What are they

RRBs are state sponsored, regionally based and rural oriented commercial banks envisaged to combine simultaneously the desirable qualities of both co-operative banks and commercial banks. RRBs, being an important segment of the Rural Financial Institutions in the country, have carved out a special place for themselves in terms of geographical coverage, clientele outreach, business volume and contributions for development of rural economy. RRBs are focusing their attention on the attainment of sustainable viability, improved customer services, new and innovative loan products and diversified business portfolio. RRBs are at par with the scheduled commercial banks in respect of priority sector lending, investment avenues and credit discipline and transparency.

While the performance of many RRBs improved significantly, the performance of some of them remains far from being satisfactory in view of their tardy business growth and lack of operational viability.

Though RRBs are basically scheduled commercial Banks they differ from the commercial banks in the following respects:

1. The area of operation of an RRB is limited to a particular region comprising one or more districts of a State.

2. RRBs grant direct loans and advances specifically to weaker sections of the rural areas for productive purpose

3. They are to provide credit to agriculturists and others in the rural areas at the lower lending rate than any other agency in the rural area. To facilitate this various concessions have been provided to them by the sponsoring bank, as well as the Reserve Bank of India. These concessions take the form of lower rate of interest on refinance by RBI, refinance facilities by NABARD, lower cash ratio, lower SLR, lower rate of interest from the sponsoring banks, managerial and staff assistance from the sponsoring banks and reimbursement of expenses on staff training.

Although the co-operative and commercial banks had an impressive record in terms of geographical coverage and disbursement of credit, it was observed that the vast majority of the poor were generally deprived of credit and other banking facilities. In order to provide access to low-cost banking facilities to the poor, a new set-up of banks, viz. RRBs, was established in the country to meet exclusively the needs of the weaker sections of the rural population, as institutions which "combine the local feel and the familiarity with rural problems which the cooperatives possess and the degree of business organization, ability to mobilize deposits, access to central money markets and modernized outlook which the commercial banks have".

The Govt. of India, in July 1975, appointed a Working Group to study in depth the problem of devising alternative agencies to provide institutional credit to the rural people in the context of steps then initiated under the 20 Point Economic Programme. The Working Group identified various weaknesses of the co-operative credit agencies and the commercial banks and felt that these institutions would not be able to fill the regional and functional gaps in the rural credit system within a reasonable period of time. The Group therefore recommended a new type of institution which combines-

1. Local feel and familiarity with rural possess problems which co-operative banks.

2. Degree of business organization ability to mobilise deposit, access to money market and modernised outlook which commercial banks have.

Thus, it was envisaged to combine desirable qualities of co-operative banks and commercial banks in RRB's at the same time, it was emphasised that the role of RRB's would be to supplement and not supplant the other institutional agencies already existing in the field.

The Government of India promulgated the Regional Rural Banks Ordinance on 26th September 1975, which was later replaced by the Regional Rural Bank Act 1976. The preamble to the Act states the objective to develop rural economy by providing credit and facilities for the development of agriculture, trade, commerce, industry and other productive activities in the rural areas, particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.

The RRB Act empowers the Central Govt. to open the banks from time to time at places where it may consider it necessary. A Regional Rural Bank is jointly owned by the Govt. of India, the Government of concerned state and public sector bank, which sponsored it. The authorised capital of each bank is Rs. 1 crores (subsequently raised 5 Crores) with paid-up capital Rs.25 Lacs (subsequently increased to Rs.1 Crore) which is held by them in the proportion of 50, 15 and 35 per cent respectively. Each bank carries the banking business within the local limits specified by the Govt. notification.

The management of a RRB is vested in a nine-member Board of Directors headed by

1. Chairman who is an officer deputed by a sponsor bank but appointed by the Govt. of India.

2. Three directors to be nominated the Central Govt.

3. Two directors to be nominated by the concerned State Govt.

4. Three directors to be nominated by the sponsor bank.

The sponsor bank, besides subscribing to the capital and deputing one of its official as chairman, provides assistance to RRB in several ways such as financial accommodation, deputing managerial and other staff and arranging the recruitment of staff and their training.

Every RRB may undertake the following types of functions:

1. The granting of loans and advances particularly to small and marginal farmers and agricultural labourers individually or to a group, co-operative societies, agricultural processing societies, co-operative farming societies, etc.

2. The Granting of loans and advances to artisans, small entrepreneurs and small traders, businessmen, etc.

The Reserve Bank of India has brought RRBs under the ambit of priority sector lending on par with the commercial banks. They have to ensure that forty percent of their advances are accounted for the priority sector. Within the 40% priority target, 25% should go to weaker section or 10% of their total advances to go to weaker section.

From a modest beginning with 6 RRBs in 1975, as many as 196 RRBs were operating in 500 districts with a network of 14,313 branches as on 31 March, 2001 excluding satellite branches and extension counters. The branch network comprises 6 metropolitan, 348 urban, 1875 semi-urban and 12,084 rural branches. RRBs have a large branch network in the rural area, which forms nearly 37% of the total rural branch network of all scheduled commercial banks.

The rural banking system with 196 banks and 14,300 branches, employing 70,000 staff is catering to the remote villages. There are six crore account holders and the turnover is a whopping Rs. 70,000 crore. RRBs operate under the regulatory supervision of NABARD. NABARD has the responsibility of laying down the policies for RRBs, to oversee their operations, provide refinance facilities, to monitor their performance and attend to their problems.

These banks, which at the outset adopted lower scales of compensation for their staff than their sponsor banks, were specially mandated to lend to weaker sections at rates of interest with a concessional element. They could initially manage to lend at concessional rates because of their access to subsidised refinance from their sponsor banks and NABARD. But the RRBs were crippled soon enough by several factors among which was a new compensation policy in pursuance of which they had to pay their employees on par with those of their sponsor banks. Their character as low cost institutions specially designed to serve rural areas was thus lost irretrievably. They were also adversely affected by the problems of mounting overdues and uneasy industrial relations.

Other deficiencies of RRBs are as under:

• According to Narasimham Committee, RRBs have low earning capacity. They have not been able to earn much profits in view of their policy of providing low cost loans

• According to RBI, recovery position of RRBs is not satisfactory. There are a large number of defaulters.

• Their cost of operation has been high on account of the increase in the salary scales of the employees of these banks in line with the salary structure of the employees of commercial banks.

• In most cases these banks followed the same methods of operation and procedures as followed by commercial banks. Therefore these procedures have not found favour with the rural masses.

• In many cases banks have not been located at the right place. For instance the sponsoring banks are also running their branches in the same areas where RRBs are operating

Government of India have to be take up reconstruction/recapitalisation of the RRBs to sustain their viability and progress. Government of India started making recurring annual budgetary allocations for this purpose.

• Recapitalisation and other restructuring measures have had a very positive impact on the performance of RRBs. A tremendous awareness has been created and all concerned are now alive to the reality that the future of RRBs depends upon their successfully competing with other banking organisations. For this purpose, efficiency, productivity and profitability have been given their due importance. There is now a greater awareness among the sponsor banks themselves as they have become more responsive to the problems of RRBs.

• On the financial front, the performance of RRBs though actually improved in the years immediately following the first phase of recapitalisation i.e. in 1995-96 and 1996-97, it was overshadowed due to the introduction of prudential norms of Asset Classification, Income Recognition and Provisioning for the RRBs. The RRBs' financial performance came in the limelight in 1997-98 when RRBs as a group earned profit for the first time since their establishment.

• During 2001-02, as many as 167 RRBs earned profit of Rs.699.92 crore as against only 32 RRBs earning profit of Rs.29 crore during 1994-95. On the other hand, the losses incurred by the loss incurring RRBs reduced from Rs.423 crore (164 RRBs) to Rs.92.05 crore (29 RRBs) during the same period.

• The RRBs as a group made a profit of Rs.73 crore for the first time during 1997-98 and improved the same further to Rs.601 crore and to Rs.608 crore during the last two years i.e. 2000-01 and 2001-2002.

• The viability based categorisation of RRBs as on 31 March 2002 shows that out of 196 RRBs, 86 RRBs have wiped off their accumulated losses and in a way attained a sustainable viability whereas 89 other RRBs have achieved a turn around and attained a current viability status leaving only 29 RRBs which continued to incur losses.

• The genuine credit needs of the borrowers are being met by RRBs in their respective area of operations. The total loans disbursed by RRBs have increased from Rs.1440 crore in 1993-94 to Rs.10571 crore in 2001-02. The total Outstanding Advances of RRBs stood at Rs.18629 crore as on 31 March 2002 as against Rs.5253 crore as on 31 March 1994.

• The recovery performance of RRBs have shown a consistent improvement from around 40% in 1991-92 to 70 % during the year 2001-02. The NPAs of RRBs have also been declining in percentage terms and stood at 16% as on 31 March 2002 as against 43% as on 31 March 1996 when the norms were first made applicable to the RRBs.

The financial results of RRBs as on 31 March 2002 indicate that by and large the RRBs are on the path of recovery.

• As against 170 RRBs in the previous year, 167 RRBs have earned profit during 2001-02.

• 121 RRBs have shown improvement in their performance either by way of increased profit or decreased loss or shifting from loss to profit.

• 7 RRBs have entered profit arena from loss while 11 RRBs have reduced their losses.

• The aggregate accumulated losses of RRBs declined marginally from Rs.2792.59 crore in 2000-01 to Rs2694.06 crore during the year.

• As against 80 RRBs as on 31 March 2001, 86 RRBs had wiped off their accumulated losses as on 31 March 2002.

• The combined Net Profit of all the RRBs for the year is Rs.607.87 crore as against the combined Net Profit of Rs.600.62 crore in the previous year.

• As against 170 RRBs earning a combined net profit of Rs.676.47 crore as on 31 March 2001, 167 RRBs have earned a higher combined net profit of Rs.699.93 crore during the year.

• The deposits of RRBs grew on an average by 16.38 per cent.

• The Outstanding Advances of RRBs at Rs.18629 crore recorded a growth rate of 17.78 per cent.

• The total borrowings of RRBs at Rs. 4524 crore, registered a growth of 11.3 per cent.

• The percentage of recovery to demand stood at 70.59% per cent as on 30 June 2001 as against 68.20 per cent in the previous year.

• NPAs of all the RRBs have declined from 23.1 per cent as on 31 March 2001 to 16.45 per cent as on 31 March 2002.

• CD Ratio increased to at the level of 42% as on 31 March 2002 as against 41 per cent as on 31 March 2001.

A viability-based review of RRBs shows that the loss-incurring RRBs are concentrated in 3 States viz Bihar, Madhya Pradesh and Orissa and in four Sponsor Banks viz UCO Bank, SBI, BOI and BOB. Their common characteristics included low productivity, high transaction costs, lower CD ratio, negative margins, low recovery rates and high NPAs.

Regional Rural Banks are important financial institutions in the rural credit structure and they continue to receive focussed attention under the institutional development initiatives of NABARD. Some of the initiatives which have been launched by NABARD are given below:

• In order to bring about an attitudinal change in the mindset of RRB employees and to improve their motivation level, NABARD has initiated a non-conventional training intervention known as Organisation Development Intervention (ODI) in 120 RRBs in collaboration with Swiss Agency for Development and Cooperation. NABARD is also supporting 147 RRBs with computers and software to develop their Management Information System.

• NABARD is permitting the RRBs to relocate their loss-making branches to good business location/centres keeping in view the objective of building up sustainable rural financial institutions. Further, loss-incurring RRBs have been allowed to convert into satellite/mobile offices provided such conversion would not impair the performance of service area obligations.

• For ensuring unity of command, the sponsor banks have been entrusted with full managerial and operational responsibilities. RBI and NABARD will deal with matters of regulatory and supervisory nature only, besides, monitoring the performance of RRBs.

• Pursuance of the monetory and credit policy for the year 2002-03 announced by RBI, RRBs are now requested to maintain their entire SLR holdings in Govt. And other approved securities only.

• Micro-finance and group lending continue to be NABARD's priority area. NABARD issued guidelines for strengthening the Self Help Group linkage programme and most of the RRBs are now participating in the programme. RRBs are also identified as Self Help Promoting Institutions (SHPI) for giving an impetus to micro finance.

• NABARD deputes its senior officials to guide the Sponsor Banks in various review meetings of Sponsor Banks for RRBs on issues relating to staff matters, investment policy, turn-around strategies, etc.

• NABARD through its Regional Offices is regularly monitoring the performance of RRBs on a half yearly basis and takes up the issues which need policy correction.

• In order to build up the skills and expertise of the personnel of RRBs, NABARD continues to give special priority through its training institutions like BIRD, Lucknow, Regional Training Centres of National Bank at Mangalore and Bolpur. RRB officials have been trained in advanced areas of Project Management under Farm and Non-Farm sectors, Asset-Liability Management, Fund Management apart from the areas of Internal Control, MIS, Personnel Management and Industrial Relation.

• Under NB-SDC-HID-VIII Project, NABARD has firmed up a detailed strategic plan on training intervention for RRBs identified under the project (120 RRBs).

• In order to disseminate the best practices in RRBs, NABARD has arranged exposure visits for RRBs personnel within the country and abroad.

• GOI had constituted a Working Group under the Chairmanship of Dr.K P Agrawal, ED, NABARD to review the manpower norms in RRBs. GOI has accepted the reports and issued the instructions for implementation on 22 January 2001. Accordingly the policy circular has been issued to all Sponsor Banks for implementation of the recommendations.

• In order to reduce the stock of NPAs as also to improve the recovery of sticky advances, One-Time Settlement Scheme for recovery of NPAs have been introduced in RRBs. The scheme was valid up to 31 March 2002 and a sum of Rs. 208 crore have been recovered by RRBs under the scheme.

• The salary and pay structure of RRBs personnel have been revised on par with their sponsor banks.

• As a prudential measure aimed at better risk management and avoidance of concentration of credit risk, the existing single exposure limit of 20 % and Group exposure limit of 50% of RRBs own fund have been brought down to 15% and 40% respectively effective from 31 March 2002.

• RRBs have been granted exemption from the practice of marking to market norms in respect of SLR /approved securities for a period up to 31 March 2004.

• Priority sector norms applicable to RRBs have been revised. Accordingly from the year 2003-04, RRBs are required to achieve a target of 60% of their outstanding advances for Priority Sector lending as against 40% prescribed earlier.

In order to supplement the resources of RRBs, NABARD refinance is now made available to RRBs for financing to farmers for purchase land for agricultural purposes, purchase of two wheelers by farmers, setting up of Agriclinics and Agribusiness Centres by Agricultural Graduates and for Rural Housing.