In this report we will discuss about:- 1. Objectives of Regional Rural Banks 2. Organisational Structure of Regional Rural Banks 3. Functions 4. Achievements 5. Problems 6. Suggestions to Improve the Working 7. Restructuring.
Objectives of Regional Rural Banks:
The idea of establishing Regional Rural Banks was mooted in the Twenty Point Economic Programme of July 1975 to cater to the credit needs of rural people.
The Government of India appointed Narasimham Committee in July 1975 to set up the new institution in order:
(i) To provide employment to the rural educated youth; and
(ii) To bring down the cost of rural banks by recruiting their staff on the same scale of pay and allowances as for the employees of State Government/local bodies. It was on the recommendations that the first five RRBs were set up on 2 October, 1975 under an Ordinance promulgated on 26 September, 1975 which was replaced by the Regional Rural Banks Act of 1976.
The major objectives of the RRBs are to develop the rural economy by providing credit and other facilities for agriculture, trade, commerce, industry and other productive activities in the rural areas, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.
Organisational Structure of Regional Rural Banks:
A Regional Rural Bank is sponsored by a commercial bank. For this purpose, the sponsor bank requests the Central Government, which issues a notification after consulting the concerned State Government. Normally, a RRB covers one district but it is also permitted to open its branches in other districts. So far the maximum coverage has been eight districts, as in the case of Manipur Regional Rural Bank which covers the entire State of Manipur.
The authorised capital of an RRB at present is Rs.5 crores. The issued share capital is Rs.1 crore now and is subscribed by the Central Government, the sponsor bank and the concerned State Government in the ratio of 50:35:15.
The Government of India raised the issued share capital of 27 RRBs from Rs.50 lakh to Rs.75 lakh and of 42 RRBs from Rs.75 lakh to Rs.1 crore during 1994-95. This has raised the number of RRBs having issued capital of Rs.1 crore to 62 and those having issued capital of Rs.75 lakh to 122.
The RRB is governed by a Board of Directors who exercises all the powers and discharges all the functions of RRB. It consists of a Chairman appointed by the Central Government for five years, three directors nominated by the Central Government, two directors nominated by the concerned State Government, and three directors nominated by the sponsor bank. Usually the Chairman of the RRB belongs to the sponsor bank, though he is nominated by the Central Government.
The NABARD is vested with powers of inspection of RRBs and to call for any data from them. For opening of new branches, applications are routed through NABARD to Reserve Bank of India for issue of licences. The responsibility of overseeing the overall functioning of RRBs rests on NABARD. NABARD also provides refinance at concessional interest rate to RRBs.
Functions of Regional Rural Banks:
The main functions (or objectives) of-the RRBs are:
1. To grant loans and advances to the weaker sections of the rural population, especially to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs who are engaged in agriculture, trade, commerce, industry and other productive activities.
2. To grant loans and advances to cooperative societies, including marketing societies, agricultural processing societies, cooperative farming societies, primary agricultural credit societies or farmers’ service societies for agricultural purposes.
3. To take banking services to the doorsteps of the rural masses, particularly in hitherto unbanked rural areas.
4. To mobilise rural savings by accepting deposits and channelize them for productive activities in the rural areas.
5. To create supplementary channel for flow of credit from the urban money market to the rural areas through refinance.
6. To generate employment opportunities in rural areas.
7. To bring down the cost of supplying credit in rural areas.
In recent years, the RRBs have been permitted to extend advances for purchase of durable consumer goods and loans for various purposes against the security of gold ornaments, National Savings Certificates, Indira Vikas Patras to both target and non-target groups up to 10 per cent of their fresh lending within the over ceiling of 60 per cent of fresh loans to non-target group lending.
They have also been allowed to issue guarantees on behalf of their customers without any limitation 100 per cent cash margin and up to Rs.20 lakh on Rs.40 lakh cash margin plus collateral security of more than 50 per cent.
The limits for purchase of demand drafts and cheque have been raised per customer and per branch to Rs.25,000 and Rs.1 lakh respectively. The RRBs can issue travellers’ cheques as agents of their sponsor banks and also provide locker facilities.
The RRBs can invest their surpluses in UTI listed schemes, fixed deposits of profit making term lending institutions, bonds of nationalised banks and other public sector undertakings, non-convertible debentures of blue chip companies and in credit portfolios of their sponsor banks-subject to a maximum of 15 per cent of their fresh lending during the year. Effective 8 January, 1997, RRBs have been allowed to invest in corporate shares and debentures and units of mutual funds.
But these investments cannot exceed 5 per cent of the RRBs’ incremental deposits. They have also been allowed to buy corporate shares and debentures from the secondary market. They are also free to fix their lending and deposit rates.
Achievements (or Progress) of Regional Rural Banks:
The RRBs have carried banking to the doorsteps of rural masses. They have opened branches in remote and isolated villages which had no banking facilities. Initially starting with five RRBs at Moradabad and Gorakhpur in Uttar Pradesh, Jaipur in Rajasthan, Bhiwani in Haryana and Malda in West Bengal on 2 October, 1975, the RRBs have achieved a phenomenal growth over the years. As on June 30, 2003, they numbered 196, covering 451 districts, with a network of 14,522 branches.
The aggregate outstanding deposits of 196 RRBs in 2002-03 were Rs.48,346 crores. Their aggregate direct and indirect outstanding advances stood at Rs.15,944 crores in 2002-03. The credit-deposit ratio increased from 43 per cent as at the end of March, 1999 to 45 per cent in March, 2003. Investment-deposit ratio increased from 19.7 per cent in 1998-99 to 25.9 per cent in March 2003.
The loans and advances disbursed by RRBs for agriculture accounted for 46.3 per cent and the share of non-agricultural advances was 53.7 per cent. Out of 196 RRBs, the number of profit making banks stood at 156 in 2002-03 as compared with 170 out of 196 in 2000-01.
Their operating profit fell by 7.7 per cent and net profit by -13.7 per cent over the period. The RRBs showed significant improvement in terms of reduction in their NPAs (non-performing assets). The share of NPAs in total assets declined from 18.8 percent to 16.1 per cent in 2002-03.
During 2002-03, the NABARD sanctioned Rs.1,406 crores as short-term credit limits for seasonal and non-seasonal agricultural operations to RRBs. It sanctioned medium-term loans to RRBs amounting to Rs. 3 crores.
Thus, the RRBs have been highly successful in mobilising rural savings. In advancing loans, they have been concentrating on target groups viz., small and marginal farmers, landless labourers, rural artisans, self- employed persons, etc. They have also been playing a vital role in implementing the IRD Programme. Mostly, they have employed local persons. Clerical staff is recruited from within the area of operation of the RBBs from adjoining districts, whereas the officer staff is from the concerned State.
Problems of Regional Rural Banks:
Despite the important role played by RRBs in providing credit to the weaker sections of society in rural areas, they are faced with serious problems which have led critics to question their very existence. The Dantwala Committee (1978), the Kelkar Committee (1986) and the Khusro Committee (1989) have pointed towards some of the weaknesses in the working of RRBs which are as follows:
1. Haphazard Branch Expansion:
A large network of branches has been opened at a fast pace which has not contributed to substantial increase in business. It has added to overhead costs without contributing to profits. Moreover, major variations persist among States in the coverage of districts/ branches by the RRBs. In some States, backward areas still remain uncovered by these banks.
In many districts, the RRBs do not have link branches at the Taluka/ Block headquarters for meeting the cash requirements and to overcome other operational problems. In some of the places where branches are essential, it is difficult to get suitable accommodation for housing the branches.
2. Defective Recruitment Policy:
Being rural oriented, the RRBs are expected to recruit staff locally. With the transfer of recruitments in RRBs to the Banking Service Recruitment Boards, the candidates outside the area of operations of RRBs are also made eligible for recruitment into RRBs. This is against the concept of RRBs where the local feel and familiarity’ of the staff is essential for the successful working of the RRBs.
3. Rigid Norms:
The norms laid down for the selection of beneficiaries in RRBs are rigid and based on an all India income level. The poverty line available in Haryana is not the poverty line obtained in Andhra Pradesh. The village, its people, their occupations and economic status differ widely in Andhra Pradesh with that of All India average. But to apply the same norms to all the States leave out many persons who are in need of credit from the RRBs.
4. Weak Capital Base:
The capital base of each RRB is weak. Initially, the issued capital was Rs.50 lakh which has been raised to Rs.75 lakh and Rs.1 crore in the case of selected RRBs. But the State Governments failed to contribute their share. In view of its enormous credit obligation in rural areas, this limit is on the lower side. The working of many RRBs reveals that they have eroded their capital base on account of continuous losses.
5. Constraints in Deposit Mobilisation:
As the RRBs supply credit only to the weaker sections of the rural population, they have been unable to mobilise sufficient deposits. The weaker sections who are the main beneficiaries are poor and do not save so much as to deposit in the RRBs. The middle classes and the rural elite are not interested to deposit their saving in the RRBs. They deposit them in commercial banks from whom they get credit facilities.
6. Erosion of Profitability:
The RRBs have not been able to operate on a viable basis. The major factors which have contributed to the erosion of their profitability have been their lending exclusively to the weaker sections, low interest margins and high operating cost involved in handling small loans. During 1999-2000 there were 33 loss making RRBs which incurred a net loss of Rs.109 crores.
7. Poor Recoveries:
The recover of loans due has been very poor. The estimate of the Khusro Committee revealed that as on June 1986, the recovery of RRBs was 49 per cent. During 1999, the recovery level was below 30 per cent. The main factors have been willful defaults, misuse of loans, lack of follow-up, wrong identification of borrowers, extension of benami loans, staff agitations, etc.
8. Defective Credit Deployment:
In many districts, the credit deployment has not been proper., The loaning activities are mainly confined to crop loans and the schemes sponsored by the State Governments. The schematic approach towards lending is lacking in many cases.
Activities allied to agriculture, cottage and rural industries, rural artisans/craftsmen and other self-employed programmes have not been given due importance in the loaning activities of the RRBs.
9. High Loan Transaction Cost:
With parity in pay scales between the RRBs and commercial banks, the loan transaction costs in RRBs are many times higher than in rural branches of commercial banks.
Notwithstanding the constraints under which the RRBs are operating, they constitute one of the effective instruments for bringing about faster rural development with social justice.
Suggestions to Improve the Working of RRBs:
To improve the working of the RRBs, the Dantawala Committee (1978), the Kelkar Committee (1986) and the Khusro Committee (1989) have made a number of suggestions. Some of these are enumerated below:
1. To improve the viability of RRBs, the Khusro Committee recommended that the RRBs should be merged with the commercial banks. The merger would solve the problems of accumulated losses, of insolvency, and of the in-built non-viability of the majority of RRBs.
But it is wrong to presume that after merger with sponsor banks, the RRBs will be viable because many branches of commercial banks are incurring huge losses. Therefore, the suggestions made by the Kelkar Committee should be implemented. They are the bifurcation of unwieldy RRBs, and the amalgamation of small RRBs.
2. In order to strengthen the capital structure of RRBs, the Kelkar Committee recommended the raising of issued capital of RRBs from Rs.25 lakhs to Rs.100 lakhs and the authorised capital from Rs.1crores to Rs.5 crore.
3. As the very purpose of establishing RRBs is to transfer funds from urban money market to rural centres, the State Governments should permit the Panchayats and other quasi-government bodies functioning in rural areas to keep their funds with the RRB branches functioning within their area of operations.
4. The State Governments should either re-organise agricultural credit societies or establish new Farmers’ Service Societies through which RRBs can provide production credit on a large scale and thereby the cost of servicing will be reduced considerably.
5. The sponsor banks should play a more active role in advising and helping their RRBs in managing their funds, in appraising loan schemes, in making proper end-use of credit, and in providing staff for internal audit of RRBs.
6. The sponsor banks should charge a lower interest rate on the refinance to RRBs and involve themselves less in RRBs short-term and non-schematic loans.
7. The sponsor banks should invest the deposits of RRBs in long-term Government securities which are being kept in non-interest earning current accounts.
8. To increase the profit margin, the RRBs should extend credit facilities to non-target groups subject to a ceiling of 25 percent of their total outstanding advances. The State Government should help the RRBs in recovering dues by creating a proper climate for recovery and in taking action against willful defaulters.
9. The RRBs should have their own recovery system with adequate trained staff and organise recovery camps involving the Government officials, local leaders and branch staff.
10. The business of rural branches of commercial banks should be handed over to RRBs.
11. There should be uniform scales of pay for all the RRBs staff.
12. The RRBs should devise suitable strategies to develop banking habits and practices among the rural folk by imbibing banking education and awareness.
13. The RRBs should widen their sphere of activity. Instead of concentrating mainly on lending, they should provide rural consultancy services, phased credit programmes, create better avenues for employment, and take over the work of farmers’ service societies.
14. Since RRB is an area specific and target specific bank, its working hours should be suitably amended to enable the customers to make full use of its facilities. It is inconsistent to have the usual office hours between 10 AM and 5 PM in a village where the customers are busy in the fields at that time., Therefore, the working hours of RRBs should be fixed according to the needs of the area.
15. New RRBs should be opened in areas where SC/ST population predominates.
16. The entire recruitment process in the RRBs should be streamlined. Local people should be preferred and training should be given on the problems of rural life which are peculiar to the RRBs.
Restructuring of RRBs:
These suggestions apart, keeping in view that only 29 RRBs were profit making in 1991-92, the Government of India had been considering a number of options which include the merger of RRBs with the sponsor banks as suggested by the RBI or making them rural subsidiaries of sponsor banks as suggested by the Narasimhan Committee or their amalgamation with the proposed National Rural Bank of India. As the RRBs became non-viable, the Government’s interest in supporting them financially declined.
The budgetary support for RRBs was Rs.11 crores in 1992-93 which declined to Rs.5 crores in 1993-94. There was no provision for them in the budget for 1994-95 though it was announced by the Finance Minister that 50 select RRBs would be taken up for revival and restructuring.
Accordingly, the Government appointed the Bhandari Committee on Restructuring of RRBs which has since submitted its report. Based on its recommendations, action has been taken on the managerial, operational and organisational restructuring of RRBs including cleansing up their balance sheets and infusing fresh capital. In the first phase, 49 RRBs were taken up for selective restructuring.
These RRBs drew up their Development Action Plans in consultation with NABARD and sponsor banks and Mou were entered between them and sponsor banks. The Government of India contributed Rs.180 crores as its share of 50 per cent during 1994-95. During 1995-96, a sum of Rs.223.57 crores was further released by the Government for capital restructuring of select RRBs. The Budget for 1996-97 made, a further provision for the same purpose in the second phase.
In June 1995, the Reserve Bank set up an Expert Group under Dr. Thingalaya to examine the major policy issues concerning the managerial and financial restructuring of RRBs undertaken during 1994-95 and to monitor their progress on an ongoing basis. Another Committee headed by K. Basu was set up by the NABARD to look into the norms afresh and for revamping the RRBs. It recommended the selection of 68 RRBs for comprehensive restructuring in the second phase.
In order to impart durability to the restructuring process, the RRBs have been advised by the Reserve Bank to adopt income recognition, asset classification and exposure norms from 1995-96 and provisioning norms from 1996-97 onwards. As a result of these restructuring measures the number of profit making RRBs stood at 156 in 2002-03.
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