Regional
Rural Banks (RRBs)
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Regional Rural Banks (RRBs) are third layer of
commercial banking organization after commercial banks and cooperative banks.
RRBs were established on the recommendations of the Narsimhan Committee to meet
rural credit needs of the farming and other rural community.
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RRBs are new category of commercial banks
sponsored by a strong commercial bank to serve limited area and within limited
local limits. However, since its commencement, the area of operation has been
widening.
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Regional Rural Banks were established under
Regional Rural Bank Act, 1976 and first bank established was Prathama Grameen
Bank on October, 2. 1975. The first Commercial Bank to sponsor an RRB was
Syndicate Bank.
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Regional Rural banks were established as joint
banks of Central Government, State Government and Sponsored banks.
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Initial capital to start with in 1975 was Rupees
1 crore but subsequently it was increased and at present the capital
requirement is Rupees 5 crore.
o
This capital is shared by Central Government,
State Government and Sponsored Bank in the ratio of 50%, 35%, and 15%
respectively till recently. But now this ratio has changed to60%, 20% and 20%
among Central Government, State Government and Sponsored Bank respectively.
Central Government acts through NABARD and its share of subscription is also
routed through NABARD.
o
Organizational Structure : RRBs are governed and
managed by Board of Directors. Total members of the Board are 9 but can change
at the behest of the Government for better superintendence. Of the 9 members of
the Board of Directors, at least 3 are nominated by Government of India, 2 by
State Government and 3 by sponsored bank. Chairman of the RRB is normally from
sponsored bank and appointed after the approval of the NABARD. The professional
banking directions are received from Reserve Bank of India/NABARD.
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Regional Rural Banks are treated as scheduled
commercial banks as per Reserve Bank of India Act, 1934 and are included in the
second schedule to RBI.
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RRBs are managed and controlled by its Board of
Director.
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Expansion in terms of opening new branches, RRBs
have to prior approval of Reserve Bank of India.
o
RRBs public deposits are assured by Deposit
Insurance & Credit Guarantee Corporation. In the larger interest of the
depositors, RRBs are also permitted to give additional interest on deposits of
1% if required.
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RRBs are required to maintain SLR in government
securities or as directed by RBI from time to time.
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Capital Structure: There are four layers of
capital structuring of RRBs. RRBs have first level from share holders (Central
Government, State Government and Sponsor Bank) followed by second level of
deposits from public. In case of need RRB can borrow funds from sponsor bank
also. Lastly, RRBs draw refinance from NABARD. Just like in case of cooperative
banks, Reserve bank of India also provides refinance facilities to RRBs that
too at concessional rate of 2% less than the bank rate.
o
In relation to Income Tax Act and taxation
purposes all RRBs are treated at par with Co-operative Banks.
OBJECTIVE OF RRB’S
Main objective of setting up RRBs was
to provide credit and other banking facilities to small, marginal farmers and
agricultural laborers, small artisans etc. in rural areas for developing rural
economy. The RBBs Act has made various
provisions regarding the incorporation, regulation and working of RRBs.
According to this Act, the RRBs are to be set-up mainly with a view to develop
rural economy by providing credit facilities for the purpose of development of
agriculture, trade, commerce, industry and other productive activities in the
rural areas.
Such
facility is provided particularly to the small and marginal farmers,
agricultural labourers, artisans, and small entrepreneurs and for other related
matters.
The
objectives of RRBs can be summarized as follows:
(i) To
provide cheap and liberal credit facilities to small and marginal farmers, agriculture
labourers, artisans, small entrepreneurs and other weaker sections.
(ii) To
save the rural poor from the moneylenders.
(iii) To
act as a catalyst element and thereby accelerate the economic growth in the
particular region.
(iv) To
cultivate the banking habits among the rural people and mobilize savings for
the economic development of rural areas.
(v) To
increase employment opportunities by encouraging trade and commerce in rural
areas.
(vi) To
encourage entrepreneurship in rural areas.
(vii) To
cater to the needs of the backward areas which are not covered by the other
efforts of the Government?
(viii)
To develop underdeveloped regions and thereby strive to remove economic disparity
between regions.
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Another objective was to create a separate
organization with rural base and local touch since commercial banks were
largely urban based.
§
Yet another objective was to reduce regional
imbalances and encourage local self employment generation.
CAPITAL
STRUCTURE OF REGIONAL RURAL BANK:
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
crore and the issued capital is Rs. 25 lakhs; 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.
FUNCTIONS
OF REGIONAL RURAL BANKS
Rural
banking in India came into existence since the establishment of banking sector
in India. Rural Banks in those days mainly focused upon the agro sector.
Banking Regulation Act, 1949 brought cooperative Banks and Regional Rural Banks
under the Reserve Bank’s jurisdiction, while amendments to the Reserve Bank of India Act, Regional Rural Banks (RRB)
are regulated by the Rural Planning and Credit Department of Government of India and supervised by NABARD. Capital share being 50% by the
Central Government, 15% by the state government and 35% by the scheduled bank.
Total authorized capital was fixed at Rs.1 Crore which has since been raised to
Rs 5 crore. RRBs started their development process on 2nd October, 1975 with
the formation of a single bank (Prathama
Grameen Bank)
Functions of RRBs are as follows
- RRBs grant loans and advances to small farmers
and agricultural laborers so that they can start their own farming
activities including purchase of land, seeds and manure.
- RRBs provides banking services at the doorsteps
of the rural people ,particularly in those area which are not served by
any commercial Bank
- The RRBs charges a lower rate of Interest and
thus they reduce the cost of credit in the rural areas.
- RRBs provide loan and other financial
assistance to entrepreneurs in villages, sub-urban areas and small towns
.So that they become able to enlarge their business.
- Loans to artisans to encourage them for the
production of artistic and related goods.
- Encourage the saving habit among the rural and
semi-urban population.
RRBs: as on March 31, 2010
Total number of RRBs: 82
Number of Branches: 15475
Deposits: Rs145035 crore
Loans Outstanding: Rs 79157
crore
Number of Loss-making Banks: 3
Number of profit making banks:
79
Operating Profits: Rs 2913 crore
Net Profit: Rs 1884 crore
Districts Covered: 619
Source: Report on Trend and
progress of banking in India, 2009-10.
GROWTH
OF REGIONAL RURAL BANKS
Regional Rural Banks are operating at the bottom rung of
banking organizations in India. They have been set-up with the basic objective
of providing credit facilities to the rural population, who had very limited
access to the formal credit system. The area of operation of RRBs is confined
to what Government of India had notified, to include one or many districts in a
State.
The RRBs came into existence to
facilitate the poor section of people, called as the "Target Group".
In 1975, during the regime of former Prime Minister of India, Indira Gandhi,
the Narasimham Working Group recommended to set up RRBs, as the major portion
of the society – about 70% – in India comprised of rural areas. The RRBs are
owned by the Governments at the center and the states and the Sponsor Banks.
Branch Expansion
The Government initiated to open
more branches in rural unbanked areas. In the year 2001-02, banks were also
allowed to transform their branches which were incurring losses into mobile /
satellite offices. This was permitted only if did not affect their performance
in the service areas.
Deposit Mobilization
Deposit mobilization is an important
banking variable determining the path of growth of a financial institution. It
depends upon the saving capacity and saving habit of the people in the area in
which the bank is operating. Another factor determining the size of deposits is
the rate of interest. If the rate of interest is high, the number of deposit
accounts would be more. Deposits mobilized by the RRBs play a key role not only
as an important source of funds but also as an instrument for promoting savings
and banking habits among the rural people.
Credit Deployment
Credit deployment is another
essential component of growth for any banking institution. This is important to
those banking institutions which have been established to meet the credit
requirements of untapped sector in the country. RRBs grant direct advances in
the form of crop loans, agricultural loans, loans for allied activities, loans
for rural artisans, village and cottage industries, self-employed persons and
consumption loans. RRBs also make indirect advances which are routed through
agencies such as Farmers' Service Societies, Farmers' Clubs, Primary
Agricultural Societies, Self-Help Groups, etc.
Growth of RRBs
RRBs proved instrumental in
achieving the target of inclusive and sustainable economic growth. The number
of RRBs' branches have increased to 16,170 during 2011-12 from 14,468 during
2000-01 i.e. an increase of 1.1 times. The number of districts covered also
increased to 620 during 2011-12 from 482 during 2000-01 i.e. an increase of 1.3
times. The linear and compound growth rates of it account for 0.212% and 0.208%
which indicates an insignificant growth of bank branches of Regional Rural
Banks in India. However, there is a 65% increase in the Credit-Deposit ratio
during the same period, which indicates the willingness of Target Group to
invest in RRBs.
Conclusion
Although the growth rate of RRBs is
very low, the Deposits and Credits are significantly high. Credit-Deposit ratio
has increased over the period of time, leading to sufficient mobilization of
funds in the regional areas.
PROBLEMS FACED BY
REGIONAL RURAL BANKS
The following were the main problems faced by the RRBs
till recently.
(i) Running into losses:
During 1997-98, out of 196 RRBs, 70 RRBs
incurred losses amounting to Rs. 230.76 crore in total. The accumulated losses
of all RRBs up to the end of March 1998 amount to Rs. 3116.00 crore.
This may be due to heavy overhead costs,
reduction in lending rates, lower profit margins, heavy increase in salaries
and allowances of staff, etc. During 2001-02, out of 196 RRBs, 167 made net
profit of Rs. 699.93 crore while 29 suffered losses amounting to Rs. 92.05
crore. The accumulated losses of all RRBs declined to Rs. 2792.59 crore as on
March, 2001.
(ii) Slow progress:
The progress of RRBs is not up to the
expectation and is slow when comparing with other types of banks because of
many restrictions on their operations. For example till 1996, RRBS were
permitted to lend only under priority sector schemes.
(iii) Limited scope of investment:
The basic objective of RRBs was to provide
credit facilities to poor and weaker sections of society, i.e., to small and
marginal farmers and other weaker sections. They were originally having limited
scope to invest their surplus funds freely.
(iv) Delay in decision making:
The RRBs are controlled directly and
indirectly by various agencies, i.e., the sponsoring bank, NABARD, RBI, besides
Central Government. Thus, it takes long time to take decisions on some
important issues. This, in turn affects the progress of RRBs. However, since
end 1997, the operational responsibility of RRBs has been passed on to sponsor
bank.
(v) Lack of co-ordination:
Lack of co-ordination between the RRBs and
sports or banks regarding branch expansion, policy making, etc., are also the
important causes for the slow progress of RRBs.
(vi) Difficulties in deposit
mobilization:
The RRBs are aiming at catering to the needs
of poor and are not serving the needs of the rich. So, the RRBs are not able to
attract the deposit from that potential sector.
(vii) Lack of training
facilities:
Generally the staff of RRBs is urban-oriented
and they may not know the problems and conditions of rural areas. Lack of
training facility concerning these areas also affects the growth of RRBs.
(viii) Poor recovery rate:
The recovery performance of the RRBs is not up
to the mark. The /ate of recovery in respect of many RRBs is around 55 per cent
only.
(ix) Capital inadequacy: The capital adequacy is the very basis to
financial soundness. There is capital inadequacy in RRBs as most of the RRBs
have huge losses in their 3alance Sheet eating away all the Capital of RRBs.
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