The Hindu Business Line : Pvt banks as RRB sponsors seems a good bet

New Delhi and the State governments have neither the funds nor the desire for a clean-up. The correction gets shunted between high and low level meetings to process working groups' old ideas (as everything has been said).

Working groups on rural credit delivery systems seem to be turning into a paying proposition (industry) while the business of rural credit is sick.

The latest Report of the Internal Working Group on Regional Rural Banks (RRBs) from the RBI has estimated the repair cost at between Rs 3,050 crore and Rs 3,430 crore. Load the cost of re-tooling the co-operative credit system at Rs 14,839 crore (Vaidyanathan committee) and the total bill comes to between Rs 17,889 crore and Rs 18,269 crore.

The government seems to be taking the option of allowing the system to shrivel and die instead of putting up funds with tough terms disliked by political groups.

"To wipe out accumulated losses, provide for the NPAs and maintain 5 per cent CRAR (capital to risk weighted asset ratio) for the RRBs in the existing scenario, capital to the extent of around Rs 3,050 crore would have to be infused with appropriate conditionalities," says the Working Group.

If the capital adequacy ratio has to touch 8 per cent (and not 9 per cent as per Basel I norms), the capital infusion rises to Rs 3,430 crore. As of March 31, 2004, there are 196 RRBs with a network of 14,446 branches covering 518 districts. Their equity is held by the Central Government, State government and sponsor bank in the ratio of 50:15:35 and they came into being following a 1975 Working Group headed by Mr M. Narasimham, the author of 1991 banking reforms.

Over time, RRBs have been able to garner small savings from the countryside while being "relatively less successful in enhancing the flow of credit to the targeted rural poor." Aggregate deposits of RRBs moved up from Rs 4,151 crore in 1990 to Rs 56,350 crore by March 2004, while advances rose from Rs 3,554 crore to Rs 26,114 crore over the same period.

"Notwithstanding the sharp increase, RRBs' advances constituted just around 2 per cent of the credit portfolio of the banking system," avers the Working Group, headed by Mr A.V. Sardesai, Executive Director, RBI.

Going by some of the financial indicators, RRBs have not fared badly; at least they seem to be better placed than the rural co-operative credit system. In 2003-04, 163 RRBs earned profits of Rs 953 crore while 33 RRBs lost Rs 184 crore; 90 RRBs had past losses of Rs 2,725 crore in 2003-04.

Of the 90 RRBs, 53 had entirely eroded owned funds and also a part of deposits (that is Rs 1,600 crore or 11.75 per cent of the total deposits).

The percentage of recovery to demand has improved from 57 per cent as on June 30, 1997 to more than 75 per cent as of June 30, 2003. NPAs in absolute terms stood at Rs 3,299 crore as on March 31, 2004.

One can think of trimming the RRB population but it is not legally possible as "merger of RRBs with the sponsor bank is not provided for in the RRBs Act 1976 and further such mergers would go against the spirit of setting up of RRBs as local entities and for providing credit primarily to weaker sections," says the Working Group. T

he law does not specifically provide for the transfer of sponsorhip from one sponsor bank to another.

"However, provisions have been made under Section 23A of the RRB Act for the Central government to effect amalgamation of RRBs."

The Working Group has suggested bringing in private sector banks as sponsors and that looks a sensible gamble. The new and old private banks are uncomfortable with priority sector norms and could swap it with buying up RRBs.

"A change in sponsorship may inter alia improve competitiveness, work culture, management and efficiency of the concerned RRBs," says the Group.

The game turns sticky as the RRB employees earn the same as their colleagues in public sector banks. The buy terms have to be worked out by the RBI. That will help the poor.

There is no way the Indian economy can survive by wiping off its rural constituency.

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