A STUDY ON REGIONAL RURAL BANKS IN INDIA

Author : Mange Karan Ratanbhai | Published : Mar 12, 2022

ABSTRACT :

Regional Rural Banks have been in India's financial landscape for the past 41 years. The establishment of regional rural banks (RRBs) may be viewed as a one-of-a-kind trial and experience in improving the dexterity of rural loan distribution in India. With a 50:15:35 shareholding ratio between the Central Government, the concerned State Government, and the sponsoring bank, an effort was made to integrate commercial banking within the broader policy drive towards social banking while keeping slight differences in mind. In India, rural banking refers to the establishment of financial institutions in rural regions for the benefit of the rural population's economic growth. The current article aims to study the concept, evolution, functions, and developments of Regional Rural Banks in India. RRBs came in front as specialized rural financial institutions for developing the rural economy, standing at par with the commercial banking sector.?

KEYWORDS : Regional Rural Banks, Financial Institution, Development, Functions of RRB, Recapitalization, Banks.??

EVOLUTION OF REGIONAL RURAL BANKS :

Regional Rural Banks (RRBs) in India are the scheduled commercial banks that conduct banking activities for the rural areas at the state level. As the name suggests, the Regional Rural Banks cater to the needs of the rural and underprivileged people at the regional level across different states in the country. Regional Rural Banks have been in the Indian financial arena for around three decades. The establishment of regional rural banks (RRBs) may be viewed as a one-of-a-kind experiment as well as a learning experience in terms of enhancing the efficacy of rural credit delivery mechanisms in India. An attempt was undertaken, with joint shareholding by the Central Government, the relevant State Government, and the sponsoring bank, to integrate commercial banking within the broader policy drive toward social banking while keeping local characteristics in mind. The RRBs arose from the need for a more robust institutional system for delivering rural loans.?

In 1975, the Narsimham committee proposed the formation of RRBs as a new set of regionally oriented rural banks that would merge the local and national banking systems. Subsequently, the RRBs were set up through the promulgation of the Regional Rural Banks Act of 1976. Their equity is held by the Central Government, concerned State Government, and the Sponsor Bank in the proportion of 50:15:35. The main objectives of RRBs are to provide credit and other facilities? especially to the small and marginal farmers? agricultural laborers artisans and small entrepreneurs in rural areas with the objective of bridging the credit gap in rural areas, checking the outflow of rural deposits to urban areas and reduce regional imbalances and increase rural employment generation.

DEVELOPMENT OF REGIONAL RURAL BANKS :

RRBs, which are commonly referred to as "small man's banks," have acquired deep roots over the years that have become an integral aspect of the rural credit structure.? They have played an important role in rural institutional finance in terms of geographical coverage, customer outreach, and business volume, as well as contribution to rural economic development. The tremendous development of their retail network in rural regions has been a noteworthy characteristic of their performance over the last three decades.

From a modest beginning of 6 RRBs with 17 branches serving 12 districts in December 1975, the number of RRBs has risen to 196 RRBs with 14,446 branches functioning in 518 districts across the country in March 2004. RRBs have an extensive rural branch network, accounting for around 43% of all commercial bank rural branches. RRBs periodically go through a process of amalgamation. In January 2013, 25 RRBs were amalgamated into 10 RRBs, totaling 67 RRBs.?In March 2016, there were 56 RRBs, covering 525 districts with a network of 14,494 branches.?As of 1 April 2020, there are 43 RRBs in India RRBs have a strong rural emphasis, with rural and semi-urban branches accounting for more than 97 percent of its branch network. The expansion of the branch network has enabled RRBs to increase banking activities in unbanked regions and mobilize rural deposits.

FUNCTIONS OF REGIONAL RURAL BANKS :

Since a Regional Rural Bank is a Scheduled Commercial Bank, its primary functions are to accept deposits and to disburse loans. The important functions of Regional Rural Banks are discussed below.?

1. Accept Deposits

• RRBs accept deposits from their members who hold an account in the bank.?
• Deposits can be made in current or savings accounts.?
• Depositors can also be made in fixed or recurring forms.

2. Loan Extension

• The RRB Act of 1975 states that the RRB can extend loans and credit services to the Priority Sector (PS). The loans to this sector are classified under PSL or Priority Sector Lending. The RBI announced the coverage of RBBs in PSL from FY 1997.
• The priority sector comprises small and marginal farmers, craftsmen and artisans, local traders, medium and small scale businesses, education, housing, renewable energy, etc. which needs development and financial investment.
• 75% of the total Bank Credit has to be provided to the Priority Lending Sector. Out of this total credit, 10% has to be given to the economically weaker sections.
• Hence, short-term loans on a low rate of interest are extended by these banks to the priority sector. RRBs cannot, however, extend large or long-term loans to their customers.

3. Wage disbursement

• The Regional Rural Banks in India perform the important function of distribution of wages under the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), the Pradhan Mantri Gram Sadak Yojana (PMGSY).?
• The pensions provided under the poverty alleviation schemes and pension schemes of India are also distributed through these banks.

4. Secondary functions of RRBs

• Similar to commercial banks, the secondary functions of the Regional Rural Banks in India are providing agency services and general utility services to their customers.?
• Agency services like foreign exchange, bill payments, money wire transfer, etc. are performed by RRBs.
• Utility services like ATM, UPI, issuance of debit cards, locker facilities, etc. are also provided by RRBs in India.

REGULATION OF THE REGIONAL RURAL BANKS IN INDIA :

1. Reserve Bank of India: The RBI Act 1934 and the Banking Regulation Act 1949 are two principal regulating statutes for commercial banks in India.
2. NABARD: It stands for National Bank for Agricultural and Rural Development of India is the chief body for regulating the rural banking sector in India.

NABARD was set up on July 12, 1982, by the RBI to make strides in the credit stream concentrated within the urban regions to the provincial and semi-urban zones of India. Its major capacities are checking, arrangement making, arranging the exercises, and the credit framework of the rustic banks. NABARD too makes a difference in country banks in their improvement and administers their exercises on a convenient basis.

RECAPITALIZATION OF REGIONAL RURAL BANKS :

What is Recapitalization??Due to defaulting and non-repayment of loans, banks often run into debts. To prevent this, the Government, as it is the largest shareholder in RRBs, invests capital in the banks.?

The minimum prescribed?Capital to Risk-Weighted Assets Ratio (CRAR), also known as the Capital Adequacy Ratio, for any Scheduled Commercial Bank (which includes RBIs) is supposed to be?9%. The banks unable to maintain this ratio have to be considered for recapitalization.

• In 2009, a committee chaired by K. C. Chakrabarty was constituted to investigate the state of RRBs. In 2010, it proposed several steps to boost the Capital to Risk-Weighted Assets Ratio (CRAR), one of which was bank recapitalization.
• The government was supposed to release Rs. 1100 crore for this purpose in 2010-11 and 2011-12, but the state government and sponsor banks were also required to release an amount proportionate to their shareholdings.
• The government, in partnership with NABARD, established a corpus building fund with an initial budget of Rs. 100 crore to strengthen the abilities of RRB workers.

The government indicated that RRB recapitalization will continue in 2020. It has set aside Rs. 1340 crore for this purpose and would disburse Rs. 670 crore from the fund. It stipulated that the state government and sponsor banks invest a proportionate amount. This action was taken to defend farmers, local business people, traders, and others whose livelihoods had been harmed by COVID-19.

CONCLUSION :

RRBs have also been included in the category of priority sector lending, on par with commercial banks. Priority sector lending was developed to ensure that support from the banking system flowed in growing amounts to critical areas of the economy and accordance with national priorities. Agriculture, small businesses, housing, retail commerce, and education are classified as priority sectors by the Reserve Bank of India, and banks are required to lend a certain amount to these sectors. As per the guidelines, domestic banks have to ensure that forty percent of their advances are accounted for in the priority sector. Within the 40% priority target, 25% should go to the weaker section or 10% of their total advances should go to the weaker section. Weaker sections, under priority sector lending purposes, include scheduled castes, scheduled tribes, small and marginal farmers, artisans, and self-help groups.