Government of India has set up a Working Group under the chairmanship of Shri M.V.S.Chalapathi Rao, Managing Director, National Bank in July 2001 to examine various aspects of functioning of RRBs and to make recommendations for RRBs to become an effective instrument for development of the rural economy. Other members nominated on this ten member Working Group are senior officers/experts from RBI, select commercial banks, RRBs and NGOs

• To review the progress in dispensation of rural credit especially through RRBs since their inception.

• To examine the legal, regulatory and policy framework of RRBs with particular reference to determine their effectiveness in meeting the complete banking needs of rural households and rural economy.

• To make detailed recommendations in regard to legal, regulatory, supervisory, institutional and technological dimensions for making RRBs an effective instrument for development and growth of the rural economy.

The group has submitted its report during August 2002, and has suggested amendments to several provisions of the Act.

The relevant provisions relate to Preamble of the Act, licence to RRBs, capital structure and share capital, devolution of some powers of the Finance Ministry to Reserve Bank of India, corporate governance, supervisory authority, appointment of auditors, recovery of dues and penalties.

The committee has classified the RRBs (regional rural banks) into four categories. The group says, "this categorisation of RRBs into A, B, C and D should be the basis for providing flexibility in ownership options. The adoption of the concept of a "sponsor institution" has been recommended with its prescribed minimum level of shareholding at 51 per cent so as "to ensure adequate commitment as well as powers for the sponsor institution.''

In the category A fall the top class RRBs, i.e. those RRBs which have no accumulated loss and which reported profits for the past three consecutive years; in category B fall those RRBs which posted profits for the past three consecutive years and their accumulated losses have not caused erosion of public deposits; in the category C are those which reported loss in one or more of the last three years and have accumulated losses that have caused erosion in the value of their assets not in excess of 10 per cent of their total deposits as on March 31, 2002 and in the category D have been put all those RRBs which have reported losses in one or more in the last three years and have accumulated loss causing erosion of the value of their assets in excess of 10 per cent of their total deposits.

After having made the classifications, the committee has suggested that category A RRBs should be allowed to access capital market. The Union Government stake in these RRBs should be reduced to 33 per cent and the State Government's stake in them too may be purchased by the sponsoring bank.

In the category B RRBs, sponsoring banks, according to the committee, must hold majority stake and thus control. Before the Union Government disinvests 17 per cent of its stake in these RRBs, the three shareholders should inject fresh capital to wipe out the past losses.

The RRB Act needs to be amended to facilitate the sponsor institution pick up the state government stake of 15 per cent (total paid up capital of an RRB is Rs. one crore). The committee argues for sponsor banks holding 35 per cent stake in RRBs to sell off to another as a part of the revamp. "In the post-capital issue scenario as well, the shareholding of the sponsor institution may continue to be at a minimum of 51 per cent though the proportionate share of the Central Government and State Government may come down,'' the working group adds.

These categories of RRBs may be upgraded to category A. The State Government shares in these RRBs may be purchased by sponsoring bank.

For the category C RRBs, the committee has opposed the change in the ownership pattern. The amalgamation of these RRBs with other suitable RRBs has also been suggested.

The committee has suggested liquidation of the majority of the category D RRBs, conceding that some of these perpetually losing RRBs may have to be allowed to continue in public interest.

In such cases, the Union and the State Government concerned must acquire the ownership and work out appropriate policies for their functioning. The Union and State Governments might be required to provide financial support.

The salary of those employed in the RRBs, according to the committee, should be determined by the respective boards with prior approval of the sponsoring banks and in determining so the boards should pay due regard to the standard norms relating to work performance, financial position, paying capacity and the sustainable viability of the RRB concerned.

The working group is in favour of slapping capital adequacy and licensing norms on RRBs. "The capital adequacy norms may be introduced in a phased manner... starting with 5 per cent of outstanding risk weighted assets effective April 1, 2003, to be enhanced by one percentage point every year to bring it at par with that for commercial banks,'' the group lays down. It wants to make licensing mandatory for RRBs under the Banking Regulation Act, 1949. As of now they draw legitimacy from the RRB Act alone.

"The existing RRBs or those created out of amalgamation of two or more existing RRBs may continue doing banking business during the pendency of consideration of their application for license by RBI and they would have to cease business if a license is refused to them." The group is in favour of RBI continuing as the regulator with a separate "Supervisory Authority'' in place of NABARD to oversee functioning of RRBs