RRBs to extend credit for MSMEs


    In News

    • RRBs will soon extend credit for education, housing and even small businesses in rural India.

    More about the news

    • About:
      • To provide credit to rural consumers, the government is planning to leverage the 15,000-odd strong network of the 43 Regional Rural Banks (RRBs) in the country by asking them to expand their portfolio by adding new segments.
        • Rural banks, for instance, would be asked to look beyond crop loans and also provide loans for tractors, small businesses, education and housing loans in rural areas. 
    • Background:
      • This push to the RRBs by the government comes at a time when the Department of Financial Services has flagged concerns about public-sector banks having slowed lending to education loans.
      • This is due to higher defaults and the continuing struggle of the Micro Small and Medium Enterprise (MSME) sector 
        • MSME has suffered the most in the wake of the Covid-19 pandemic and national and local lockdowns.
    • EASE reforms:
      • The initiatives and targets will be part of the Enhanced Access & Service Excellence (EASE) reforms being undertaken by the Centre. 
        • EASE reforms were launched in 2018 for the public sector banks and are currently in their fifth phase.
    • The rural advantage
      • Providing RRBs a new mandate may serve two purposes: 
        • It will help them expand their business by leveraging their huge rural network and local understanding, and 
        • It will also enhance credit access to rural consumers for purposes such as education, housing and micro businesses.

    MSME Sector In India 

    • About:
      • The Micro Small and Medium Enterprises (MSMEs) sector is a major contributor to the socio-economic development of the country. 
      • In India, the sector has gained significant importance due to its contribution to the Gross Domestic Product (GDP) of the country and exports. 
      • The sector has also contributed immensely with respect to entrepreneurship development especially in semi-urban and rural areas of India.
    • Financial challenges Faced by MSME Sector in India
      • Mounting NPAs if MSMEs:
        • According to the RBI, bad loans of MSMEs now account for 9.6 per cent of gross advances of Rs 17.33 lakh crore as against 8.2 per cent in 2020.
        • The MSME sector was among the most pandemic afflicted sectors. Thousands of MSMEs either shut down or became sick after the government announced a nationwide strict lockdown.
        • Restructuring schemes and packages didn’t benefit thousands of units which were already in default.
      • Non-availability/Delays of Funds:
        • Mounting losses and debts, non-availability of proper financial help and delays from the government, reluctance from the banks for the funding, etc.
        • MSMEs in India typically rely on NBFCs for their financing needs, which in itself has been enduring a liquidity crunch since September 2018.
    • Steps taken to revive the position:
      • To revive activity, the RBI and the government introduced several measures including the Emergency Credit Line Guarantee Scheme (ECLGS) which provided Rs 3 lakh crore of unsecured loans to MSMEs and businesses.
      • The RBI also extended the scheme of one-time restructuring of loans to MSMEs without an asset classification downgrade and permitted bank lending to NBFCs for on-lending to agriculture, MSMEs and housing to be classified as priority sector lending (PSL).
      • ASPIRE scheme, Credit Guarantee Scheme, Credit Linked Capital Subsidy Scheme (CLCSS), Zero Defect Zero Effect model, etc.

    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 the economic disparity between regions. 
      • Identify the financial need, especially in rural areas.

    Source: TH