'r^ ) Chapter - 2. Regional Rural Banks in India: Growth and Performance

Transcription

1 a 'r^ ) Chapter - 2 Regional Rural Banks in India: Growth and Performance

2 Chapter - 2 Regional Rural Banks in India: Growth and Performance This chapter presents the concept and meaning, objectives, functions, jurisdiction, capital, structure and management of Regional Rural Bank. The Dantwala Committee Report on the RRB's and their role of in the rural credit market has also been discussed in this chapter. The progress of the RRB's in India has also been analysed on the basis of certain indicators such as branches, share capital, reserves, deposits, investments, loans and advances, recovery performance and profitability. 2.1 Introduction Rural finance is a matter of credit concern in a developing economy like India where 70 percent of the total population depends upon agriculture for its livelihood. 40 percent of the GDP in India is contributed by the rural sector. The economic development of our country can be achieved only through uplift of the vihage folk consisting of farmers, agricultural labourers, artisans etc. Finance being the lifeblood of every commercial venture, the availability of adequate funds at reasonable terms is a must to ensure speedy economic development of a village.^ From the First- Five Year Plan ( ) to the Tenth Five-Year Plan ( ), the agricultural development has been given due importance. During the above period in spite of the impressive stride made by the institutional channel in rural areas, the government felt that the small and marginal farmers, rural artisans and agricultural labourers are deprived of the crucial input of timely and adequate credit from the institutional sources. The government has been taking elaborate and extensive initiatives (both policy and administrative) to augment the outreach of formal channel to rural masses.^ 34

3 Financial institutions especially in rural areas play a very significant role in the economic as well as rural development. It has a special role to play in removing the poverty. The overall development of the economy depends to a large extent on the banking sector, as financial institutions act as suppliers of capital for production of goods and services v\/hich in turn raises income and standard of living of the people. In India, the banking sector has received from time to time definite orientations, and this sector has come to occupy a prominent position among the infrastructural factors of economic development. Prior to nationalization of banks their role and activities attracted a lot of criticism. The failure of the banking sector in performing its expected role in a planned economy led to their nationalization first in 1969 and again in 1980.^ The informal sector for rural finance is age-old. It consists primarily of rural money lenders, traders, merchants etc. It proved to be avaricious and ruinous for rural India. As a deterrent to the indigenous moneylenders, a three tier cooperative banking structure was set up by a cooperative movement, which established the efficacy of cooperation. Growing sporadically, the cooperative societies alone are now the bastions of rural finance in a number of states in India. The formal sector was set up only in the planning era and banks were nationalized to extend support to the rural financial institutions like cooperatives. Indeed, the present formal sector is based on a multi-agency approach consisting of public sector banks, cooperatives and Regional Rural Banks.'* According to the All India Rural Credit Survey Report, 1954, the sources of the credit in the rural area can be divided into nine categories, viz. government cooperatives, relatives, land lords, agriculturists, money lenders, professional money lenders, traders and commission agents, commercial banks and others. The problem of inequality and inequity became serious day by day despite the popular slogan 'Garibi Hatao' and good intention of the government to better the lot of masses, the rural poor remained neglected and kept striving hard for their subsistence. Therefore, the need was felt for establishing financial institutions, specialized to cater to the needs of the rural 35

4 poor in order to fill up the regional and functional gap in the financial credit available to rural areas.^ Among various institutional agencies engaged in rural finance, Regional Rural Banks play a significant role in financing the target group in the rural sector. They are specially designed financial institutions working under the guidance of the NABARD and the parent commercial banks, spread in rural areas with a close network of branches serving a particular district or region.^ 2.2 Emergence of Regional Rural Banks In spite of the rapid expansion of branches of commercial banks and increase in the membership of primary agricultural credit societies, it was realized that the institutional credit was not available in adequate measure to the weaker section in rural areas. Therefore, there is a widely shared view that a more determined effort was needed to speed up the flow of institutional credit, especially to meet the needs of the weaker sections of the rural community/ To mitigate the sufferings of the rural poor the infrastructure of the cooperative credit was brought into being. The Cooperative Societies Act of 1904 provided for the formation of primary agricultural cooperative credit societies. Later in 1912, the cooperative movement was extended to the formation of non-agricultural cooperative credit societies also. But, the cooperatives could not deliver the things envisaged to the rural people.^ The commercial banks, on the other hand, were participating in rural banking only as aliens to this field since they were programmed for meeting the financial requirements of trade and commerce. In view of the huge gap in rural credit from institutional sources and in a bid to meet the growing needs of financial assistance to modernize fanning, the government adopted the multi-agency approach. However, despite the tremendous grovrth of cooperatives and commercial banks as purveyors of rural credit, the committee on rural banks constituted by the Government of India reported in 1975 that non institutional credit in rural areas still amounted to two- thirds of the total credit. There were still many unbanked areas also.^ 36

5 In view of the aforesaid facts, the idea of setting up of some kind of rural banks was proposed by the Banking Comnnission of 1969 in its report submitted in The commission was appointed with a view to having a comprehensive review of the structure and operations of commercial banks and other credit institutions in the country, and to suggest measures for reorganization and improving the functioning of commercial banks. The terms of reference of the commission also included the review of the working of cooperative banks and making recommendations with a view to ensuring a coordinated development of commercial and cooperative banks particularly with a view to extending the geographical and functional coverage of the commercial banking system.^ The banking commission, after examining the growth and expansion of the activities of commercial banks and also considering their limitations, expressed serious doubts on the capabilities of commercial banks for giving adequate coverage to the rural sector in the foreseeable future and opined that the commercial banks even after maximum possible expansion will neither be able to meet the needs of the rural people for credit, nor will they be able to develop banking habits among the people. There will always remain a gap. The commission, therefore, proposed the setting- up of a new class of rural banks In areas where the cooperative credit structure was weak."*^ No action was taken by the Government of India on the banking commission's proposal for establishing a chain of rural banks. It was not until after the middle of June 1975 that policy makers in the Government of India felt the need for setting up of some kind of a new institution of rural banks for providing rural credit. The opportunity for such re-thinking was provided by the so-called 'Twenty-Point Programme' of the Government of India. The then Prime Minister of India announced a twenty-point programme (also known as Twenty-Point Economic Programme' or the New Economic Programme of the Government of India) on the 1^' of July Some of the points of this programme specifically aimed at ameliorating the lot of the weaker sections of the rural society. The most direct of these points having a bearing on the rural 37

6 scene related to a plan for liquidation of rural indebtedness, legislation for moratorium on recovery of debts from landless labourers, small farmers and rural artisans.''^ In accordance with the guidelines from the Government of India, several state governments enacted legislation for moratorium, discharge of debts and scaling dov^/n of debts of the small and marginal farmers, landless labourers, rural artisans and other weaker sections of the society from the non- institutional sources. This led to creation of a vacuum for meeting the credit requirements of the rural poor, since indigenous money lenders now felt skeptical of recovery of these loans. Thus, the Government of India seriously considered devising new alternative sources of credit to meet the requirements of the weaker sections of the society. With this background, the Government of India appointed a working group on Rural Banks under the chairmanship of Sri M. Narasimham to examine in depth the setting up of new rural banks as subsidiaries of public sector banks to cater to the credit need of the rural people.^^ The working group was appointed on the 1^* of July, 1975 and was asked to submit its report within the short period of one month. The report was submitted by the working group on the 30*^ of July, The working group recommended the setting up of the state sponsored, regionally based and rural oriented banks to be known as Regional Rural Banks. ^'* They were set up under the Regional Rural Banks Ordinance, 1975, later replaced by the Regional Rural Banks Act, 1976.^^ According to the Regional Rural Banks Act, RRBs are set up mainly with a view to developing rural economy by providing for the purpose of development of agriculture trade, commerce, industry and other productive activities in rural areas, credit and other facilities particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs for matters connected therewith and incidental thereto.^^ The bank can carry on its business within the geographical limit specified and the area is generally confined to one to five districts in the state with homogeneity in agro-climatic conditions and rural clientele. The bank has the status of a scheduled commercial bank. While RRBs may accept all types of deposits from the 38

7 public, their lending operations are directed exclusively towards meeting the needs of the weaker sections of society.^^ Regional Rural Banks were meant to combine the local feel and familiarity with several problems which the cooperatives possess and the degree of business acquisition, ability to mobilize deposits, access to central money markets and a modernized outlook which the commercial banks have.^^ They were set up under the lowcost banking principle. The group clarified that the role of the new institution would be to supplement and not supplant the other institutional agencies in the field.^^ The committee also made it clear that the task of these banks should be seen in the proper perspective of promoting rural development. 2.3 Establishment of Regional Rural Banks The setting up of RRBs was to focus exclusively on the weaker sections of the rural society, i.e. small and marginal fanners, agricultural labourers, artisans and small entrepreneurs for development of agriculture, trade, commerce and other productive activities. The RRBs are state sponsored and partnered, rural oriented commercial banks. These banks were expected to constitute a low cost banking system with local feel and a high degree of efficiency coming with organic links with the commercial banks, which not only contributed to their share capital along with the union and the state government but also provided key manpower and guidance. These banks were to be manned by rural based staff who were expected to be better suited to look after the needs of the rural population. However, hope of both the low cost of operations and better attention to the needs of the rural population have remained elusive due to the insistence of their unionized staff for salaries comparable to the commercial bank staff and taking up of narrow 20 banking by most of these banks and their reluctance to lend. The establishment of the RRBs has created a new era in the credit structure of the Indian economy and they have been conceived as an instrument and catalytic agent for ensuring the development of rural economy by providing credit as well as other facilties.^^ RRBs were established under an Act of the Indian parliament called Regional Rural Bank Act, 1976; which was deemed to have come into effect with retrospective date of 26 39

8 September, 1975.^^ Initially, first five RRBs were set up in October 2, 1975, the details of which are given in table 2.1 Table 2.1 The First Five Regiona Rural Banks S.N. Name of the Bank Sponsor Bank Location of H.O. State Jurisdiction I. Prathama Bank Syndicate bank Moradabad Lf.P. Moradabad 2. Gorakhpur Kshetriya State Bank of India Gorakhpur U.P. Gorakhpur Grameena Bank and Deoria Haryana Kshetriya Grameena Bank Jaipur Nagaur Ananchalik Grameena Bank Gaur Grameend Bank Punjab National Bank United Commercial Bank United Bank of India Bhiwani Haryana Bhiwani Jaipur Raj as than Jaipur and Nagaur Malda West Bengal Malda West- Din aj pur Mursidabad Source: M.S. Bapna, Regional Rural Banks in Rajasthan. Himalaya Publishing House, New Delhi, 1989, p Objectives of Regional Rural Banks The main objective of Regional Rural Banks is to provide credit and other facilities particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs so as to develop agriculture, trade, commerce, industry and other productive activities in the rural areas. " "Banks exist for the people and not the people for the Banks" is the basis of the RRBs. Their main objects have been discussed as under. 24 a) Financing of the Rural Sector for Raising Productivity: The major objective of the RRBs is to mobilize resources from the region and deploy them within the same region, mainly for productive purposes. The major thrust of lending activities of these banks should be towards providing a productive credit for small and marginal farmers, landless labourers, small traders and rural artisans in such a way that it raises their productivity in the rural sector. b) Rural Industrialization: Rural industrialization is possible by motivating and inspiring rural artisans and small entrepreneurs to establish cottage and small industries in these areas. Their financial needs are adequately met by the RRBs because it is one of their objectives. As such, these banks would 40

9 promote rural industrialization by providing financial assistance to artisans and small industrialists. c) Encouraging Employment Opportunities: Another objective of the RRBs is to provide need based credit to small farmers, marginal farmers, landless labourers, artisans, rural industrialists in such a v^^ay that it may improve employment opportunities in those areas. The RRBs w\\\ also provide job opportunities by financing subsidiary occupations. Employment opportunities would be further created for the local population as these regional banking activities would require persons having knowledge of regional language which is used in relations and discussions between bankers and customers. d) Balanced Regional Growth: The RRBs have been set up in rural areas where the activities of commercial banks and cooperatives are relatively poor. It is also seen that the areas chosen by these banks should have a real potential for development and be poised for a breakthrough once the flow of credit is assured. Thus, RRBs will strive to mobilize resources from the region and will deploy them within the same region particularly through lending for productive and consumption purposes. This will certainly help in achieving balanced regional growth. In fact, RRBs should aim at working for 'generation of viability' among small borrowers. e) Economic Welfare of the Rural Masses: The RRBs are expected to serve the objective of development of the rural poor, who have not been able to meet their full credit requirements from the existing institutions of rural credit. The RRBs can be a potentially useful instrument to the goal of promoting economic welfare with social justice in rural areas. By providing productive credit, and possibly all other banking and non-banking facilities to the weaker sections of the society, these banks provide them with new means of improving their economic conditions as well as achieving development of local economy to which they belong. This process is expected to contribute to redistribution of income and wealth in favour of the weaker sections of the rural society. It will, by all means, accelerate the welfare of the rural masses. 41

10 f) To reach those far-flung areas, particularly backward and tribal areas, and to make these areas economically better by opening branches.^^ 2.5 Functions of RRBs The main function of the RRBs is to provide credit and banking facility to the rural people. It also provides some non- banking facility to the rural people. It also provides some non-banking facility to the rural population such as constructing and maintaining godowns on their own, supplying agricultural inputs and acquiring agricultural and other equipments for leasing it out, providing assistance in the marketing of agricultural and other products. The various functions of the RRBs may be listed as hereunder^^: a) To provide short-term and medium-term credit for agriculture and other purposes to rural producers and long-term loans to agriculturists as agent of the land development bank. b) To mobilize local savings. c) To implement programmes of the supervised credit, tailored to meet the needs of individual farmers. d) To provide ancillary banking services to local people. e) To set up and maintain godowns. f) To undertake supply of inputs for agricultural and other products through marketing organization. g) Generally help in the overall development of the villages in its areas. 2.6 Special Concession to RRBs To achieve viability of the RRBs, the Reserve Bank of India has granted the following concessions:^^ a) Regional Rural Banks have been allowed to maintain a lower cash reserve ratio as compared to other scheduled commercial Banks. 42

11 b) Regional Rural Banks can refinance at a concessional rate of 3 percent below the bank rate from the NABARD. c) Regional Rural Banks are allowed to offer Vi percent higher rate of interest on all deposits except the deposits of 3 years and above. d) Regional Rural Banks are allowed to earn interest at the rate of 9 percent on the current account balances maintained by them with the sponsor banks. e) RRBs are required to maintain a lower statutory liquid ratio at 25 percent as against 36 percent by commercial banks, f) The training cost of the staff is borne by the concerned sponsoring bank. g) In case the RRBs incur heavy losses in excess of its paid up capital, the sponsoring banks may perhaps have to bear a part of its losses. h) Salary, allowances etc., of the chairman of the RRB is borne by the sponsor bank.^^ 2.7 Jurisdiction of RRBs Each RRB would operate within its regional specific limits. Generally the RRBs have a compact operational area of one to five districts with homogeneity in agro-climatic conditions. The RRB was authorized to establish branches at any place notified by the government. According to the 1987 amendment in the Act' if the Government of India, after consultation with the national bank for agriculture and rural development, the concerned state government and the sponsor bank, felt it necessary in public interest or in the interest of the development of the area served by any RRB or in the interest of the RRBs themselves; in either case, two or more RRBs would be amalgamated into a single RRB.^^ 2.8 Sponsorship of RRBs Each RRB is sponsored by a public sector commercial bank. It will be set up at the initiative taken by the sponsoring bank in consultation with the 43

12 concerned state government and the central government and under licence from the reserve bank. The sponsor bank provides assistance in several ways, viz., subscription to its share capital, provision of managerial and other staff assistance to be mutually agreed upon within the period of first five years of its existence and financial assistance on mutually negotiable terms. Generally, the RRBs have been sponsored by the concerned lead bank of the district of their operation.^ 2.9 Capital Structure of RRBs As per the RRBs Act, 1976, the authorized share capital of each rural bank was Rs. 1 crore, divided into 1 lakh shares of Rs. 100 each. 50 percent of the issued capital was subscribed to by the central government, 15 percent by the concerned state government and 35 percent by the sponsoring bank. With the enactment of the Regional Rural Banks (Amendment) Act, 1987, the authorized capital of each RRB has been raised to Rs. 5 crore and paid-up capital to Rs. 1 crore. The board of directors of Rural Bank may, in consultation with the Reserve Bank and the Sponsoring Bank and with the prior approval of the central government, increase the issued capital from time to time. The additional capital shall be subscribed in the same proportion as is specified above.^^ 2.10 Management of RRBs The general superintendence, direction and management of the affairs and business of an RRB is vested in a board of directors. In discharging its function, it has been specifically laid down in the ordinance that the board should act on business principles and should have due regard to public interest. Further, an RRB in the discharge of its functions is guided by such directions with regard to matters of policy involving public interest as the central government may give after consultation with the Reserve Bank. Besides the chairman, the board of directors consists of not more than 3 directors to be nominated by the central government, and not more than 2 directors to be nominated by the sponsor bank. The central government is empowered to increase the number of members of the board, subject to the 44

13 maximum of 15 and also prescribe the manner in which the additional number may be filled in. The chairman of RRB is appointed by the central government for a term not exceeding five years. A director holds office for a period of 2 years and is also eligible for re-nomination.^^ 2.11 Business of the RRBs Every RRB has the status of a scheduled commercial bank and has been empowered to undertake all types of banking business, i.e. the business of banking as defined in section 5 (b) of the Banking Regulation Act, 1949, and engage in one or more forms of business specified in section 6 (i) of this act. In pursuance of section 18(2) of the Regional Rural Banks Act, 1976, an RRB may undertake the following business in addition to nonnal banking business: a) The granting of loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and to cooperative societies, including agricultural marketing societies, agricultural processing societies, cooperative farming societies, primary agricultural credit societies or farmers' service societies, for agricultural purposes or agricultural operations or for other purposes connected therewith.^^ b) Granting of loans and advances to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry or other productive activities, within its area of operation.^ 2.12 Regional Rural Bank (Amendment) Act, 1987 Based on the recommendations of the working group, under the chairmanship of late Shri S.M. Kelker, the Regional Rural Banks Act, 1976 was amended by the Regional Rural Bank (Amendment) Act, 1987, which was brought into effect from September 28, The salient features of the Amendment Act are as follows: 45

14 a) The authorized capital of the RRBs has been raised from Rs. 1 crore to Rs. 5 crores and the paid up share capital from Rs. 25 lakh to Rs. 1 crore. b) The chairman of an RRB is to be appointed by the concerned sponsor bank in consultation with the national bank. c) The sponsor bank have been given greater responsibilities in respect of the functioning of the RRBs, they are to aid and assist the RRBs in greater measure by importing training to the personnel and providing necessary managerial and financial assistance to the RRBs during the first five years of their functioning. d) A provision has also been made in the Act for amalgamation of the RRBs. Amalgamation can be done between two or more RRBs after consultation with national banks, concerned state government and sponsor bank. e) The sponsor banks have also been empowered to monitor the progress of their sponsored RRBs from time to time and also to cause inspection, internal audit and scrutiny and to suggest necessary corrective measures.^^ 2.13 Dantwala Committee Report on RRBs In June, 1977, the Reserve Bank of India appointed a committee 'to review the working of Regional Rural Banks' under the chairmanship of M.L. Dantwala. The review committee was assigned the work of evaluating the performance of the RRBs in the light of the objectives for which they were set up, to indicate their precise role in the rural credit structure and to make recommendations with regard to the scope, methods and procedures of their functioning and other matters of enquiry. After reviewing the overall progress of the business of all the RRBs functioning in the country up to the end of June 1977, the Dantwala committee submitted its report to the Reserve Bank in February The Reserve Bank announced its decision on the major recommendations of the review committee report on the RRB in September 46

15 1978.^^ The following are the other findings and recommendations of the committee. ^^ a) Observed that the RRBs are well suited for the purpose of progressively filling up the credit gap and therefore, the programme for the establishment of the RRBs deserves to be accelerated. It is recommended that the Government of India and the Reserve Bank of India take steps to initiate the process of making the RRBs an integral part of the rural credit structure. b) It is observed that identification of the RRB with the local people and their problems may suffer if its jurisdiction becomes unduly large. Therefore, it is recommended that jurisdiction of a RRBs should be over one district only with 50 to 60 branches, each branch covering a population of about c) The committee observed that the steering committee appointed by central government is not required to consider crucial points such as location and licence. The central government may give direction and guidance in these matters through the RBI. It is recommended that there should be an appropriate organizational set-up in the RBI to look after the RRB work. d) The committee recommended that the RBI should take steps to bring about uniformity in the interest rate policy for all credit institutionscooperative and commercial catering to the requirements of the rural community. e) The Dantwala committee expressed the view that, over a period of time, total replacement of the rural branches of the commercial banks by the RRBs and their branches is possible and that the proposal would be acceptable to the commercial banks and the rural clientele would also welcome it. f) The committee felt the need for training facilities, particularly to the branch managers of the RRBs, and recommended that specialized 47

16 training should be imparted to the personnel of the RRBs by the sponsoring banks Significance of Regional Rural Banks in the Rural Credit Market The RRBs occupy a pivotal place in the credit delivery system of our country. They have been regarded as a potent instrument of rural development. They have been catering to the needs of the weaker sections of the community. Rural development is the major theme of their working. Though there are a large number of agencies functioning in rural India, the RRBs have a distinct role to play. They are established to develop the rural economy by eradicating poverty through the provision of credit and generation of adequate employment in the villages.^^ The RRBs provide credit to that section of the rural community which has suffered for centuries at the hands of landed aristocracy. This section of people has been living below the poverty line for ages. It consists of small and marginal farmers, landless labourers, small traders and rural artisans. make their living better, the To RRBs have a special role to play. The other agencies in the rural credit market have been providing credit to the nontarget population. The potential target population remained totally neglected till recently. Hence, the RRBs were created. The genesis and rationale of the scheme bring out sufficiently the significance of the RRBs in the rural credit market. ^^ The existing institutional rural credit structure is given in figure The RRBs have now been considered active agents of economic development in rural India. The future of the weaker sections of the rural community is in the hands of the RRBs. They have become unique institutions in the rural credit structure of India. The significance of the RRBs lies in their efforts to transform the present rural scene by converting the dream of the poor masses into reality. The RRBs are the banks for masses and not for classes. The ultimate aim is to make them an integral part of the rural credit structure. 48

17 INSTITUTIONAL RURAL CREDIT MARKET STRUCTURE \l'\ \t,r i I 1 riiut ( KI UN siaii.\n\ CIM)!' HANKS SaiDt'Ll [MtlMMI-RCIAI. BANKS RKilON.M. Kl RAi. awks SIAIf C(M)P. LAND DFVI.l,ni*MENT BANKS SIAIl-CtMRAl INIH SIRlAi <0- Ol' HANKS MILUPLRPOSL CO-OPs CRIMARV N()\- M.RKll IIRAI t KiDir socirii-s I'RIMARN ((t-lil' i.a\r> 1JI\1[.IH>\IF\I HWKSURAVll V Figure 2.1 Source: A.B. Kalkundrikar, Regional Rural Banks and Rural Development. Daya Publishing, New Delhi, 1999, p NABARD and RRBs NABARD being an apex institution and entrusted with the responsibilities of speeding up the process of rural development through evolving rural credit delivery system appropnate to the needs of the rural areas in India, it too has a unique role to play in the development of RRBs. The idea of a national bank for agriculture development was first put up by the committee on cooperation (1965). The All India Credit Review Committee (1969) examined the issue and rejected the idea and suggested that the agriculture credit infrastructure should continue under the Reserve Bank. 49

18 The National Commission on Agriculture (1976) too looked into the issue and urged for formation of an agriculture development bank of India by integrating the total structure of financing agriculture and rural development from the ground level upwards. In March, 1979, a committee was appointed by the Reserve Bank of India to review the existing arrangements for institutional credit for agriculture and rural development under the chairmanship of Sh. B. Sivaraman. The committee was also to examine the issue of the national bank and suggest recommendations and probe into the working of the ARDC. The committee examined the pros and cons of establishing a national bank for agriculture and the NABARD was inaugurated on July 12, 1982.'* The role of the NABARD as the apex bank for agriculture and rural development was to act as a national level financial institution for granting financial assistance to eligible institutions. Purposing to support and promote agriculture and rural development, the NABARD provides, through the financial and banking system, several lines of production and investment credit to agriculture, small scale, cottage and village industries, handicrafts and other allied economic activities. The role of the NABARD with reference to the RRBs can be briefed as under: a) Promotion of adequate refinance with reasonable spread so as to ensure continuous flow of credit in rural areas through the RRBs which in different areas find difficulties in mobilizing resources, e.g., in desert, drought prone, hilly and tribal districts. b) To take various initiatives to improve functioning, viability, competitiveness, profitability and efficiency of the RRBs. c) Refinance assistance for financing the IRDP and through schematic and non-schematic schemes. It may be concluded that the role of the NABARD in the promotion and functioning of the RRBs is of great significance. 50

19 2.16 Amalgamation of RRBs The advisory committee on the flow of credit to agriculture and related activities (Chairman: V.S. Vyas) in June 2004 recommended restructuring of The RRBs in order to improve the operational viability of the RRBs and take advantage of the economies of scale. Following this, an internal working group on the RRBs was set up by the Reserve Bank to examine various alternatives available within the existing legal framework for strengthening the RRBs. In order to reposition the RRBs as an effective instrument of credit delivery in the Indian financial system, the Government of India, after consultation with the NABARD, the concerned state government and the sponsor banks initiated state level sponsor bank wise amalgamation of the RRBs in September 2005 to overcome the deficiencies prevailing in the RRBs and making them viable and profitable units. Consequent upon the amalgamation of 147 RRBs into 46 new RRBs, sponsored by 19 banks in 17 states, effected by the Government of India since September 12, 2005, the total number of RRBs declined from 196 to 95 as on August 31, Total districts covered by the 45 amalgamated RRBs were 357 as on March 31, Each of the RRBs covered districts ranging from 2 to 25. The number of branches of the amalgamated RRBs as on March 31, 2007 was 10,563. The branch network of these amalgamated RRBs was quite large, varying from 50 to 667 branches.'*^ After amalgamation, the RRBs would become bigger in size with a larger area of operation, which would enable them to function in a competitive environment more effectively by taking advantage of the economies of scale and reduction in transaction cost. The process of bringing down the number of RRBs would also make it more convenient for the sponsor banks to manage the affairs of the RRBs Progress of RRBs in India The RRBs were set up with a view to developing rural economy by providing credit facilities for the development of agricultural, trade, commence, industry and other productive activities in the rural areas. Such facility was 51

20 intended mainly for small and marginal farmers, agricultural labourers, artisans and small entrepreneurs. These banks are expected to provide cheap and liberal credit facilities to the poor and the marginalized, to inculcate banking habits, create employment opportunities among these people and save them from the clutches of moneylenders.**^ The spread of bank branches is understood as a very important indicator of banking infrastructure. Table 2.2 reveals that the number of branches of the RRBs which were in , has increased to in , and a compound growth of 0.20 percent has also been recorded during this period. Year No. of RRBs Brsnchcs (-1 37) (0 07) (-> (0 55) (0 30) (0 09) (0 26) (-32 14) (0 07) (-27 82) (0 18) ( (166) Table 2.2 Financial Indicators of RRBs In India Share Capital (0 02) (0 03) (0 08) (0 02) (0 04) (0 04) (0 51) Reserves Deposits Borrowings InvestmeDt (57 34) (49 78) (40 25) (32 26) (31 80) (22 90) (1184) (14 78) (1635) (1899) (18 84) (1638) (1248) (12 84) (1028) (1478) (1656) (19 18) (3 22) (8 19) (1132) (6 06) (-4 23) (20 22) (32 18) (33 87) (17 58) (21 12) (20 45) (10 48) (8 29) (9 29) (175) (1201) (10 89) (6 34) (Rs. in Crore) Loans & Advances (16 08) (19 98) (17 80) (18 94) (17 85) (25 88) (20 81) (22 11) (2164) Total Mean SD cv CGR n Note: Figures in parenthesis indicate the percentages increased and decreased over the previous year Source: NABARD The share capital is regarded as one of the major components of the bank's owned funds. This is the base which enables the bank to expand its operations and to achieve its goals.^^ Table depicts the share capital of the RRBs which was recorded to the tune of Rs crores during , 52

21 which has further gone Rs. 197 crores respectively during the end of study period The average share capital has gone to the tune of Rs crores and a compound growth rate of.08 percent has also been recorded during this period. The reserves of the RRBs have revealed increasing trends during the period under study. It has touched the figure of Rs crores during and increased to the figure of Rs crores respectively during The maximum increase in the reserves of the RRBs has noted a hike of percent during The average reserves of the RRBs have been noticed to the tune of Rs crores and compound growth rate has been noted to the tune of percent during the study period. The deposits in the Bank play an important role not only in making disbursement possible but also In materializing various plans, policies and other objectives of the banks. Proper mobilization is a crucial factor for the overall development and performance of the bank. Table shows that the deposits of the RRBs have increased rapidly. During the deposits were noted to the tune of Rs crores, which has gone to the tune of Rs crores respectively during The average deposits have been recorded to the tune of Rs crores and the compound growth rate has been noted percent of the RRBs during to respectively. The borrowings of the RRBs have Increased to a great extent. The borrowing which was Rs crores in has increased up to Rs crores in The average borrowing of the RRBs has gone to the tune of Rs crores and the coefficient of variation has been percent in this duration respectively. The compound growth rate has been noted percent during the period under study. The investments of the RRBs have revealed increasing trends during the period under study. It has been noted that investments of the RRBs have been noted to the tune of Rs crores during and have increased to the figure of Rs crores respectively during

22 The average investment has been recorded in the RRBs to the tune of Rs crores and the coefficient of variation has been percent during the study period. The compound growth rate has gone to percent. The loans and advances of the RRBs have revealed increasing trends during the period under study. The loans and advances of the RRBs which was Rs crores during rose to Rs crores in the average loans and advances of the RRBs have gone to the tune of Rs crores and C.V. has been percent in the period under study. The compound growth has been noted at percent during the study period Loans and Advances The advance is a crucial component of the business plan of the bank. The RRBs had tried to touch the doors of each and every neglected section of the society. They devote special attention to the weaker sections and target group in order to enable them to participate in the activities and share the benefits of rural development. Their advances are predominantly confined to the needs of the weaker sections. The RRBs provide short term and medium term loan to the poor.'*^ Table 2.3 reveals that loans and advances of agricultural and non agricultural sectors of the RRBs have continuously increased during the period under study. During , the loans and advances of agriculture and non-agriculture sectors of the RRBs was noted to the tune of Rs crores and Rs 5896 crores respectively which has gone to the tune of Rs crores and Rs crores during The average loans and advances have been revealed to the tune of Rs crores and Rs crores and the compound growth rate has been recorded to the tune of percent and percent respectively during the period under study. 54

23 Table 2.3 Outstanding loans and Advances of Regional Rural Banks in India (Rs. in Crore) Year Agriculture Sector Non-Agriculture Sector Total (14.05) (16.72) (16.08) (15.90) (24.63) (20.48) (16.46) (19.20) (17.95) (22.08) (16.36) (18.94) (14.24) (20.97) (17.85) (42.55) (12.29) (25.88) (28.72) (12.64) (20.81) (27.63) (11.79) (22.11) (21.00) (22.46) (21.63) Total Mean S.D C.V C.G.R Note: Figures in parenthesis indicate the percentages increased and decreased over the previous year Source: Reports on Trends and Progress of Banking in India, Reserve Bank of India, Supplement to RBI Bulletin ( to ) Recovery Performance The recovery of loans means realization of loans, scheduled to be repaid by the borrowers. The recovery of loans is a source of funds for future operations. If the recovery is low, the bank will have to arrange additional funds through deposit mobilization or borrowings for carrying on the existing and potential business. Loans and advances given by a bank are of different maturities, ranging from very short to longer period. The loans sanctioned for different maturities become due in part at different points of time during a year of operation. The banks compute the amount due at a particular points of time for recovery and send demand notices to clients. The amount so demanded is called as demand raised for recovery.^^ Table 2.4 exhibits that the recovery performance of the RRBs in India has been very encouraging. The total demand of the RRBs has been Rs. 55

24 crores in and out of which the recovery made was Rs crores, which was around percent of the total demand. On the other hand, the total demand in was Rs crores and Rs crores were recovered out of this, which was around percent of the total demand and compound growth rate of percent and has also been recorded during the study period. This reveals excellent recovery to the total demand which is indicative of good recovery performance of the Banks. The overdue is the difference between total demand and total recovery. Table 2.4 Recovery Performance of Regional Rural Banks in India (Rs. In Crore Year Demand Recovery Balance Recovery Over dues ('/ ) (%) {-) (19.42) (26 97) (7.89) (14.10) (21 12) (1.50) (19.83) (24.49) (10.80) (20 29) (21.87) (16.51) (14 50) (17.10) (6.45) (19.13) (24.34) (4.66) (25.03) (30.28) (8.27) (22.00) (21.93) (22.31) (22.67) (23.72) (18.50) Total Mean C.G.R Note: Figures in parenthesis indicate the percentages increased and decreased over the previous year Source: NABARD Table further reveals that the total demand of the RRBs was Rs crores in and the overdue was to the tune of Rs crores which was percent of the total demand. Whereas the total demand and over dues during were Rs crores, and Rs crores were unrecovered out of this; which was around percent of the total demand. It shows lower percentage of the over dues to the 56

25 total demand during the period under study that indicates significant recovery performance of the banks Profitability Performance of RRBs in India The most important point for financial institutions that wish up to assume the responsibility of implementing a profit-oriented business will be the accurate identification of market needs and the choice of a strategic position compatible with their own management resources The profit and loss account exhibits an immediate impression about the working of an organization It provides a clear picture whether the organization is earning profit or incurring losses. Table 2.5 Progress of Regional Rural Banks in terms of Malting Profit (Rs. in Crore Year Income Expenditure Proflt/Losses (20 77) (16 68) (73 39) (16 88) (14 24) (39 77) (14 49) (16 37) (1 16) (6 60) (9 10) (-13 82) (5 28) (126) (46 76) (-1 74) (-161) (-2 47) (6 66) (10 06) (-17 73) (1691) (19 03) (3 40) (22 91) (18 73) (211 91) Total Mean SD C V CGR Note: Figures in parenthesis indicate the percentages increased and decreased over the previous year Source Reports on Trends and Progress of Banking in India, Reserve Bank of India, Supplement to RBI Bulletin ( to ) The total income earned by the banks which stood at Rs 3443 crores in increased to Rs crores in , indicating a compound growth of percent Similarly, the amount of expenditure incurred, which 57

26 stood at Rs crores, increased to Rs crores, which indicates an increase of percent and a compound growth rate of percent during the period under study. It is clear from table that the banks show an increasing profit earning trend during the period of study except in the year ( and ) while there is decrease in the amount of profit. The profit earned by the bank, which stood at Rs. 248 crores in , increased to Rs crores in , which indicates a tremendous increase of percent and a compound growth of percent has also been recorded during this period. Therefore, it is clear from the table that the increase in expenditure has been quite low in comparison with the increase in income because of which the margin for profit has improved considerably during the period under study. It can be concluded that the RRBs have done an important job of providing banking facilities to the rural masses in India. The emergence of the RRBs has made a significant dent in the socio-economic development of the rural people. The RRBs are catering to the credit needs of the rural people. There has been tremendous increase in the reserves, deposits, borrowings, investments and loans and advances of the RRBs in India. The recovery performance of the RRBs in India has also been very encouraging. But they still need to make efforts to be profitable and viable. 58

27 References 1. A. Subbiah and M. Selvakumar, "Regional Rural Banks and Agricultural Credit", Kurukshetra, Vol. 54, No. 2, December 2005, p Anurag Agrawal, "Regional Rural Banks", Kuruksheta, Vol. 53, No. 9, July 2005, p M. Devendra Babu, ''Regional Rural Banks, Need Structural Change", Kurukshetra, Vol. 46, No. 12, December 1998, p K.K. Tripathy, "Micro-Credit Intervention and Poverty Alleviation", Kurukshetra, Vol. 54, No. 11, September 2006, p Sunil Kumar, Regional Rural Banks and Rural Development, Deep & Deep Publication, New Delhi, p Valsamma Antony, "Regional Rural Banks as Champions of Rural Credit", Kurukshetra, Vol. 53, No. 3, Jan. 2005, p S.S.M. Desai, Rural Banking in India, Himalaya Publishing House, Bombay, 2"** Revised Edition, 1986, p C. Krishnan, Role of Rural Banks in the Rural Development, Printwell Publishers, Jaipur, 2001, p Ibid. 10. Government of India, Report of the Banking Commission, Department of Finance, 1972, New Delhi, pp Sanjai Singh Rathore, Rural Banking in India-With Special Reference to Avadh GraminBank, New RoydX Book Com^awf, Lucknow, 2QQ4, p. \A, 12. Government of India, Department of Revenue and Banking, Report of the Expert Committee on Consumption Credit, New Delhi, 1976, Chapter Government of India, Report of the Committee on Rural Banks, Working Group, New Delhi, Reserve Bank of India Bulletin, July, Reserve Bank of India, Annual Report and Trend and Progress of Banking in India, Suppiement Co RBI Bulletin, , p Government of India, The Regional Rural Banks Act, 1976, Preamble, p Reserve Bank of India Bulletin, July, Report of the Committee on Rural Banks, pp Ibid, p