Killing our very own grameen bank

The regional rural banks (RRBs), the Indian Gramin Banks, would have been the most suitable institutions to serve the poor, better than the so called ‘world’s best model’, ‘Grameen Bank’ of Bangladesh. However, continued distortions in the name of reforms by successive governments have distracted them from their original goals. The final blow in that direction came to them in the form of the recent RRBs Amendment Act, 2015.

The amendment to the Act facilitates the raising the share capital of RRBs from the present ₹5 crore to ₹2,000 crore, infusing capital from other than the present owners to the extent of 49 per cent against the present arrangement of the Centre, States and sponsor banks sharing in the ratio 50:15:35 respectively. These changes will pave way for their part privatisation and pure commercialisation, totally ignoring the very purpose of their birth.

Born with a cause The RRBs came into being in 1975, through an ordinance, which was later made RRBs Act, 1976, with the sole purpose of catering to the credit and other needs of the poor — small and marginal farmers, agricultural labourers, rural artisans, street vendors, petty traders and all those below the poverty line — as enshrined in the very preamble to that enactment.

These banks had been genuinely successful in achieving the goals set. But that was before the so-called reforms set in. The spread of their network had been very rapid.

By 1990, that is, within 15 years, as many as 196 RRBs were established with 14,500 branches in the un-banked rural, tribal and far-flung areas of the country. About 123 million poor were given loans to support their small farming and other economic activities. All this was not without some cost, but this was within anticipated levels.

Cost and benefit The architects of the RRBs had rightly forecast in the very beginning that they would incur some losses, which should be treated as essential social cost for the social benefit of covering the rural poor.

But the accumulated losses of ₹621 crore by 1991-92 of 152 out of 196 RRBs had resulted in the policy prejudice of the later day governments, whereby the loss sustained was blown out of proportion, although it worked out to just ₹18 lakh per RRB per year — peanuts compared to the service they had rendered to the millions of poor people.

The policy makers who had become obsessed with making profit went ahead with the overhauling of the RRBs. The first crucial distortion was made in 1992-93 when the RRBs were allowed to finance to the non-target groups — the rich borrowers — removing the barrier of financing exclusively to the weaker section.

The priority-sector norms were set just on a par with other commercial banks: limiting only 40 per cent of their lending to that sector and 10 per cent of the total to the poor. These ratios, however, were slightly altered to 60 and 15, yet bringing down the weaker sections’ share of RRBs’ credit from 100 per cent to 15 per cent.

In addition, the RRBs were given freedom to fix their own interest rates, allowed to liberally invest in shares and securities and the choice of opening and closing the branches was left to the RRBs. Another significant change was the sponsor bank-wise merger of RRBs in each State.

The distancing the RRBs from the rural poor did, however, result in increasing their profits. As per the latest available data, all the RRBs made profits in 2013-14. The net profit earned in the year was ₹2,833 crore. The profit earned before taxes during previous five years (2008-09 to 2012-13) was ₹12,589 crore. The government got ₹9,318 crore towards tax income which was much bigger than its recapitalisation of ₹1,003 crore it had provided in terms of the Chakrabarty Committee.

Meat and poison Such high profits and income could not have been made without that being a loss to the rural poor, as is indicated by several outcomes.

One: Instead of using the deposits mobilised in rural areas for the benefit of the poor, the RRBs started investing money in shares and securities much beyond their statutory liquidity ratio requirement. The investments in shares and securities as of March, 2014 was ₹1,10,514 crore against the outstanding deposit of ₹2,39,504 crore which gives an investment/deposit ratio of 46.14 per cent. It was still higher, 52.34 per cent, during the previous year and 72 per cent in 2001.

Two: the area of operation of RRBs was originally confined to one or two districts in tune with the norm of keeping the banks small and to operate in a homogenous agro-climatic area, helpful in designing the uniform schemes for the bank. That is not the case now. Following the Vyas Committee’s recommendation, 196 RRBs have been condensed to 57 as of March 2014.

Three: while RRBs were supposed to be pure rural banks RRBs, the reforms made them open branches in urban centres. There were 1080 urban and 190 metropolitan branches in their about 19,000 total branches as of March 2013.

Four: the RRBs, before their reforms, had ploughed back entire of the resources in the rural areas themselves, as denoted by a credit deposit ratio of 100 per cent and more. Now the credit deployed by RRBs in rural areas, by March 2013, for instance was ₹88,022 crore against ₹1,20,827 crore rural deposits resulting in the rural credit deposit ratio of 72.84 per cent. In fact, rural credit was 64.78 per cent of the total credit of RRBs, meaning a significant amount of credit went to urban areas from the rural banks, besides heavy investments in shares and securities.

Five: The small loans concept of RRBs is fast disappearing. The RBI’s size classification for 2013 shows the RRBs having sanctioned some 20 loans above ₹100 crore each and 539 loans above ₹25 crore but below ₹100 crore and 30,022 loans of the size between ₹10 lakh and ₹25 lakh. All the loans above ₹5 lakh each with aggregate outstanding of ₹15,938 crore by March 2013 could be construed as loans to rural non-poor.

The new amendment to the RRBs Act will surely help for the deepening of the reforms process which means further distancing the rural poor, from the access of institutional credit, with great impunity.

The writer is a consultant

COMMENT NOW