Regional Rural Banks (RRBs) are government-owned scheduled commercial banks which operate at the regional level in different states across the country. RRBs have been created to serve primarily rural areas with basic banking and financial services. They also have urban branches, and their area of operation may include semi-urban or urban areas.
Overview of RRBs
|2 October 1975
|Government of India (50%),
Nationalised Banks (35%),
State Governments (15%)
|Regulated by RBI and supervised by NABARD
About Regional Rural Banks (RRBs)
To review the flow of the institutional credit facilities, especially to the weaker section of the rural community, the Government of India appointed the Narasimhan Working Group in 1975 during the Fifth Five-Year Plan. (Narasimhan Working Group also referred to as Narasimhan Committee on Rural Credit).
This Working Group headed by M. Narasimhan submitted its report dated 30 July 1975. It identified certain deficiencies in the functioning of co-operatives and commercial banks. The Group recommended setting up State-sponsored, regionally based and rural-oriented banks, known as Regional Rural Banks (RRBs).
On the recommendations of the Narasimhan Working Group, RRBs were established under the provisions of an Ordinance passed on 26 September 1975. Later, on 9 February 1976, Regional Rural Banks Ordinance was replaced by the Regional Rural Banks Act of 1976. RRBs were set up to provide sufficient banking and credit facility for agricultural and other rural sectors.
The first Regional Rural Bank, Prathama Grameen Bank, was set up on 2 October 1975, with head office in Moradabad (Uttar Pradesh). Syndicate Bank sponsored the Prathama Gramin Bank.
The other four RRBs set up in October 1975 were Gaur Gramin Bank (sponsored by UCO Bank), Gorakhpur Kshetriya Gramin Bank (sponsored by State Bank of India), Haryana Kshetriya Gramin Bank (sponsored by Punjab National Bank), and Jaipur-Nagpur Anchalik Gramin Bank (sponsored by UCO Bank).
RRBs are recognised by the law and have the legislative backing of the Regional Rural Banks Act 1976. As per the provisions of this 1976 Act, the authorised capital of each RRB is INR 5 crore, and the issued capital is a maximum of INR 1 crore.
RRBs are regulated by the Reserve Bank of India (RBI) and supervised by National Bank for Agriculture and Rural Development (NABARD).
Ownership of RRBs
Regional Rural Banks (RRBs) are jointly owned by:
- Central Government with 50% shareholding.
- Sponsoring bank with 35% shareholding.
- State Government with 15% shareholding.
Objectives of RRBs
RRBs purpose was to include the rural areas into the economic mainstream by connecting rural areas with basic banking and financial services. The main objectives of RRBs are as follows:
- To provide credit and other facilities to the small & marginal farmers, agricultural labourers, artisans and small entrepreneurs in rural areas.
- To check the outflow of rural deposits to urban areas.
- To reduce regional imbalances.
- To increase employment generation.
Functions of RRBs
The area of operation of RRBs is limited to a region as notified by the Indian government, covering one or more districts in the State. RRBs perform various functions, such as:
- Providing banking facilities to rural and semi-urban areas.
- Carrying out government operations like distribution of pensions, disbursement of wages of MNREGA, etc.
- Providing para-banking facilities like locker facilities, debit & credit cards, mobile banking, internet banking, and UPI services.
Features of RRBs
- The idea behind the establishment of RRBs is to develop a comparatively backward area where the commercial bank is relatively poor.
- They provide lending for agriculture, allied activities, retail trade and small rural industries.
- One of the tasks envisaged for the RRBs is to maintain their cost of operations at a lower level than that of the commercial banks.
- RRBs are required to provide 75% of their total credit as Priority Sector Lending (PSL).
Reforms in RRBs
- In 1977, the Reserve Bank of India (RBI) appointed the Dantwala Committee led by ‘Prof. M. L. Dantwala’ to review the working of RRBs, which recommended continuing the Regional Rural Banks. The Committee suggested that RRBs become an Integral part of the rural credit structure.
- In 1984, the working group on RRBs, S. M. Kelkar Committee, recommended that small and uneconomic RRBs should merge in the interest of economic viability.
- In 1986, the Kalyanasundaram Committee was appointed to study the wage structure and service conditions of the RRBs staff.
- In 1989, the Khusro Committee, also known as Agricultural Credit Review Committee, led by ‘Dr A. M. Khusro’, recommended that the RRBs have no justifiable cause for a continuance. The Khusro committee also suggested the RRBs merge with sponsor banks.
- In 2003, the Government appointed the Chalapathi Rao Committee to re-structuring the Regional Rural Banks in India. The Committee suggested that the entire system of RRBs may be consolidated while retaining the advantages of the regional character of these institutions.
- In September 2009, K. C. Chakrabarty Committee was constituted to analyse the financials of the RRBs and suggest measures, including re-capitalisation, to bring the CRAR (Capital to Risk-weighted Assets Ratio) of RRBs to at least 9% in a sustainable manner by 2012. The committee submitted its report in May 2010 and recommended RRBs to have a CRAR of at least 7% on 31 March 2011 and at least 9% from 31 March 2012 onwards.
What is ‘CRAR’?
The ‘Capital to Risk-weighted Assets Ratio (CRAR)’ or ‘Capital Adequacy Ratio (CAR)‘ is the ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities.
CRAR is decided by the Central bank and bank regulators to prevent the commercial banks from taking excess leverage and becoming insolvent in the process.
CAR is vital to ensure that banks can absorb a reasonable amount of loss and complies with statutory capital requirements.
As per RBI norms, Indian scheduled commercial banks are required to maintain a CRAR of 9%.
How are RRBs different from commercial banks?
Regional Rural Banks provide banking and credit facilities to rural areas of the country. RRBs are limited to agriculture finance and small-sector loans, whereas commercial banks offer agriculture finance, loans for housing & vehicle, letters of credit, utility services, etc.
What is the Priority Sector Lending (PSL)?
Priority Sectors are those sectors that the Indian Government and the Reserve Bank of India (RBI) consider essential for the development of the basic needs of the country, and these sectors are given priority over other sectors.
Priority Sector Lending (PSL) focuses on the idea of directing the banks to provide lending to a few specified sectors of the economy, such as:
• Agriculture and allied activities,
• Micro and Small enterprises,
• Housing for the poor,
• Social infrastructure,
• Other low-income groups and weaker sections.
Under the PSL, the Banks are mandated to encourage the growth of such sectors with adequate and timely credit. PSL is essentially meant for the all-round development of the economy as opposed to focusing only on the financial sector.