Regional Rural Banks

What are regional rural banks?

In the early 70s, there was a realisation that the even after nationalisation there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers. To address this issue, the government set up a working group to suggest alternatives for institutional finances to the rural sector. Accepting the recommendations of the committee, the government promulgated the Regional Rural Banks Ordinance on September 1975, which was replaced by the Regional Rural Banks Act 1976. The Act allowed the government to set up banks from time to time at places where it considers necessary. Each bank carries on banking business within local limits specified by the government notification. The regional rural banks (RRBs) were owned by the central government, the state government and the sponsor bank who held shares in the ratio of 50,15 and 35%.

Why are they in the news?

The Reserve Bank of India in its discussion paper on grant of bank licences to corporate houses said that if corporates were keen on improving financial inclusions, they could look at taking over some of the weaker RRBs and strengthen them through capital and technology infusion.

Is this likely to happen?

There are several impediments. Firstly, the RRB Act will need to be amended. Secondly, there will be resistance from employee unions and state governments. Thirdly, corporates themselves may not be inclined to get into rural banking where the payback may take many more years.

What is the status of RRBs now?

The worst appears to be behind the RRBs, a large number of which were in the red for most of the previous decades. The process of consolidation through amalgamation of RRBs is now almost complete, resulting in a decline in the total number of RRBs to 84 as on August 31, 2009 (which includes a new RRB set up in the Union Territory of Puducherry). The process of recapitalisation of RRBs with negative net worth as on March 31, 2007, is also almost complete, with 27 RRBs fully recapitalised with an amount of Rs 1,796 crore as on July 31, 2009. The assets in the consolidated balance sheets of RRBs have increased by 16.5% in March 2009 to Rs 1.46 lakh crore.

They now open no-frills accounts and issue general credit cards. An RBI working group on technology in RRBs has observed that RRBs could not remain isolated from the technological developments sweeping the banking sector. The group has set a target date of September 2011 for all RRBs to move to a core banking solution platform.