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Our Bureau

Mumbai , May 17

THE Internal Working Group on Regional Rural Banks (RRBs) set up by the Reserve Bank of India has recommended merger of these banks to improve their operational viability and help them take advantage of economies of scale.

"The merged entities will have a larger area of operation and the merger process will help in strengthening some of the weak RRBs," the draft report of the Working Group said.

It has suggested two options - merger between RRBs of the same sponsor banks in the same State and merger of RRBs sponsored by different banks in the same State. This process, according to the Working Group, will bring down the number of RRBs and make it convenient for sponsor banks to manage the affairs of the RRB.

The Group has also suggested that RRBs should maintain a minimum capital adequacy level.

The capital to risk-weighted asset ratio should be initially kept at 5 per cent. "Over time, they may be expected to align themselves with the Basel I norms," the report said.

According to the Working Group, Rs 3,050 crore would be required to wipe out accumulated losses, provide for the NPAs and maintain five per cent capital to risk-weighted asset ratio for the RRBs in the existing scenario.

The Group has also suggested that the chairman for RRBs should be appointed from outside the sponsor bank.

"As chairman of RRBs are from the sponsor bank, there could be several potential areas of conflicts of interest,'' the report said.

The Group has also recommended that RRBs be encouraged to distribute products of mutual funds and insurance and participate in referral arrangement to improve their non-interest income.

As some RRBs have performed better under some sponsor banks and not so well under others, the Group has recommended that a change in sponsor banks may help in improving their performance.

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Panel for merger of RRBs to improve efficiency

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