Regional Rural Banks

Dr. Prashant S. Desai,

Assistant Professor of Law,
NLSIU

 Exploitation of Rural people in India such as small

and marginal farmers, landless agricultural laborers,
artisans and socially and economically backward
castes and classes, in the name of credit facility by
informal sectors.
Both formal and informal financial institutions and
agencies meet the credit needs of the rural masses
in India.
The informal sector advances loans at very high
rates of interest; the terms and conditions attached
to such loans have given rise to an elaborate
structure of intimidation of both economic and noneconomic conditions in the rural population of
India.

 The supply of total formal credit is inadequate and

rural credit markets are imperfect and fragmented.
The distribution of formal sector credit has been
unequal, particularly with respect to region and
class, caste and gender in the country side.
The Banking Commission (1972) recommended to
establish an alternative institution for rural credit and
ultimately Government of India established RRBs as
a separate institution basically for rural credit on the
basis of the recommendations of the Working
Group under the chairmanship of M. Narashimham.

 In order to provide access to low-cost banking

facilities to the poor, the Narashimham Committee
(1975) proposed the establishment of a new set of
banks as institutions which combine the local feel
and the familiarity with rural problems which the
cooperatives possess and the degree of business
organization, ability to mobilize deposits, access to
central money markets and modernized outlook
which the commercial banks have.

 Regional Rural Banks were established under the

provisions of an Ordinance promulgated on the 26th
September 1975 and RRB Act, 1976 with an
objective to ensure sufficient institutional credit for
agriculture and other rural sectors.
The RRBs mobilize financial resources from rural /
semi-rural areas and grant loans & advances mostly
to small and marginal farmers, agricultural labourers
& rural artisans.
The area of operation of RRBs is limited to the area
as notified by Government of India covering one or
more districts in the state.

 Mandates
1. To take banking to the doorsteps of the rural
masses, particularly in areas without banking
facilities;
2. To make available cheaper institutional credit to
the weaker sections of society, who were to be the
only clients of these banks;
3. To mobilize rural savings and canalize them for
supporting productive activities in the rural areas;
4. To generate employment opportunities in the rural
areas
5. To bring down the cost of providing credit in rural
areas.

 Functions
1. To provide financial facility to small & marginal
farmers, agricultural labourers, co-operative
societies for agricultural purposes or other
purposes related to agriculture.
2. To grant loans and advances to artisans, small
entrepreneurs, persons of small means engaged in
trade, commerce etc.
3. To relieve the rural masses from the clutches of
money lenders

4. To provide easy credit facility to weaker sections of

the society
5. To establish branches in unbanked rural areas
6. To take the banks to the doorsteps of the poorest
people in remote areas
7. To provide banking services to the rural community
at a relatively lower cost by adopting a different
staffing pattern, wage structure and banking
policies.

 Sponsorship
Each RRB is sponsored by a nationalized bank
known as sponsoring bank which provides all sorts of
help to these RRBs. The sponsoring bank will assist
the RRB in its establishment, recruitment and training
of personnel. They may also provide managerial
and financial assistance with mutual agreement

 Capital Resources
Each RRB may have an authorized capital of Rs. five
crore divided into one lakh shares of Rs. 100 each
and issued capital of Rs. 1 crore to improve their
liability.
Management
The management of each RRB is vested in nine
member BoD, headed by a Chairman. The
chairman is appointed by the Central Govt. The
chairman is a paid servant of the sponsoring bank
while the members are honorary.

Functioning and performance of RRBs

The Kelkar Committee (1986)
Enhancement of authorized capital of RRBs from Rs.
1 Crore to Rs. 5 Crore and paid-up share capital
from Rs. 25 lakhs to Rs. 1 Crore;
Appointment of Chairman of RRBs by the
concerned sponsor bank in consultation with
NABARD;
Provision of assistance to RRBs in greater measure
by sponsor banks in training RRB staff & giving
financial assistance to RRBs in their first five years of
their existence;

 Provision for amalgamation of RRBs in consultation

with all the concerned parties.
Empowering the sponsor banks to monitor the
progress of RRBs and also to arrange for their
inspection, internal audit etc.
Though the progress of implementation was tardy
the amended Act came into force only by the end
of 1988.

 NABARD (1986)
Published A study on RRBs viability, which was
conducted by Agriculture Finance Corporation in
1986 on behalf of NABARD.
The study revealed that viability of RRBs was
essentially dependent upon the fund management
strategy, margin between resources mobility & their
deployment & on the control exercised on current
and future costs with advances.
The proportion of the establishment costs to total
cost and expansion of branches were the critical
factors, which affected their viability.

 Initiatives by NABARD during 1998-99

To undertake quarterly / half yearly reviews of the
RRBs by the sponsor banks coming under their
jurisdiction.
The sponsor have been advised to explore the
possibility of the merger of RRBs coming under
them.
To evolve an early warning system as part of the
supervisory function of the NABARD, an off-site
surveillance system has been introduced to
supplement on-site inspection.

 The appointment & Promotion Rules (1998) have

been framed by the GOI in consultation with
NABARD for the staff of RRBs
The Kisan Credit Cards have been introduced in the
RRBs to facilitate the provision of credit to farmers
The RRBs have been encouraged to adopt self-help
groups for canalling credit to the poor on a
sustainable basis.

 In 1989, the conceptualization of the entire structure

of RRBs was challenged by the Khusro Committee,
which argued that these banks have no justifiable
cause for continuance and recommended their
mergers with sponsor banks.
It is of the view that the weaknesses of RRBs are
endemic to the system & non-viability is built into it,
and the only option was to merge the RRBs with the
sponsor banks. The objective of serving the weaker
sections effectively could be achieved only by selfsustaining credit institutions.

 The Committee on Financial Systems, 1991

(Narasimham Committee) stressed the poor
financial health of the RRBs to the exclusion of every
other performance indicator.
The low equity base of these banks didnt cover for
the loan losses of most RRBs.
The Committee suggested that the RRBs should be
permitted to engage in all types of banking business
and should not be forced to restrict their operations
to the target groups, a proposal which was readily
accepted, which marked a major turning point in
the functioning of RRBs.

 Policy Initiatives during 2010-11

Subsequent to review of the financial status of RRBs
by the Union Finance Minister in August, 2009, it was
felt that a large number of RRBs had a low Capital
to Risk weighted Assets Ratio (CRAR).
A committee was therefore constituted in
September, 2009 under the Chairmanship of Dr K C
Chakrabarty, Deputy Governor, RBI to analyse the
financials of the RRBs and to suggest measures
including re-capitalisation to bring the CRAR of RRBs
to at least 9% in a sustainable manner by 2012.
The Committee submitted its report in May, 2010.

 The following points were recommended by the

committee:
1. RRBs to have CRAR of at least 7% as on 31 March
2011 and at least 9% from 31 March 2012 onwards.
recapitalisation requirement of Rs.2,200.00 crore for
40 of the 82 RRBs. This amount is to be released in
two instalments in 2010-11 and 2011-12. .
2. The remaining 42 RRBs will not require any capital
and will be able to maintain CRAR of at least 9%
on 31st March 2012 and thereafter on their own.
3. A fund of Rs.100 crore to be set up for training and
capacity building of the RRB staff.

 The Government of India recently approved the

recapitalization of RRBs to improve their CRAR in the
following manner:
Share of Central Government i.e. Rs.1, 100 crore will
be released as per provisions made by the
Department of Expenditure in 2010-11 and 2011-12.
However, release of Government of India share will
be contingent on proportionate release of State
Government and Sponsor Bank share.

 A capacity building fund with a corpus of Rs.100

crore to be set up by Central Government with
NABARD for training and capacity building of the
RRB staff in the institution of NABARD and other
reputed institutions.
The functioning of the Fund will be periodically
reviewed by the Central Government. An Action
Plan will be prepared by NABARD in this regard and
sent to Government for approval.
Additional amount of Rs.700 crore as contingency
fund to meet the requirement of the weak RRBs,
particularly those in the North Eastern and Eastern
Region, the necessary provision will be made in the
Budget as and when the need arises.

Policy Initiatives during 2010-11 [contd]

Regional Rural Bank Service Regulations 2010 issued
by GOI based on the recommendations of
Amaresh Kumar Committee.
Regional Rural Bank Appointment and Promotion
Rules 2010 also notified by GOI
Technology Innovation through Core banking
Solutions (CBS) put on RRBs to provide hassle free &
any where banking services to their clients.
Financial inclusion as envisaged by GOI in rural
areas.
Continuance of the interest subvention scheme was
announced in the Union budget 2010-11.

 Problems (Weakness) of RRBs

1. Very limited area of operations
2. High risk due to exposure only to the target group
3. Public perception that RRBs are poor mans banks
4. Mounting losses due to non-viable level of
operations in branches located at resource-poor
areas.
5. Switch over to narrow investment banking as a
turn-over strategy

 Heavy reliance on sponsor banks for investment

avenues with low returns barring exceptions, stepmotherly treatment from sponsor banks
Chairman of RRBs appointed as BoD by sponsor
banks under the direction of Regional Managers.
Burden of government subsidy schemes and
inadequate knowledge of customers leading to low
quality assets
Unionized staff with low commitment to profit
orientation and functional efficiency
Inadequate skills in treasury management for profit
orientation

 Inadequate exposure and skills to innovate

products limiting the lending portfolios
Inadequate effort to achieve desired levels of
excellence in staff competence for managing the
affairs and business as an independent entity
Serious undermining of the Board by compulsions to
look up to sponsor banks, GOI, NABARD and RBI for
most decisions
RRB hampered by an across the board ban on
recruitment of staff.

 Recommendations
Government should encourage and support banks
to take appropriate steps in rural development.
Efforts should be made to ensure that the noninterest cost of credit to small borrowers is kept as
low as possible.
Policy should be made by govt. for opening more
branches in weaker & remote areas of state.
Productivity can be improved by controlling the
costs and increasing the income.
To participation cost, subsidy should be adjusted
towards the end of the transaction for which loan
assistance is sanctioned.

 Govt. should take firm action against the defaulters

and shouldnt make popular announcements like
waiving of loans.
The RRBs have to make an important change in
their decision making with regard to their
investments.
The RRBs have to be very careful and reduce the
operating expenses, because it has been found
from the studies that these expenses have
increased the total expenditure of the banks.
The RRBs have to give due preference to the microcredit scheme and encourage in the formation of
self help group.

 Cooperative societies may be allowed to sponsor or

co-sponsor with commercial banks in the
establishment of the RRB.
A uniform pattern of interest rate structure should be
devised for the rural financial agencies.
The RRB must strengthen effective credit
administration by way of credit appraisal,
monitoring the progress of loans and their efficient
recovery.
The credit policy of the RRB should be based on the
group approach of financing rural activities.
The RRB may relax their procedure for lending and
make them easier for village borrowers.