areas but they have very few formal channels of money supply. Due to reliance on informal channel of money like money lenders, rural population faces high hardship. Over the time government has created few formal channels of finance especially for the rural area. Regional rural banks are one of the most important channels of money supply in rural India. The Banking Commission (1972) recommended for a particular institution for rural credit system and finally Government of India established Regional Rural Banks as a separate institution for rural credit. Regional Rural Banks (RRBs) were established in 1975 under the provisions of the Regional Rural Banks Act, 1976. They were formed with some specific objectives like;

• Develop the rural economy and to create a supplementary channel to the ‘Cooperative Credit Structure’.
• To enlarge institutional credit for the rural and agriculture sector.
• The RRBs mobilise deposits primarily from rural/semi urban areas.
• Provide loans and advances mostly to small and marginal farmers, agricultural labourers, rural artisans and other segments of priority sector.

There are three stake holders in regional rural banks. The Government of India, the concerned State Government and the sponsored bank. The share capital of RRBs is in the proportion of 50%, 15% and 35%, respectively for Government of India, Concerned State Government and the sponsored bank. RRB’s operational area is limited to districts which are notified.

Over the years lot of RRB’s has come up, many of them are small banks and face challenges because of that. The RBI in 2001 constituted a Committee under the Chairmanship of Dr V S Vyas to look into the performance and viability of RRB’s in rural credit system. Dr. V S Vyas committee recommended for the consolidation of RRB’s. First phase of consolidation of RRB’s was started in 2005 and the second phase in 2012. As a result of this two phase consolidation, number of the RRBs have come down from 196 to 64 on 2013. This consolidation process was done to provide benefits like; better customer service, better infrastructure, common publicity and marketing efforts etc. Amalgamation process also helped in increasing the credit limits of a RRB and it also helped in increasing the number of branches for RRB. The number of branches of RRBs increased to 17856 which covered 635 districts throughout the country.

Still there are some pressing challenges before the RRB’s like;

• High risk due to exposure only to the target group.
• Mounting losses due to non-viable level of operations in branches located at resource-poor areas.
• Burden of government subsidy schemes and inadequate knowledge of customers leading to low quality assets.
• Serious undermining of the Board by compulsions to look up to sponsor banks, GOI, NABARD and RBI for most decisions.
• Under skilled staff and very less orientation towards profit maximization.

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