Regional Rural Banks: its evolution and contribution

Regional Rural Banks were set up on the recommendations of The Narasimham Working Group in Sep 1975 and RRB act came into force in 1976. These are local level banking organizations operating in different States of India created with a view to serve primarily the rural areas of India with basic banking and financial services Their area of operation covers one or more districts in the State. RRBs perform a variety of functions like providing banking facilities to rural and semi-urban areas, carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc., providing Para-Banking facilities like locker facilities, debit and credit cards.  The development process of RRBs started on 2 October 1975 with the forming of the first RRB, the Prathama Bank. RRBs are jointly owned by the Government of India, the concerned State government and sponsor banks, with the issued capital shared in the proportion of 50 percent, 15 percent and 35 percent, respectively.


Reforms in the RRBs


First Phase: 1993-2000
Based on the recommendations of the Narasimham Committee Report (1992), reforms were initiated in 1993 with a view to improve the financial health and operational viability of RRBs.
  • Various measures including recapitalization, rationalization of branch network, providing better access to non fund business, expanding avenues of investment and advances, upgrading the level of technology and taking up select RRBs for comprehensive restructuring were taken.
  • Further, the compulsion to lend to the target group were limited to 40% of new loans.
  • From January, 1995 the investment avenues for RRBs were broadened to improve the operational efficiency and profitability. In December, 1996 the investment policy was further liberalised, to accord parity with commercial banks, permitting RRBs to invest in shares and debentures of corporate and units of Mutual Funds with a ceiling upto 5% of the incremental deposits of the bank during the previous year.
  • Prudential accounting norms of income recognition, asset classification, provisioning and exposure, were implemented during this period to provide durability to the reform process.
  • In April, 2000, RRBs were allowed to apply for permission to maintain non-resident accounts in rupees.
Second Phase: 2004-2010
The next Phase of reforms started in 2004-05 with the structural consolidation of RRBs by amalgamation of RRBs of the same sponsor bank within a State. Followings were the key changes made during this phase: 
  • Capital support aggregating Rs. 1796 crore was provided during the period 2007-08 to 2009-10 as part of this process.
  • In October, 2004, RRBs were permitted to undertake insurance business without risk participation and in May, 2007 they were allowed to take up corporate agency business for distribution of all types of insurance products without risk participation.
  • In December, 2005, to further extend support to RRBs for accelerating the flow of credit to the rural areas, the resource base of RRBs was expanded to include lines of credit from sponsor banks; they were also permitted to access the term money markets and CBLO/Repo markets.
  • Issuance of credit/debit cards, setting up of ATMs, opening of currency chests, undertaking government business, as subagents, were allowed to enhance business opportunities.
  • In March, 2006, RRBs were permitted to apply for AD-Category II licence to undertake non-trade related current account transactions for certain specified purposes to further enhance the scope of business.
  • In June, 2007 to increase their exposure to foreign exchange business they were allowed to accept FCNR deposits.
  • RRBs were also allowed to participate in consortium lending with sponsor banks, DFIs and other banks within the area of operation.
  • The capital adequacy standards were introduced in December, 2007 in the context of financial stability and RRBs were required to disclose the level of CRAR in their balance sheets.
Third Phase: 2010 onwards
  • Based on the recommendations of Dr. K. Chakrabarty Committee (2010), 40 RRBs have been taken up for recapitalization to enable them to achieve and sustain a CRAR of 9%.
  • In November, 2010 the branch licensing policy was liberalized which allowed RRBs to open branches in Tier 3 to Tier 6 centres (with population of up to 49,999 as per 2001 Census) without prior approval from the Reserve Bank, subject to certain conditions. This policy was further liberalized in August, 2013 to also include Tier 2 centres.
  • The second phase of consolidation commenced from October, 2012 with amalgamation of RRBs across sponsor banks within a State.
  • A capacity building fund with a corpus of Rs.100 crore to be set up by Central Government with NABARD for training and capacity building of the RRB staff in the institution of NABARD and other reputed institutions. The functioning of the Fund will be periodically reviewed by the Central Government. An Action Plan will be prepared by NABARD in this regard and sent to Government for approval.
  • Additional amount of Rs. 700 crore as contingency fund to meet the requirement of the weak RRBs, particularly those in the North Eastern. and Eastern Region, the necessary provision will be made in the Budget as and when the need arises.

RRB Amendment Act 2014

The highlights are: 

  • Authorised capital: The authorised capital of each Regional Rural Bank (RRB) increased from Rs 5 crore to Rs 2000 crore divided into Rs 200 crore of fully paid share of Rs 10 each. Presently, Rs 5 crore share capital of RRBs is split into 5 lakh shares of Rs 100 each.
  • Issued capital: As per this amendment act, the authorised capital issued by any RRB’s shall not be reduced below Rs 1 crore and shares in all cases to be fully paid up shares of Rs 10 each.
  • Shareholding: RRBs are now allowed to raise capital from sources other than the central and state governments, and sponsor banks. But one condition that combined shareholding of Union+State+Sponser bank should not fall below 51%.  States can buy more shares, to increase their shareholding above 15%. 
  • Board of directors: RRB can appoint Board of directors from outside union-state and sponsor bank nominated people. The Bill adds provision that any person who is a director of an RRB is not eligible to be on the Board of Directors of another RRB. It also mentions that directors will be elected by shareholders based on the total amount of equity share capital issued to such shareholders. The tenure of directors is raised to 3 years from existing 2 years. The act also states that no director can hold office for a total period exceeding six years.
  • Closure and balancing of books: The parent Act had provision which mentioned that the balance books of RRBs should be closed and balanced by 31st December every year, which is now amended to 31st March in order to bring RRB’s balancing of books in uniformity with the financial year.

Role of RRBs in Financial Inclusion: 

Financial inclusion is a process of ensuring access to suitable financial products and services needed by susceptible groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream financial institutional players. 
  • RRBs as a group have become a strong intermediary for financial inclusion in rural areas both through its branches and business correspondents by opening a large number of “No frills” accounts and by financing under General Credit Card (GCC), as per RBI guidelines. As on 31 March 2013 there were 319.59 lakh No Frills accounts.
  • The number of branches of RRBs has increased to 19660 by 31st Mar 2015 out of which 14613 are in rural areas. 

Future Challenges for Regional Rural Banks

Even after the positive findings that RRB’s are successful in achieving the objective of financial inclusion to a great extent, still they have to overcome the following challenges to the path ofFinancial Inclusion:
  • All backward sections and informal sectors should be included up to a large extent.
  • Rural people are not much aware of financial inclusion because of illiteracy and theaccess to financial services should be increased.
  • People consider that financial services are costly and access is difficult because of theseveral reasons and this thought needs to be addressed.

Conclusion

RRBs serve the backward section of the society, the rural poor and people belonging to the lower income group. These banks play a significant role in ensuring sustainable development through financial inclusion. The objective of the paper has been proved and it can be concluded that spread of financial inclusion in India through RRB’s is more than significant. RRB’s is an important player in Indian financial System because of penetration and the increasing amount of loans and customers.The dream of inclusive growth is still a dream but will be overcome with continual growth of RRBs and effective financial services. 


Ref: 
3.  www.indiacode.nic.in/acts-in-pdf/2015/201514.pdf




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