Wednesday, February 24, 2010

Expanding Roles of Regional Rural Banks

Regional Rural Banks{RRBs} were first set up in the year 1975, under the RRB Ordinance Act {1975}; the ordinance was later replaced by the RRB Act {1976}. Formation of these banks was the result of the growing realization that the ethos and attitude of the existing Public Sector banks were not entirely conducive to meet the credit needs of the rural peoples.
RRBs or Gramin Banks existential quest originated through the broad financial vision of then the Prime Minister Mrs. Indira Gandhi, who could foresee these banks strong role in future consolidation of Indian banking businesses, particularly in rural hinterlands. –remarkably this was the culmination earlier revolutionary move of large scale nationalization of banking industry i8n 1969.

To cope with the contemporary existing challenges, nationalization of fourteen banks along with the creation of a strong pool of regionally focused RRBs were the well timed initiative of the government which constructively moulded the further Indian growth stories for next two decades before foraying into liberalization of the Indian economy in 1991. Indeed government ownership led banks to expand their network dramatically, which in turn helped them in procuring low-cost deposits, boosting profits besides fueling country’ rate of savings and growth.
RRBs infact played very vital role in meeting with the goal of “social control” of Indian banks to reach with idealistic dream to the social hierarchy-RRBs have very high stake in forwarding Indian GDP growth rate to the 5.5-6% in the eighties and further improvement of banking performances in the nineties and thereafter besides broadening the saving rate from 12%in 1969 to 20% in 1980-branches from 8,000 in 1969 to 32,000 in 1980 and further to 60,000 in 1990.

Partial success of rural banking model could be best attributed to the no-frills operational methodology with low-cost and very less cumbersome services delivery in unbanked rural areas which was out rightly an unprecedented phenomenon before these two very important changes in Indian banking landscape.
Although post economic reform era witnessed a drastic shift in earlier compulsions of PSU banks to widen their rural footprints; in recent years these banks have shown stark differences from their rural responsibility albeit RRBs have alone displayed the proper resolution in this regard.With RBI’s new flexible branch opening rulings, their ongoing amalgamation and restructuring in their businesses-today RRBs are swiftly emerging as a lead player in rural banking business.

As on March 31,2009, RRBs had total business of Rs1,80,000 crore, of this deposits were of Rs 1,20,000 crore and total lending was at Rs 20,000 crore-besides statistics, the significant contribution of RRBs in rural financing is suffice to place it in high end Indian banking.
In recent annual international ranking by the UK based Brand PLC-this year SBI breaks into top 50 with a brand value of $4,5551 million; Indian banks have explicitly improved their brand value during the recent recession phase as big daddies of global banking were struggling to germ their previous standings, there are twenty Indian banks have placed in the recent Brand Finance@Global Banking-very soon as a single entity, Indian Regional Rural Banks would be next among them with unique rural dimensions.

But steps taken by the government and RBI in the last few years were not reached to the level of satisfaction; as per RBI records-of the six lakh habitations in the country , only about 30,000 have access to commercial banks-just 40% of the population have bank accounts and this ratio is hugely variable in different geographical region. RRBs with more than 15,000 branches have massive reach in the country’s deep rural areas, its mandate is to provide a business roadmap for these banks to strengthen them and extend banking facilities to the unbanked areas.

The RBI’s recent recommendation of 9% CRAR{Capital to Risk Weighted Asset Ratio}for RRBs to make sure of their capitalization is good omen since most of them are way behind this , a lot of RRBs are not well capitalized and their CRAR varies between 5-7%. It’s a welcome move from government to constitute a committee under the RBI Deputy Governor K.C.Chakravarty to capitalize the RRBs in the country; accompanying this with Raghuram Rajan Committee on Financial Sector Reform recommendations-such as minimizing the undue emphasis on credit delivery and shift of focus to improving access to financial services would surely back RRBs to focus on the crest of Indian banking.
Atul Kumar Thakur
February 21st 2010, New Delhi


  1. Dear Atul Bhaijee.Read your blog about the rural banking.Very much qualitative and informative.All these data shows that rural banking in india is being successful, but as you will go to the villages nearby your home,will find that most rural part of india is been untouched by this reform.Since it is being almost 35 years and still loan facility is rarely available.
    Aaagey main kuch nahin kahunga...

  2. Thanks my dear Prafull...indeed it is nice having words from you after a long haul.Glad you have liked the piece...I appreciate your concern as awareness playing major hurdle in reaching out effectively by these RRB's...telling you from grassroot perspective,middlemanship and feeble economic bases are engraved the entire fouls with these bottom level banking.We must wait for some more while as government has pronounced some goodies in budget remarks beside their genuine poising with UID campaign...hope all these things would make life simpler to millions of financially excluded common man of our country..tommorow I have a fleeting meeting with the honourable Finance Minister...sure I would let some of my views to him regarding the actualities of rural banking in country.Hope,we would witnees no-frills regime in rural banking very soon...let us prolong this debate.

  3. Indeed RRB's are doing good in limited resourses.Government must give its due to these Rural banks to lift the morale of bottom of pyramid.
    Nihal Sharma,New Delhi