Chapter – 7 Regional Rural Banks


 

ESTABLISHMENT AND STRUCTURE – SALIENT FEATURES

• Regional Rural Banks (RRBs) are third layer of commercial banking organization after commercial banks and cooperative banks. RRBs were established on the recommendations of the Narsimhan Committee to meet rural credit needs of the farming and other rural community.

• RRBs are new category of commercial banks sponsored by a strong commercial bank to serve limited area and within limited local limits. However, since its commencement, the area of operation has been widening.

• Regional Rural Banks were established under Regional Rural Bank Act, 1976 and first bank established was Prathama Grameen Bank on October, 2. 1975. The first Commercial Bank to sponsor an RRB was Syndicate Bank.

• Regional Rural banks were established as joint banks of Central Government, State Government and Sponsored banks.

• Initial capital to start with in 1975 was Rupees 1 crore but subsequently it was increased and at present the capital requirement is Rupees 5 crore.

• This capital is shared by Central Government, State Government and Sponsored Bank in the ratio of 50%, 35%, and 15% respectively till recently. But now this ratio has changed to60%, 20% and 20% among Central Government, State Government and Sponsored Bank respectively. Central Government acts through NABARD and its share of subscription is also routed through NABARD.

• Organizational Structure : RRBs are governed and managed by Board of Directors. Total members of the Board are 9 but can change at the behest of the Government for better superintendence. Of the 9 members of the Board of Directors, at least 3 are nominated by Government of India, 2 by State Government and 3 by sponsored bank. Chairman of the RRB is normally from sponsored bank and appointed after the approval of the NABARD. The professional banking directions are received from Reserve Bank of India/NABARD.

• Regional Rural Banks are treated as scheduled commercial banks as per Reserve Bank of India Act, 1934 and are included in the second schedule to RBI.

• RRBs are managed and controlled by its Board of Director.

• Expansion in terms of opening new branches, RRBs have to prior approval of Reserve Bank of India.

• RRBs public deposits are assured by Deposit Insurance & Credit Guarantee Corporation. In the larger interest of the depositors, RRBs are also permitted to give additional interest on deposits of 1% if required.

• RRBs are required to maintain SLR in government securities or as directed by RBI from time to time.

• Capital Structure: There are four layers of capital structuring of RRBs. RRBs have first level from share holders (Central Government, State Government and Sponsor Bank) followed by second level of deposits from public. In case of need RRB can borrow funds from sponsor bank also. Lastly, RRBs draw refinance from NABARD. Just like in case of cooperative banks, Reserve bank of India also provides refinance facilities to RRBs that too at concessional rate of 2% less than the bank rate.

• In relation to Income Tax Act and taxation purposes all RRBs are treated at par with Co-operative Banks.

OBJECTIVE OF SETTING UP RRBS

• Main objective of setting up RRBs was to provide credit and other banking facilities to small, marginal farmers and agricultural laborers, small artisans etc. in rural areas for developing rural economy.

• Another objective was to create a separate organization with rural base and local touch since commercial banks were largely urban based.

• Yet another objective was to reduce regional imbalances and encourage local self employment generation.

GROWTH AND PERFORMANCE OF RRBS

• From 1975 onwards there has been phenomenal growth of RRBs in terms of numbers. From 5 banks in 1975, it grew to over 196.

• RRBs cover around 619 districts of the country mobilizing over 145035 crore rupees.

• As on 2013 there were near 16000 branches.

• Performance wise as on 2013, there were 82 RRBs left after amalgamation, of which 2 banks were in loss and rest 80 in profit.

• One of the biggest problems faced by RRBs was recovery of loans and advances. On the part of the Government, RRBs were in 2007 included as beneficiary of SARFAESI Act, 2002. (Securitization and Restructuring of Financial Assets and Enforcement of Security Interest Act, 2002.

ROLE OF SPONSOR BANKS

• The role of sponsor banks is broadly specified below:

Subscription to Bank’s share capital
Managerial assistance in the initial stages.
Financial assistance on mutually agreed terms
Help RRB in recruitment and training of manpower.

RRBS AND COMMERCIAL BANKS

• RRBs have limited area of operation like 2-25 districts whereas commercial banks can operate anywhere in the country and have no geographical restrictions. However of late, NABARD has also, in order to make RRBs become viable entities, removed geographical restrictions to very large extent. RRBs are also permitted to open extension counters at suitable places. They are also permitted now to re-locate their loss-making branches at more business lucrative places.

• Beneficiaries of RRBs loans and advances are pre-determined like lending only to weaker sections, labourers, marginal farmers, small farmers, village artisans etc. But in case of commercial banks such predetermination is not there.

• RRBs can also do non-fund business in order to overcome financial burden and improve their profitability.

• Manpower recruitment and compensation in RRBs is determined by Central Government which largely relates to State Government pattern of equivalent rank.

• Rates of interest are restrictive for lending purposes.

ACTIVITIES THAT RRBS UNDERTAKE

• Granting loan and advances to specified section of society like small and marginal farmers, agricultural labourers and other poor persons, whether individually or in group.

• Granting loans and advances to cooperative societies including marketing societies, agricultural processing societies.

• Granting loans and advances to small entrepreneurs and other small traders etc. in their area of operation.

• Helping people below poverty line (BPL) to become part of main stream of economy.

• NABARD has permitted RRBs to increase their lending to non-target people up to 60% from present 40%. This will help RRBs to diversify their business activities in area of lending.

• RRBs are permitted to undertake sale of third party products (TPP) like insurance products- both human and animal related, health products but without risk participation subject to the condition that RRBs complies with IRDA (Insurance Regulatory and Development Authority) regulations, bank should not recommend any particular product or service to any person ensuring that any tie-up should not bind the bank for risk coverage.

• RRBs can also issue Travellers Cheques of sponsor banks’. If agreed between RRB and sponsor bank, the former can do remittance business for customers.

• Permission of lockers can be obtained if RRBs performance is good and can afford cost.

• In case the bank (RRB) has positive net worth and is a non-defaulter of SLR/CRR besides having lower NPA levels (say 5% and below) then such banks can open NRI accounts.

• To make themselves more profitable,RRBs can do the business of credit cards , open currency chests and are authorized to government business also.

IMPROVING FUNCTIONING OF RRBS- PRESENT SHORTCOMING

• RRBs lack uniformity in their functioning. There are different controllers of an RRBs and each tries to pull its ideas in the system. This results in poor monitoring and controlling over RRBs.

• Due to area restriction RRBs are unable to mobilize good business. RRBs may be allowed to operate in a larger area.

• Manpower development is on the back-foot in most RRBs.

• Poor recoveries are major issues in such banks. Use of SAFAESI Act, 2002 can be of great help.

• Management system is poor. Chairman and Board Members must develop proper vision of the bank. Each subsequent Chairman, who is for short period in the bank, must work for that vision, particularly making it competitive organization.