FINANCIAL PERFORMANCE EVALUATION OF REGIONAL RURAL BANKS OF INDIA

FINANCIAL PERFORMANCE EVALUATION OF REGIONAL RURAL BANKS OF INDIA INTRODUCTION As India is a developing country, the Government of India continuously tries for the well being of citizens. Because 70% of Indian population belong to rural areas and rural sector is the backbone of Indian Economy as over 40% of the gross national products are coming from this sector and priority sector credit is one of the strategic inputs for the successful implementation of rural development schemes and rural households, particularly low income working households were dependent on informal sector to meet their demand for credit and this sector advances loans at a very high rate of interest with the terms and conditions attached to it. So, considering the requirement of banking services for rural people the Government of India appointed a Working Group under the Chairmanship of M. Narshimham, who after examining the problem of rural finance and to provide low cost banking facilities to the poor suggested a new form of banks called Regional Rural Banks. The Regional Rural Banks (RRBs) were established in 1976 under Regional Rural Banks Act, 1976. The objectives as given in the preamble of RRBs Act of 1976 were to develop the rural economy in providing for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities particularly to the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs and for matter connected Prasanna Kumar Das GIFT, Bhubaneswar therewith and incidental thereto. Since then, the Government of India has initiated so many steps to improve the functioning and financial health of RRBs. RRBs are jointly owned by the Government of India, the concerned State government and sponsor banks, the issued capital of a RRB is shared in proportion of 50 percent, 15 percent and 35 percent, respectively. (Source: Reserve Bank of India Occasional Papers, 2006) From a modest beginning of 6 RRBs with 17 branches covering 12 districts in December, 1975 the number of RRBs increased to 196 RRBs with 14,446 branches in 1991 operating in 518 districts across the country. After a phase of consolidation between September 2005 and March 2010, RRBs of the same sponsor banks within a state were amalgamated bringing down their number to 82 from 196. In the current phase of consolidation which began in October, 2012 by amalgamation of RRBs across sponsor banks within a State to have just one RRB in medium-sized states and 2 or 3 RRBs in large states, the number of RRBs has further reduced to 61 RRBs as on date with over 18000 branches in 638 districts. On 31 March, as per the reports of RBI and NABARD, the number of RRBs operating is 64 with 17856 branches in 635 districts (Source: Annual Report of NABARD for the year 2012-13). Phases of Consolidation of RRBs The following table represents the two Phases of Consolidation of RRBs 77

Table No. 1: Phases of Consolidation of RRBs and Measures Adopted Phases Time Period Measures Adopted First September 2005 to RRBs of the same sponsor banks within a state were amalgamated Phase March 2010 Second October 2012 Amalgamation of RRBs across sponsor banks within a State to have Phase onwards just one RRB in medium-sized states and 2 or 3 RRBs in large states REVIEW OF LITERATURE So many studies have been conducted for analyzing financial performance of RRBs in India like Khankhoje Dilip and Sathye Milind (2008), Dr. Karam Pal and Jasvir S. Sura (2006), Chavan and Pallavi (2004), but after implementation of phase of consolidation and amalgamation by GOI, the studies conducted are very less and no such study is available for analyzing the effect of second phase of amalgamation initiated from October 2012, on the financial performance of RRBs so this was the reason for conducting present study. Some review from the existing literature is presented here: Table No. 2: Review of Existing Literature Author/ Authors Title of the study Time Key Parameters used for performance period Evaluation of the study Niraj K Verma, A Study of 2000-01 Operating profit to total assets, Net profit to V. Alagu Pandian Profitability to 2010- total assets, Interest income to total assets, (2013) Performance of 11 Other income to total assets, Total income to RRB s in India total assets, Spread interest income to total assets, Net profit to total advances, Interest spread to total income, Interest spread to Operating profit, Operating profit to net profit, Interest income to Total advances. Jaynal Uddin Performance 2000-01 Branch Expansion of RRBs, Deposit Ahmed (2013) Evaluation of to 2010- Mobilization of RRBs, Credit Channelization Regional Rural 11 of RRBs, Credit Deposit Ratio of RRBs, Banks: Evidence Population Group - Wise Growth of Deposits from Indian Rural of RRBs, Population Group wise Credit Banks Channelization of RRBs, Deployment of Credit of RRBs in India Kanika, Nancy Financial 2006-07 growth of RRBs, geographical distribution of (2013): Performance to RRBs, outstanding loans and advances of Evaluation of 2011-12 RRBs Credit deposit and investment deposit RRB s in India ratio, Financial Performance of RRBs. Anil Kumar Soni, Performance 2006-07 Number of banks, branches, loans, advances Abhay Kapre Evaluation of to 2010- etc. and concluded a positive impact on the (2012): Regional Rural 2011 performance of RRBs Banks in India Dr.D.Maheshwara Evaluating 2006- Capital Adequacy, Assets Quality, efficiency Reddy Performance of 2010 of Management, quality of Earnings and K.V.N.Prasad Regional Rural Liquidity of financial institutions based on (2011) Banks: sample of two RRBs, Andhra Pragathi 78

An Application of Grameena Bank (APGB) and Sapthagiri Camel Model Grameena Bank (SGGB) M. Syed Ibrahim Performance 2001-02 Performance between the pre-merger period (2010): Evaluation of to 2008- and post- merger period, Geographical Regional Rural 09 Coverage and Man Power Deployment, Banks in India Capital Composition, Deposits and Loans Outstanding Of RRBs, Credit Deposit Ratio, Growth of Investments All these studies concluded that performance (based on selected parameters) of the RRBs has improved in post-merger period. OBJECTIVES OF THE STUDY 1. To identify the key financial indicators for RRBs performance in India. 2. To analyze the performance and growth pattern for two phases of post amalgamation period i.e. 2005-06 to 2012-13. 3. To analyze the overall and region wise position of NPA and recovery percentages. 4. To check policy initiatives by NABARD for improvement of performance of RRBs. RESEARCH METHODOLOGY This study is descriptive in nature based on secondary data collected and compiled from published annual reports of RBI and NABARD for Post Merger Period i.e. 2005-06 to 2012-13. ANALYSIS OF PERFORMANCE OF REGIONAL RURAL BANKS 1. Area Coverage: The following table represents the growth of RRBs in India based on Number of RRBs, Districts covered and Branch Network Table No. 3: Increase in Area Coverage of RRBs in India Years No. of RRBs No. of Branches No. of Districts No. of States and Covered UT Covered 2005-06 133 14494 524 26 States 2006-07 96 14520 534 26 States 2007-08 91 14761 594 26 States, 1 UT 2008-09 86 15181 617 26 States, 1 UT 2009-10 82 15480 618 26 States, 1 UT 2010-11 82 16001 620 26 States, 1 UT 2011-12 82 16909 635 26 States, 1 UT 2012-13 64 17856 635 26 States, 1 UT UT: Union Territories Source: Annual Reports of NABARD and RBI from 2005-06 to 2012-13. Table 3 represents a continuous increase in area coverage by RRB in the form of districts covered and branch network. Even, major reduction has been noticed in number of RRBs that is because of various phases of consolidation and amalgamation adopted by Government of India (GOI) to improve the functioning and financial health of RRBs. 2. Profit Generating RRBs The following table represents the profit / loss generating RRBs 79

Table No. 4: No. of RRBs generating Profit/ Loss Years Total No. of Profit Generating Loss Making RRBs with RRBs RRBs RRBs accumulated losses 2005-06 133 111 22 58 2006-07 96 81 15 39 2007-08 91 83 8 36 2008-09 86 80 6 31 2009-10 82 79 3 27 2010-11 82 75 7 23 2011-12 82 79 3 22 2012-13 64 63 1 11 Table 4 represents that consolidation and amalgamation initiatives of GOI has increased the number of profit generating RRBs while loss making RRBs are continuously declining and as per the results of 2012-13 only 1 RRB Nagaland Rural Bank from North Eastern Region has incurred loss. Number of RRBs with accumulated losses has decreased to a great extent. 3. Working Results of RRBs The following table represents the trend of Net Profit earned by RRBs. Table No. 5: Working results of RRBs Years Net Index No. Yearly Accumulated Index No. for Yearly Profit for Net change in Losses (crore) Accumulated change in (crore) Profit profit(in%) Losses losses (in %) 2005-06 617 100-2636.85 100-2006-07 625 101 +1.30 2759.49 105 +4.65 2007-08 1027 166 +64.32 2624.22 99.52-4.90 2008-09 1335 216 +30 2299.98 87-12.36 2009-10 1884 305 +41.12 1775.06 67-22.82 2010-11 1785 289-5.25 1532.39 58-13.67 2011-12 1886 306 +5.66 1332.57 51-13.04 2012-13 2382 386 +26.30 1011.78 38-24.07 Source of Net Profit: Reports on Trend and Progress of Banking in India and NABARD Source of Accumulated Losses: Annual Reports of NABARD and RBI Index numbers are calculated by taking year 2005-06 as a base year for other years. The index numbers calculated for net profits show that profits are continuously increasing and are about four times (` 2382 crore) in year 2012-13 in comparison to 2005-06 (` 617 crore) except in year 2010-11(slight decrease is noticed in this year from ` 1884 crore in 2009-10 to ` 1785 crore in 2010-11) when the first phase of amalgamation got over. While index numbers calculated for accumulated losses present that accumulated losses are continuously decreasing and are about one third (` 1011.78 crore) in 2012-13 comparative to the 2005-06 (` 2636.85 crore). Annual change column in the table presents that in year 2006-07 there is a slight increase (1.30%) in profit, in 2007-08 profits increased tremendously showing the highest annual increment (64.32%), in 2008-09 profits increased but rate of increase is less, in 2009-10 i.e. last year of 1st phase, profits again increased with a high rate then in year 2010-11 profits reduced showing a negative trend then in year 2011-12 profits again recovered and 80

presented a slight increase then in the last year 2012-13 which is the first year of second phase profits again increased with 26.30% Chart No. 1: Trend of Net Profit and accumulated losses Annual change column for accumulated losses presents that except 2006-07 every year losses are decreasing but highest decrease is noticed in year 2009-10 and 2012-13. 3000 2500 2000 Net Profit (in 1500 crores) 1000 500 0 Accumulated Losses (in crores) 4. Position of NPA and Recovery The following table presents the percentage of NPA to loans outstanding as well as percentage of recovery. NPA percentage has shown major decrease in 1 st phase of amalgamation but after that it is continuously increasing. Although recovery percentage presented a fluctuating trend in 1 st phase but after that it shows a positive trend still more efforts are required for recovery. Table No. 6: Position of NPA and Recovery Years NPA to loans outstanding (%) Recovery (%) (As on 30 June) 2005-06 7.28 79.85 2006-07 6.55 79.80 2007-08 6.05 80.84 2008-09 4.14 77.85 2009-10 3.72 80.09 2010-11 3.75 81.18 2011-12 5.03 81.60 2012-13 5.65 82.57 Table No. 7: Region wise Position of NPAs for RRBs (As on 31 March 2013*) Region Loans & Advances NPAs Amount NPA to loans Recovery (%) O/S(` crore) (` crore) outstanding (%) As on 30 June 2012 Central 33,359.63 3,214.00 9.63 60.28 Eastern 22,160.96 1,757.46 7.93 75.36 Northern 21,299.64 875.38 4.11 89.70 North-Eastern 6,781.01 250.68 3.70 63.77 Southern 48,611.83 1,484.37 3.05 89.92 81

Western 7,623.93 325.05 4.26 77.15 All India 1,39,837.00 7,906.94 5.65 82.57 *Provisional Source: Annual Report of NABARD for the year 2012-13 This table presents that the loans and advances outstanding are highest for southern region (34.76%) but due to its better recovery percentage, NPA percentage to loan outstanding is least i.e. 3.05% among all. While central region has provided about 23.86% loan to total loans provided but it s bad recovery position (60.28%) has created the problem of NPA which is 40% of total NPAs. The recovery % of North-Eastern Region is also low (63.77%) because it has provided very less loans (4.85%) so it is not reflected through NPA Amount and NPA %. POLICY INITIATIVES 1. Recapitalization: To bring the CRAR (Capital to Risk Weighted Assets Ratio) of RRBs to at least 9% in 2010, Chakrabarty Committee recommended the recapitalization support of `2200 crore to RRBs in 21 states in the proportion of 50:35:15 for GOI, Sponsor Bank and State Government respectively. As on 31 March 2013, an amount of 2015.86 has been released to 37 RRBs in 20 States. During 2013-14 an amount of Rs. 27.99 crore has been released to 3 RRB as Government of India share out of the total amount of Rs.88.00 crore provided for 2013-14. The recapitalization is complete for 35 RRBs. As all the State Governments did not releae their share for recapitalization. So, this process has been extended with the approval of the cabinet up to March, 2014. 2. Technology Innovation and System generated NPAs in RRBs: All 64 RRBs have migrated to CBS (Core Banking Solution) and the NPA is required to be generated through system. 3. Financial Inclusion: As per RBI guidelines, RRBs have contributed strongly for financial inclusion in rural areas by opening large number of No Frills accounts and by financing through General Credit Card (GCC). Total number of accounts stood at 1885.71 lakh in March 2013 as against 1383.54 lakh in March 2012. For financial inclusion, the RBI has asked to set up 25% branches in un-banked regions. 4. Village Adoption and Debt Swap by RRBs: As per the target given to RRBs for adopting at least one village per branch, RRBs adopted 30333 villages up to March 2013 and issued loans of `2396 crore to 2.39 lakh indebted farmers. 5. Regional Rural Banks (Amendment), Bill 2013: The above Bill proposing amendment in the Regional Rural Banks Act, 1976 has been introduced in the Lok Sabha on 22 April, 2013 and was with the Standing Committee till December 18,2013.. The proposed amendments inter-alia includes the following: a. Increase in Authorized Capital from Rs.5 crore to Rs.500 Crore. b. Issued capital not below Rs.1 crore. c. Enabling provision for allowing RRBs to raise private capital. d. Enabling provision for appointment of Private shareholder Directors. e. Enabling provision for change in interse-share holding of RRBs in consultation with State 6. Revised Rate of Interest on Refinance: NABARD has revised the rate of interest on refinance provided to banks for investment credit with effect from January 7, 2014. The refinance rate has been reduced by 20 basis points, and the revised rate of interest on refinance for a period of five years for Regional Rural Banks will be 9.70%. The revised rate of interest for refinance for a period of three to five years will be 9.90%. 7. Interest Subvention to RRBs: As per announcement in Union Budget 2013-14, the 82

Government has issued instructions for the continuance of Interest Subvention Scheme to provide short term crop loans up to `3.00 lakh to farmers at an interest rate of 7% per annum and an additional subvention (rebate) of 3% to prompt payee farmers. A provision of `6000 crore is proposed for the year 2013-14. FINDINGS and SUGGESTIONS Based on the analysis of data collected from reports of NABARD, some findings and suggestions to improve the performance of RRBs are given here: 1. Analysis based on Area Coverage presents that out of total 651 districts in India, 635 districts are covered by RRBs and out of 28 states and 7 union territories, 2 states Goa and Sikkim and except Pondicherry all other union territories are yet to be covered. As per the Branch Expansion program of GOI, these areas should be covered by opening branches of existing RRB or setting up new RRB under Financial Inclusion Initiative. 2. There is a need to improve the working of Nagaland Rural Bank from North Eastern Region because data taken from important key indicators for the year ending 2013 presents Nagaland Rural Bank as single RRB out of 64 incurring loss in 2012-13 and having a network of 10 branches in 5 Districts. 3. There is continuous reduction in number of RRBs with accumulated losses still there are 11 RRBs having accumulated losses out of 64. GOI should complete the process of recapitalization and region oriented policies should be framed for writing off accumulated losses of specific RRB. 4. Although profits are continuously increasing still index numbers and percentages calculated for net profit presents a fluctuating trend and need to get stabilized with some policy changes and initiatives taken by officers of RRBs and implemented with the help of Government for improving the functioning of RRBs like controlling the costs and increasing the income, preference to micro-credit scheme, formation of self help group, effective credit administration, efficient recovery policy, easy lending procedure for village borrowers, timely scrutiny of results and awareness about Government sponsored schemes. 5. Although accumulated losses are decreasing with an increasing rate still these are about 40% of net profits in year 2012-13 which is a high percentage so need to be covered up quickly to improve the position and region wise analysis presents that these accumulated losses are mainly from eastern region covering 75% of total accumulated losses so this region needs more improvement. Government should not rely on sponsor banks while staff of the RRBs should be encouraged to be strategic partner for policy implementation, financial inclusion initiative should be properly taken for increasing the capital flow and a balance is required between cost of funds and interest rate on loans because high cost of funds and below cost interest rates on loans has led to high accumulated losses and piling up of bad assets in the case of many RRBs. 6. According to the figures of Loans and Advances O/S, NPA Amount and NPA % for the year 2012-13, the position of Southern Region is best while Central and Eastern Region are so weak, Central Region requires some major steps for recovery because its recovery % is least among all which has increased the problem of NPA. LIMITATIONS OF THE STUDY 1. This study is conducted for a specific time period i.e. post merger period. 2. Analysis may be influenced by some subjective factors like knowledge, judgement and can vary person to person and situation to situation. 3. Some key performance indicators are considered but other indicators can be covered in future research work. REFERENCES Annual reports of NABARD from year 2007-08 to 2012-13 accessed from URL https://www.nabard.org/english/annualreport.asp 83

Annual report of RBI from this URL (retrieved on 14-02-2014) http://www.rbi.org.in/scripts/annualreportpublicat ions.aspx?id=1084 Ahmed Uddin Jaynal (2013): Performance Evaluation of Regional Rural Banks: Evidence from Indian Rural Banks, Global Journal of Management and Business Research, Volume 13, Issue 10, Version 1.0, Year 2013 Extract of a speech given in the Conference of Principal Code Compliance Officers (PCCOs) / Chairmen of Regional Rural Banks organized by BCSBI at Mumbai, on July 15, 2013 http://www.rbi.org.in/scripts/bs_speechesvie w.aspx?id=820 (retrieved on 14-02-2014) Ibrahim Syed M. (2010): Performance Evaluation of Regional Rural Banks in India, International Business Research, Vol. 3, No. 4, October 2010, pp.203-211 Kanika, Nancy (2013): Financial Performance Evaluation of RRB s in India, International Journal of Management and Information Technology, Vol. 4, No.2, July 2013 pp.236-247 https://www.nabard.org/pdf/imp_key_indicato rs_of_rrbs_2013.xls (retrieved on February 15, 2014) Reddy Maheshwara D. and Prasad N. V. K. (2011): Evaluating Performance of Regional Rural Banks: An Application of Camel Model, Researchers World-Journal of Arts, Science and Commerce, Vol. 2, Issue 4, Oct. 2011, pp.61-67 Soni Kumar Anil and Kapre Abhay (2012): Performance Evaluation of Regional Rural Banks in India, Abhinav National Journal of Research in Commerce and Management, Vol. 1, Issue 11, November 2012, pp.132-144. Verma K Niraj and Pandian Alagu V. (2013): A Study of Profitability Performance of RRB s in India International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 2, No. 10, October 2013, pp.39-51. Press Information (December 18, 2013): Year End Review of Ministry of Finance for the year 2013 (PDF) Press Information (January 10, 2014): NABARD Initiatives A Slew of Measures for Promoting Rural Credit and Rural Infrastructure (PDF) Report of Ministry of Finance, Department of Financial Services: Consolidated Review of Performance of Regional Rural Banks (RRBs) as on 31 March 2013 (PDF) Report of Ministry of Finance, Department of Financial Services: Consolidated Review of Performance of Regional Rural Banks (RRBs) as on 31 March 2011 (PDF) Report of NABARD on Important Key Indicators of RRBs for the year ending 2013 from this URL 84