The Regional Rural Banks (RRBs) were established in 1975 under the provisions of an ordinance promulgated on 26th September 1975 and the Regional Rural Banks Act, 1976. They serve as critical financial institutions ensuring sufficient credit for agriculture and other rural sectors. By combining the characteristics of a cooperative with a commercial bank’s efficiency, RRBs have a deep understanding of rural issues and exhibit professionalism in mobilising financial resources.
Over time, after the 1990s reforms, the government initiated consolidation programs that reduced RRBs from 196 in 2005 to 43 in FY21. Currently, 30 out of the 43 RRBs are generating net profits. However, recently, a meeting was held between the finance minister and the heads of banks to discuss necessary reforms in Regional Rural Banks (RRBs).
Functions and Issues Faced by RRBs
RRBs serve several essential functions such as providing safety to customer savings, increasing money supply through credit creation, encouraging public confidence in the financial system, and mobilising public savings. They focus on extending their network to reach all society segments and provide equitable financial services irrespective of income levels.
Despite their significant role, RRBs face challenges like rising operational costs compared to scheduled commercial banks. Many RRB branches incur losses due to insufficient business activities. As of now, only 19 RRBs offer internet banking facilities and 37 have mobile banking licenses, indicating a low adoption rate of digital banking.
Government Suggestions for RRB Reforms
The government has suggested several measures to improve the situation. It recommends that RRBs should digitise their operations, including offering internet banking services to customers. Additionally, expanding their credit base through increased lending to the Micro, Small, and Medium Enterprises (MSME) sector could help them become financially sustainable. The government also urges sponsoring banks to create a clear roadmap to further strengthen the RRBs and support economic recovery post-pandemic.
Government Efforts to Reform RRBs
Since 1969, when major renovations took place with the Nationalization of all the Banks in India, the government has taken multiple steps to increase people’s contribution to India’s financial system. In 1981, the National Bank for Agriculture and Rural Development (NABARD) was established to promote sustainable and equitable agriculture and rural prosperity.
Hence, NABARD will spearhead the initiative to revive the RRBs. It is already working on a roadmap for 22 RRBs that is expected to be implemented by the end of this year. The plan also includes merging branches of these RRBs with sponsor banks once these branches reach a certain level of business.
Financial Contributions and Technological Leverage for RRBs
In FY 2021-22, the government contributed Rs. 4084 crores towards RRB recapitalisation, out of which Rs. 3197 crores were released to 21 lenders. This endeavour reflects the focus on financial inclusion and leveraging technology to enhance RRB services.
Looking Ahead: The Need for a Common Framework
Going forward, there is a need for a common framework for RRBs, akin to the core banking solution (CBS). This would enable all RRBs to provide online banking services to their customers, enhancing their outreach and profitability. They must increase their efficiency and explore various dimensions of banking, like providing loans to merchants, MSME’s, which could boost their profitability.
Decoding Past UPSC Civil Services Examination Questions
A question posed in the 2013 UPSC Civil Services Examination Prelims was “Which of the following grants/grant direct credit assistance to rural households?” with options including Regional Rural Banks, National Bank for Agriculture and Rural Development, and Land Development Banks. The correct answer is (c) 1 and 3 only, shedding light on the specific roles held by different rural banking institutions in India.