Regional Rural Banks (RRBs)


    In News

    • Recently, as part of reforms to make Regional Rural Banks (RRBs) financially sustainable, the government has asked them to move towards digitisation.

    About Regional Rural Banks (RRBs)

    • Regional Rural Banks Act, 1976:
      • Regional Rural Banks (RRBs) were set up as government-sponsored, regional based rural lending institutions under the Regional Rural Banks Act, 1976.
      • The RRBs were established as per the recommendations of the Narasimham Committee to cater to the rural credit needs of the farming and other rural communities.
      • The Prathama Grameen Bank was the first bank to be established on 02nd October 1975. The Syndicate Bank became the first commercial bank to sponsor the Prathama Grameen Bank RRB
    • Operation:
      • Regional Rural Banks (RRBs) are government owned scheduled commercial banks of India that operate at regional level in different states of India.
      • The area of operation is limited to the area notified by the government of India covering, and it covers one or more districts in the State.
    • Ownership
      • The equity of the Regional Rural Banks is held by the stakeholders in a fixed proportion. This proportion is 50:35:15, distributed as:
        • Central Government – 50%
        • Sponsor Bank – 35%
        • State Government – 15%
    • Aim
      • They were created to serve rural areas with basic banking and financial services. 
      • However, RRBs also have urban branches.
    • Functions
      • RRBs perform various functions such as providing banking facilities to rural and semi-urban areas, carrying out government operations like disbursement of wages of MGNREGA workers and distribution of pensions, providing para-banking facilities like locker facilities, debit and credit cards, mobile banking, internet banking, and UPI services.

    Objectives of RRBs

    • To provide cheap and liberal credit facilities to small and marginal farmers, agriculture labourers, artisans, small entrepreneurs and other weaker sections. 
    • To save the rural poor from the moneylenders. 
    • To act as a catalyst element and thereby accelerate the economic growth in the particular region.
    • To cultivate the banking habits among the rural people and mobilize savings for the economic development of rural areas. 
    • To increase employment opportunities by encouraging trade and commerce in rural areas. To encourage entrepreneurship in rural areas. 
    • To cater to the needs of the backward areas which are not covered by the other efforts of the Government. 
    • To develop underdeveloped regions and thereby strive to remove economic disparity between regions. 
    • Identify the financial need especially in rural areas.

    Role of RRBs

    • To accept deposit
    • To grant advances
    • To provide ancillary banking services
    • To supply inputs and equipments to farmers
    • To provide assistance in the marketing of their products
    • To maintain godowns 

    Reforms Suggested

    • To move towards digitisation: including offering internet banking services to its customers, and expanding their credit base further through increased lending to the Micro, Small and Medium Enterprises (MSME) sector.
    • Core Banking Solutions (CBS): almost all these rural banks are under Core Banking Solutions (CBS) meaning their branches are connected with each other. Offering internet services to customers is the next step for these banks. 
    • Roadmap: to formulate a clear roadmap in a time-bound manner to further strengthen the RRBs and support the post-pandemic economic recovery and also suggested to conduct a workshop of RRBs and share the best practices with each other. 
    • Merging branches: the plan also included merging branches of these RRBs with sponsor banks once these branches reach a certain level of business. 

    Issues/ Challenges

    • Focus mainly on offering government’s schemes 
      • One of the key reasons for RRBs incurring losses is the fact that many of these branches do not have enough business as they focus mainly on offering government’s schemes like direct benefit transfer in the rural areas of the country.
    • Inadequate finance
      • They are dependent on NABARD to collect finance for their further operation. 
      • Poor rural people are unable to save anything due to poverty and low per capita income.
      • The low level of savings of these customers create obstacles for RRBs to collect sufficient deposits.
    • High overdues and poor recovery of loan
      • Reasons being poor access of granting loan, insufficient and untrained staff, unproductive or less productive use of credit, inadequate production, poor marketing facilities and improper channel of recovery system.
    • Regional imbalance in banking facilities
      • They are creating this problem by concentrating their branches in some specific states and districts & losing other prospective groups of customers.
    • Not played a significant role in poverty alleviation of the country
      • Although various efforts have been made in this regard, lack of economic infrastructure, poor marketing strategies, poor knowledge of customers, low production, low awareness about savings have created many hurdles for RRBs.

    Way forward/ Suggestions  

    • The costs of operations of RRBs were much lower as compared to scheduled commercial banks but that has increased now and the government wants them to work towards increasing their earnings. 
    • The RRB may be permitted to lend up to 25% of their total advances to the richer section of the village society.
    • The State Government should also take keen interest in the growth of RRB.
    • Participation of local people in the equity share capital of the RRB should be encouraged.
    • Cooperative societies may be allowed to sponsor or co-sponsor with commercial banks in the establishment of the RRB.
    • A uniform pattern of interest rate structure should be devised for the rural financial agencies.
    • The RRB must strengthen effective credit administration by way of credit appraisal, monitoring the progress of loans and their efficient recovery.
    • The RRB may initiate certain new insurable policies like deposit-linked cattle and other animals insurance policy, crop insurance policy or the life insurance policy for the rural depositors.
    • Coordination between district level development planning and district level credit planning is also required in order to chart out the specific role of the RRB as a development agency of the rural areas. 

    Micro Finance Institutions

    • It offers a form of financial service which provides small loans and other financial services to poor and low-income households.
    •  It promotes financial inclusion which enables the poor and low-income households to come out of poverty, increase their income levels and improve overall living standards. 
    • It can facilitate achievement of national policies that target poverty reduction, women empowerment, assistance to vulnerable groups, and improvement in the standards of living. 
    • Growth 
      • The Indian microfinance sector has witnessed phenomenal growth over the past two decades in terms of increase in both the number of institutions providing microfinance as also the quantum of credit made available to the microfinance customers. 
    • Microcredit Delivery Channels
      • Microcredit is delivered through a variety of institutional channels viz.
        • Scheduled commercial banks (SCBs) (including small finance banks (SFBs) and regional rural banks (RRBs)) lending both directly as well as through business correspondents (BCs) and self-help groups (SHGs)
        • Cooperative banks
        • Non-banking financial companies (NBFCs), and 
        • Microfinance institutions (MFIs) registered as NBFCs as well as in other forms

    Source: IE