Regional Rural Bank

Regional Rural Bank (RRBs) in India are public sector entities established to provide financial services to the rural population. They aim to provide credit to weaker sections at affordable rates, stop the outflow of rural deposits to urban areas, and help increase rural employment. RRBs operate locally within specific districts, performing key functions like providing loans, basic banking solutions, and digital banking. However, they face challenges such as inadequate financial resources, high loan defaults, and regional imbalance in services. In this article, you will know about meaning and definition of Regional Rural Bank, its objectives, history, functions and associated concerns. To explore more interesting UPSC Economy topics like Regional Rural Bank, check out other Economic articles and IAS Notes of IASToppers.   

Table of Content

• What is Regional Rural Bank (RRB)?
• What are objectives Regional Rural Bank?
• History of Regional Rural banks
• Functions of Regional Rural Bank
• Committees Related to RRB
• Recapitalization of Regional Rural Banks
• Other Policy initiatives for development of RRBs
• Concerns and Issues of Regional Rural Bank
• Conclusion
• FAQs on Regional Rural Banks

What is Regional Rural Bank (RRB)?

• Regional Rural Banks are public sector commercial bank in India that were set up under Regional Rural Banks Act, 1976.
• Regional Rural Banks primarily operate on a regional scale across Indian states.
• These banks are under the ownership of Ministry of Finance, Government of India.
• Shareholding pattern of RRB: 50 (Central Government): 15 (concerned State Government): 35 (Sponsor Bank).
• The area of operation of RRB is restricted to specific regions as notified by the Indian government, usually one or more districts within a state. 
• They are configured as hybrid micro banking institutions, combining local orientation and small-scale lending culture of cooperatives and business culture of commercial banks.
• They are required to provide 75% of their total credit as priority sector lending.

What are objectives Regional Rural Bank?

• To provide credit to the weaker sections (who previously depended on private money lending) at concessional rate of interest.
• To check the outflow of rural deposits to urban areas and reduce regional imbalances and increase rural employment generation.

History of Regional Rural banks

• The first 5 Regional Rural Banks were set up on October 2, 1975, based on the Narsimhan Committee on Rural Credit’s recommendations during Indira Gandhi’s administration.
• Among these 5, the first RRB of India was Prathama Grameen Bank which was located inMoradabad, Uttar Pradesh.
• Other 4 were: Gaur Gramin Bank (backed by UCO Bank), Gorakhpur Kshetriya Gramin Bank (backed by State Bank of India), Haryana Kshetriya Gramin Bank (backed by Punjab National Bank), and Jaipur-Nagaur Anchalik Gramin Bank (backed by UCO Bank).

Functions of Regional Rural Bank

• Providing basic banking solutions to rural and semi-urban locations,
• Provide loans in rural areas in sectors such as agriculture, trade, energy, education etc.
• Accept deposits from the members who hold the bank account
• Providing services like safe deposit lockers, debit and credit cards, digital banking via mobile and internet, along with UPI transactions.
• Managing governmental tasks such as disbursing MGNREGA workers’ wages and pension distribution.
• Provide facilities like Payments & Collection of cheques, Bills of exchange, Promissory notes, Money Transfers, etc.

Committees Related to RRB

• The government ceased the establishment of new Regional Rural Banks (RRBs) in 1987 following the recommendations made by the Kelkar Committee. This action was prompted by the financial losses incurred by RRBs in the early 1980s, due to excess social banking and catering to the highly economically weaker sections.
• To remodel the RRBs, two committees were formed by the government: Bhandari Committee in 1994–95, and Basu Committee in 1995–96.

Recapitalization of Regional Rural Banks

• In 2009, RBI found that many RRBs had a low Capital to Risk weighted Assets Ratio (CRAR). A committee under K.C. Chakrabarty was formed to analyse the financial condition of the RRBs.
• The Committee’s suggestions led to the establishment of a Recapitalization Scheme for RRBs, which was approved by the Cabinet in 2011.
• The plan was to offer recapitalization assistance of Rs. 2,200 crores to 40 RRBs, with an additional Rs. 700 crore as contingency fund.
  • The contingency was for weaker RRBs, mainly located in the Eastern and North Eastern regions.
• National Bank for Agriculture and Rural Development (NABARD) identifies those RRBs, which require recapitalisation assistance to maintain the mandatory CRAR of 9%.
• After 2011, the recapitalization plan for RRBs was extended until 2019-20 in stages.
• In 2020, government approved continuation of the RRBs recapitalization process with capital infusion of Rs 1,340 crore. The plan aimed towards those RRBs that are unable to retain a minimum CRAR of 9%.

Other Policy initiatives for development of RRBs

1. The Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) were introduced for RRBs to help them better manage their liquidity.

2. The Regional Rural Banks (Amendment) Act was passed in 2015 and took effect from February 4th, 2016. It came into effect from4^th February 2016.

Key Features

• Raised authorised capital to Rs 2,000 crore and mandated a minimum of Rs 1 crore.
• Gave RRBs the freedom to get capital from sources other than the three existing shareholders: central and state governments, and the sponsoring banks.
  • However, the combined shareholding of the central government and the sponsor bank cannot be less than 51%.
  • Sponsoring banks could continue to extend initiating assistance to RRBs beyond the initial five years.
• The central government was granted the authority to increase or decrease the shareholders’ ownership limit, through a notification.
• For this, the central government may consider the opinions of the state government and the sponsor bank.

3. Amalgamation of RRBs

Aim of RRB Amalgamation: To minimize their overhead expenses, optimize the use of technology, enhance the capital base and area of operation and increase their exposure.

• Phase 1 (2004-05): Drastically decreased the number of RRBs.
• Phase 2 (2012 to 2015): Large geographically dispersed RRBs within a state under various sponsor banks were merged to have only one RRB in medium-sized states and 2-3 RRBs in larger states.
• Phase 3 (2018-19 onwards): Introduced amalgamation based on the principle of ‘One state – One RRB’ in smaller states and reduction in the count of RRBs in larger states.

4. Joint Consultative Council (JCC)

• The National Bank for Agriculture and Rural Development (NABARD) established the Joint Consultative Council (JCC) in 2009 for RRBs to facilitate discussions with national level Unions/Associations in RRBs.
• NABARD also periodically reviews RRB’s financial performance through empowered committee (EC) meetings at the state level.

Concerns and Issues of Regional Rural Bank

Inadequate Financial Resources

• RRBs are struggling due to insufficient finance. This is due to their dependency on NABARD for funding.
• The lack of savings from their primary clients, the poor rural people, is an additional strain on their finances. The inability to save due to poverty and low per capita income restricts RRBs’ ability to accumulate enough deposits.

Poor Loan Recovery and High Defaults

• The RRBs are deeply troubled by the high rate of loan defaults and the difficulty in recovering loans.
• These issues stem from factors such as poor loan approval systems, misappropriation of credit, insufficient marketing facilities, and inefficient recovery mechanisms.

Regional Imbalance in Services

• A notable issue with RRBs is the regional imbalance in banking facilities provided by RRB’s. By concentrating their branches in some specific states, they are missing out on other potential customer groups.

Prevalence of Heavy Loans

• Many RRBs are grappling with the issue of burdensome loans due to factors such as the clients’ poor repayment capabilities, low deposit levels, and sanctioning loans without assessing the customers’ creditworthiness.
• The lack of properly trained staff acts as a major obstacle for RRBs, as loans and advances are often granted without assessing the customers’ ability to repay.

Limited Impact on Poverty Reduction

• RRBs have not significantly contributed to reducing poverty in the country despite various initiatives.
• The lack of economic infrastructure, poor marketing tactics, limited customer knowledge, low production, and insufficient savings awareness create numerous obstacles for RRBs.

Ineffective Coordination with Other Institutions

• The lack of proper coordination between RRBs and other financial entities such as commercial banks, NABARD, and cooperative banks negatively impacts the RRBs’ performance.

Absence of Uniformity

• Inconsistencies, particularly in the rates of interest for savings, time deposits, and loans, as compared to other commercial banks, can also lead to conflicts and negatively impact RRBs.

Below are the List of all the Regional Rural Bank in India

Conclusion

Regional Rural Banks have undoubtedly been a catalyst for rural growth in India, yet challenges persist. These banks need to address issues of financial adequacy, loan defaults, and service imbalances. The Indian government must continue to support these institutions, focusing on strategies such as broadening the base of credit availability, improving loan recovery systems, and enabling better coordination with other financial entities. In doing so, RRBs can become more sustainable, contributing more effectively to the economic empowerment of rural India.

Ref: Source-1

FAQs (Frequently Asked Question)