Performance Review of Regional Rural Banks (RRBs)

Syllabus: GS3/ Economy

Context

• The Union Minister for Finance and Corporate Affairs chaired a meeting to review performance of nine Regional Rural Banks (RRBs) of 5 states.

About

• The review meeting focused on business performance, upgrading digital technology services, fostering business growth in MSME clusters, and deepening financial inclusion in rural areas.
• The RRBs were urged to generate awareness of Government schemes, especially in aspirational districts.

Achievements of RRBs

• Consolidated Capital to Risk (Weighted) Assets Ratio (CRAR) of RRBs has increased from 7.8% in FY 2021 to 13.7% in FY 2024.
• The profitability has improved from losses of Rs. 41 crore in FY 2021 to net profit of Rs. 2,018 crore in FY 2024.
• The Gross Non-Performing Assets (GNPA) are relatively lower with a ratio of 3.9%.

Regional Rural Banks (RRBs)

• RRBs were established under the provisions of an Ordinance passed on 26 September 1975 and the RRB Act 1987 to provide sufficient banking and credit facilities for agriculture and other rural sectors. 
• The RRBs were established as per the recommendations of the Narasimham Committee to cater to the rural credit needs of the farming and other rural communities.
• The Prathama Grameen Bank was the first bank to be established on 2nd October 1975.
  • The Syndicate Bank became the first commercial bank to sponsor the Prathama Grameen Bank RRB.

Operation of RRBs

• Regional Rural Banks (RRB) are Indian Scheduled Commercial Banks (Government Banks) operating at regional level in different states of India.
  • They have been created with a view of serving primarily the rural areas of India with basic banking and financial services.
• RRBs perform various functions in following heads:
  • Providing banking facilities to rural and semi –urban areas.
  • Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pension etc.
  • Providing Para-Banking facilities like locker facilities, debit and credit cards, mobile banking, internet banking, UPI etc.

Ownership of RRBs

• The equity of the Regional Rural Banks is held by the stakeholders in a fixed proportion. 
• This proportion is 50:35:15, distributed as:
  • Central Government – 50%
  • Sponsor Bank – 35%
  • State Government – 15%

Issues with Regional Rural Banks (RRBs) 

• High Non-Performing Assets (NPAs): RRBs experience a high level of NPAs, particularly in the agricultural sector. This is due to factors like crop failures, natural disasters, and the vulnerability of rural borrowers.
• Limited Capital Base: RRBs often operate with a limited capital base, restricting their ability to expand, invest in technology, and meet regulatory capital requirements.
• Operational Inefficiencies: RRBs often face operational inefficiencies due to outdated infrastructure, lack of skilled staff, and bureaucratic processes.
• Regulatory Constraints: RRBs are subject to various regulatory constraints, including strict lending norms and capital adequacy requirements, which can be challenging to meet given their limited resources.
• Mobilization issue: Practical exclusion of the richer rural population restricts deposit mobilization.

Significance of Regional Rural Banks (RRBs) 

• Financial Inclusion:  RRBs are crucial in extending banking services to rural and remote areas where commercial banks have limited presence. They help bring the unbanked population into the formal banking system.
• Support to Agriculture and Allied Sectors: A major focus of RRBs is to provide credit for agricultural activities, including crop production, purchase of agricultural equipment, and other related activities.
• Promotion of Rural Entrepreneurship: RRBs play a key role in promoting rural entrepreneurship by providing credit and financial services to small and medium enterprises (SMEs), self-help groups (SHGs), and individual entrepreneurs in rural areas.
• Poverty Alleviation: Through targeted lending programs and government schemes, RRBs contribute to poverty alleviation efforts by providing microfinance and small loans to the poorest segments of society.
• Implementation of Government Schemes: RRBs are instrumental in the implementation of various government-sponsored schemes and programs like PMJDY, PMJAY etc
• Stabilization of Rural Credit Markets: RRBs help stabilize rural credit markets by providing consistent and regulated sources of credit, reducing the reliance on informal moneylenders who often charge exorbitant interest rates.

Way Ahead

• Structural Consolidation to Improve Efficiency: Structural consolidation involves merging smaller or weaker RRBs to create larger, stronger entities.
• Recapitalization of RRBs for Capital Augmentation: Recapitalization involves infusing additional capital into RRBs to strengthen their financial base.
• Periodic Review and Capacity Building of Human Resources: Regularly reviewing the performance and skills of the workforce in RRBs is essential for maintaining a high standard of service. Capacity building involves training and development programs to enhance the skills and knowledge of RRB employees.

Source: BS