INDIA'S BEST BANKS

Focus / Rural Banking

The changing face of RRBs

OP Posted: 2008-04-09 Updated: Apr 09, 2008 at 0347 hrs IST Thomas 03:23:02+05:30 IST

Regional Rural Banks (RRBs) have evolved since their inception in 1975, when the sole purpose was to cater to rural needs. The Narsimham committee recommended the creation of RRBs to offset regional imbalances due to a lack of professionalism and resources that possibly could be best tackled by scheduled commercial banks (SCBs), if they became the sponsors with government participation. Subsequently, RRBs were set up through the promulgation of the RRB Act of 1976. The equity holding pattern of RRBs evolved in the ratio of 50:15:35, with the Central government holding the majority share, the sponsored bank holding the second highest stake, and the rest by the respective state governments that housed the RRB. RRBs, were originally conceived as low-cost institutions with a rural flavour and the primary role was akin to that of commercial banks, as in raising deposits and lending onwards for a profit. Except that, these banks targeted rural and semi-urban areas for deposit mobilisation and lent primarily small loans to marginal farmers. However, somewhere down the line, RRBs lost sight of their purpose and began incurring heavy losses. To add to their woes, roles were duplicated by SCBs and RRB- sponsor banks that either had rural branches or began penetrating rural destinations under their expansion drives. As time went by, trade unions found a new axe to grind and demanded wages at par with employees of their sponsor banks and sought cross-border transfers, while sponsor bank managements began using rural postings as a weapon to punish their employees. Duplication of branches in many cases were so obvious that it wasnt surprising to witness the same premises having a SCB branch and its sponsored RRB branch. Goals took a back seat and many RRBs ended up with irrecoverable loans. In 1990, a major blow, by way of an award, brought RRB pay scales at par with SCBs and the new scales were effective retrospectively from 1987. This added to the woes of RRBs that were already burdened with heavy losses due to their narrow banking and low return on business. The heavy salaries and concurrent losses, now, made the management of banks rethink ways to turn around. In 1994-95 the first dose of recapitalisation-Rs 2,188 crorewas administered in the ratio of ownership, i.e. 50% by the Central government, 35% by the sponsor bank, and 15 % by the state government where the bank had its presence.

A few state governments delayed in their recapitalisation commitment and that was the end of round one. In the second round of recapitalisation, the money assessed was Rs 1,796 crore. The recapitalisation drive was completed by March 31, 2007. Of the total 196 RRBs, only 92 remain, after a post-merger exercise last year with unviable ones. Of the 92 RRBs now, post merger and consolidation, only 27 would get recapitalisation, implying that 65 RRBs were in profit. They are now profit-driven and compete in the same space with SCBs on feeor commissionbased incomes like issuances of drafts, selling of insurance products, and mutual fund schemes, in addition to commercial banking like agriculture project funding. They have given convenience banking a shot through the use of information technology and ATMs. Within their primary role of catering to rural society, RRBs now have a better understanding of commercial banking businesses as well. RRBs covered 525 of the 625 districts as of March 31, 2006. The Rangarajan Committee, in its January 2008 report, has also recommended a Rs 500-crore technology fund for upgradation. The increased coverage of districts makes them an important segment of Rural Financial Institutions for financial inclusion, the Rangarajan Committee had noted in its report this year. In the last few years, the National Bank for Rural Development (Nabard) has also increased its role in the deployment of human resources in RRBs. Today, Nabard screens top-level candidates like the chairman, even though the short-listing of such officers is done by the sponsor bank. RRB chairmen are usually in the scale-IV to scale VI cadre of the sponsor SCBs. For example, in Manipur, of the 23 branches, nine were closed down due to insurgency. The challenge that lies before RRB chairmen today, is to tackle the issue of financial exclusion. Inclusion is now possible, where earlier banks have ignored certain sections of society, perhaps due to the less profitability or no profitability of that segment. The commitment by the government to ensure that every citizen in the country be included by banks, has also made banks think out of the box. In terrain that does not facilitate the use of vehicles, financial inclusion of one set of the population could have been easily overlooked had it not been for the government and regulators breathing down their necks. There are locations that take as much as three-days to travel oneway, yet financial inclusion is nearly 100%. For example, in Arunachal Pradesh, which is rich in natural resources, the hilly terrains makes approach a tougher task for bankers, as the population is not just concentrated at one place but on many such hills. There are hordes of such terrain with limited population. RRBs therefore have entered into informal tie-ups with local tribal heads that act as business correspondents for the banks, collect, and disburse funds within the community. The banks on their part have entered into a profit-sharing arrangement with such local heads-promoting entrepreneurial skills in the bargain.

This apart, RRBs have also entered into tie-ups with local shopkeepers and government post offices. RRBs have, therefore, travelled the extra mile to include as many of them into the fold. The role of self-help groups has therefore gained prominence as they bring about self-discipline and narrow the scope of defaults. The Rangarajan committee in its 2008 report has urged the government to ensure that RRBs cover 87 un-banked districts identified by it. For SCBs and RRBs, they have to ensure that at least 250 new bank (small) accounts per annum were opened in their semi-urban and rural bank branches. The committee findings said financial exclusion was as high as 78.2% among non-cultivator households, which comprise of agricultural labourer households, artisans and other rural households. There was no data to show the position of finance extended exclusively to marginal farmers, though small farmers were given credit from institutions. Exclusion was most acute in the central, eastern, and north-eastern regions. If the ongoing support by SHGs and banks are sustained and in line with the recommendations of the Rangarajan Committee findings, the country will win hands down in removing poverty from the map of India. After all, where there is a government will, there is a way!