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Friday, Mar 19, 2004

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Regional rural banks need a shot in the arm

V. Jagan Mohan

RRBs have done well in mobilising deposits and infusing the thrift habit among the rural masses.

THE latest policy pronouncements of the Government have been largely agriculture and rural centric. The constitution of a Farmers Commission is one among them. Rural credit is emerging as a focal issue and this can be gleaned from the fact that the Government earmarked Rs 15,000 crore in the Interim Budget to revitalise the co-operative structure. In this context, regional rural banks (RRBs), which operate in around 476 districts of the country, too need further strengthening.

Looking back

In the early 1970s, the Government observed that despite a wide banking network and developmental initiatives in the first 25 years since Independence, a critical gap still existed in meeting the credit needs of the rural poor. To find a solution, the Government appointed a working group on rural credit, the Narasimham Committee, in July 1975. The committee observed that the cost structure of commercial banks, the attitude of bank employees and the lack of a professional approach in the co-operative credit system were the main stumbling blocks to rural credit.

The committee also observed that the deposits collected by banks from rural areas were not totally deployed there. The panel, therefore, recommended the creation of a new set of regionally-oriented rural banks which would combine a co-operative's local feel and a commercial bank's business acumen.

The Government accepted these recommendations and, accordingly, the ordinance of Regional Rural Banks, 1975 was promulgated on September 26, 1975. This was replaced by the Regional Rural Banks Act, 1976 on February 9, 1976. The mandate of these rural financial institutions were to:

  • take banking to the doorsteps of the rural masses, particularly in areas without banking facilities;

  • make available cheaper institutional credit to the weaker sections of society, who were to be the only clients of these banks;

  • mobilise rural savings and canalise them for supporting productive activities in rural areas;

  • generate employment opportunities in the rural areas; and

  • bring down the cost of providing credit in rural areas.

    With partnerships with the Central Government (50 per cent), State governments (15 per cent) and commercial banks (35 per cent), the number of RRBs rose from just six in 1975 to 196 by 1987, covering 476 districts. They financed only the weaker sections of the rural community — small and marginal farmers, agricultural labourers, small traders, and so on.

    Along with commercial banks, RRBs participated enthusiastically in poverty alleviation schemes (IRDP, for example) and disadvantaged area (drought-prone regions and deserts) development programmes. They quickly became an important and integral part of the rural credit system. However, their financial viability was initially overstretched by policy rigidities coupled with a low capital base in an environment of inadequate infrastructure and deeper social and economic disparities.

    As at end-March 2003, there were 196 RRBs spread over 23 States/Union Territories and with a network of 14,350 branches, accounting for 44.5 per cent of the total rural network of all scheduled commercial banks (including RRBs). The rural and semi-urban branches of RRBs constitute 98 per cent of their network. Their deposits and advances as on March 31, 2003, were Rs 49,078 crore and Rs 22,028 crore respectively.

    Thus, RRBs have done well in mobilising rural deposits and infusing the thrift habit in their clients. The bulk of the loans from RRBs have been to priority sectors, which accounted for over 70 per cent of the total. Agriculture alone took up 46 per cent of the priority sector advances. The involvement of RRBs in providing credit support to small and retail trade and other non-farm rural activities is better than that of co-operatives and commercial banks.

    As on March 31, 2002, the outreach of RRBs in terms of number of deposits and advances was 50.02 million and 11.94 million respectively. The per-employee accounts handled by RRBs were 885 against the national average of 464 in the banking industry. Similarly, the staff and branch network of RRBs, though respectively 6.7 per cent and 21.8 per cent of the national network, served 11.5 per cent of the total deposit accounts and 21.8 per cent of credit accounts of the banking industry.

    The challenges

    The Indian economy grew at an estimated 3.7 per cent in 2002-03 against 5.6 per cent the previous year. This was largely because of the negative growth of 4.4 per cent in the agriculture sector. This steep fall in GDP highlights the vulnerability of the Indian economy to the performance of the agricultural sector. This is despite other macroeconomic indicators and sectors gaining in strength.

    The Tenth Plan (2002-2007) has set an ambitious average GDP growth of 8 per cent per annum. To achieve this, it is important to revitalise and revamp not only the agricultural sector but also rural financial institutions. An annual average growth of 7 per cent from this sector alone in the next five years is crucial for achieving the GDP target.

    The Task Force on Rural Credit for the Tenth Plan has projected institutional credit flow to agriculture and allied activities at Rs 7,36,570 crore for 2002-2007, which is more than treble (320 per cent) the credit flow (Rs 2,29,853 crore) during the Ninth Plan (1997-2002).

    The agriculture sector is emerging as part of the new economic order arising out of globalisation and implementation of the Agreement on Agriculture (AoA) under the World Trade Organisation (WTO). If some agreement is reached at the WTO negotiations, the agriculture sector in the country would be poised for a radical transformation. To withstand the global competition, enhanced productivity and sustainability of the sector has become imperative.

    With the demand for food increasing at more than 2 per cent per annum, the financial, land and water resources in the rural sector have come under severe strain. At the same time, agriculture is a matter of livelihood and food security, with nearly 650 million people depending on it. In this context, productivity augmentation in agriculture and other allied sectors, expansion of rural credit, poverty eradication, infrastructure and development and export competitiveness of agricultural products have assumed high priority in the nation's development agenda. It is in this context that the Rs 50,000-crore outlay has also been proposed by the Government to be implemented by Nabard.

    The Rural Non-Farm Sector (RNFS) has emerged as a key focus area for creating employment in the rural sector and to enable migration from the over-stretched farm sector. The strategy of rural institutions would have to include strengthening the credit delivery system for increasing RNFS employment.

    The roadmap

    RRBs have emerged as the only surviving rural financial institution with a professional management culture to meet small-value, large-volume rural credit needs. Therefore, the time has come to revitalise/revamp the structure of RRBs along with co-operatives so that they play a critical role in achieving the developmental targets in the rural sector under the Tenth Plan and emerge stronger.

    In this context, the following initiatives are suggested:

    RRBs need to be provided with adequate capital support to enable them have a net capital adequacy ratio (CAR) of 5 per cent. The issue of capital infusion by the owners assumes critical importance and needs immediate attention to enlarge the scope of RRB operations.

    The share of sponsoring institutions in the capital structure of RRBs needs to be enlarged to make them a majority shareholder. By acquiring the majority shareholding in RRBs, the sponsor banks/institutions can convert them into vibrant and professional subsidiaries and area-specific special business units (SBUs).

    In the long run, they may converge all their agricultural and rural activities under the umbrella of these SBUs. Even co-operative banks can be merged with these SBUs at later stages.

    Nabard has evolved over the past two decades into a strong and rural-sensitive developmental institution with complete grass-root level understanding of the complexities of the agricultural and rural sectors. Nabard has become a major shareholder in the proposed Agricultural Insurance Corporation of India Ltd, which includes General Insurance Corporation and four public sector insurance companies, to extend crop insurance cover to all farmers. Similarly, Nabard has played a pioneering role in setting up and operationalising the National Commodity and Derivatives Exchange (NCDX) with equity participation in association with other national level institutions such as ICICI Bank, LIC and NSE (National Stock Exchange).

    Similarly, they may acquire an equity stake in the gross-root level rural financial institutions such as RRBs from the Central Government and State governments to enable them play a more direct and proactive role in rural credit. Nabard should thus become an apex development bank in the rural and agricultural sectors with direct equity participation in RRBs along with sponsoring institutions.

    With district development managers (DDMs) in most of the districts and also on the boards of all RRBs and co-operatives, Nabard is now fully equipped organisationally and expertise-wise to emerge as a strong player in the rural credit system. A case in point is the promotion of self-help group (SHG) movement by Nabard, which reflects its immense capability in capacity building and nurturing the rural credit delivery system.

    Similarly, the RBI, during the past two decades, has passed on the mantle of rural planning and credit to Nabard, its own subsidiary. Post-reforms and post-liberalisation of trade and foreign exchange, the RBI is donning the role as super regulator of the monetary and financial system.

    With increasing complexity of macro-economic management, the RBI needs to confine itself to a regulatory role for all financial institutions, including the rural ones. The supervisory role of rural financial institutions needs to be restored to the RBI for effective monitoring and control. CRR and SLR requirements of RRBs and rural SBUs need to be different from the dispensation given to other commercial banks.

    A different dispensation under CRR and SLR would make available more resources for rural credit deployment. The rate of interest paid on CRR balances held by these rural institutions might also be 100 basis points above what is paid to commercial banks. Similarly, the Central Government and all State governments need to park their rural developmental funds with RRBs to ensure cheaper flow of demand deposits. These simple measures, without any cross-subsidisation, would bring down the cost of credit to the rural/agricultural sector.

    At the same time, the stipulated 18 per cent benchmark for lending to agriculture needs to be hiked to 25 per cent commensurate with contribution of this sector to GDP. Similarly, the minimum benchmark credit-deposit ratio of 60 per cent needs to be insisted upon for each bank/RRB in every rural district of the country to ensure adequate credit flow to the rural and semi-urban sectors.

    Much of the RRB staff was recruited during the initial stages and there has been ban on fresh recruitment since 1992. The staff is getting older whereas the complexities and demands of rural banking now call for more dynamism and youthful talent. Rural banking has emerged as a niche, wherein special skill-set and sensitivity is required. Therefore, the imposed ban on fresh recruitment should be reviewed at the earliest to enhance and diversify the business of RRBs.

    Also, RRBs should be permitted to recruit specialists in the technology and agriculture fields. Similarly, grants/soft loans may be provided for technology so as to enable RRBs compete with commercial/private banks that invest heavily in technology projects. The technology induction in rural banking would facilitate handling low-value, high-volume business effectively in a more cost-effective manner.

    In sum, the mandate for RRBs as envisaged in the Act of 1976 is still largely relevant, as the socio-economic conditions of a majority of rural population continue to be a cause of concern for policymakers. Therefore, the requirement of a strong and flexible structure for RRBs in the rural segment cannot be overemphasised. The proposed Farmers Commission and the Dr Vyas Committee constituted by the RBI need to look into these issues comprehensively to strengthen the rural credit-delivery mechanism.

    (The author is Chairman, Kakathiya Grameena Bank. The views are personal and feedback may be sent to

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