The Indian government has proposed merging Regional Rural Banks (RRBs) to reduce their number from 43 to 28. 

• The government’s consolidation plan aligns with the ‘One State-One RRB’ goal.
• Current Status: 12 states, including Andhra Pradesh, Bihar, Gujarat, Karnataka, and West Bengal, currently have more than one RRB.

About Consolidation of Regional Rural Banks

• RRB consolidation began following the recommendations of the Dr. Vyas Committee (2001).
• Consolidation Phases: Initiated in 2004-05, reducing RRBs from 196 to 43 by 2020-21 across three phases.
  • The ongoing fourth consolidation phase aims to further reduce the number to 28.
  • Significance of Consolidation: Reduces overhead expenses and promotes technology adoption.
  • Enhances capital base, expands operational areas, and increases exposure.

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About Regional Rural Banks

• Genesis: Established in 1975 on the recommendations of the Narasimhan Working Group (1975), through an ordinance later replaced by the Regional Rural Banks Act, 1976.
  • First RRB: Prathama Grameen Bank, established on October 2, 1975.
• Objectives: Created to support rural development by providing credit to small/marginal farmers, agricultural labourers, and small entrepreneurs.
• Operational Scope: Primarily serve rural areas, with permission to open branches in urban areas as needed.
• Shareholding Structure:
  • Government of India: 50%

• • State Government: 15%
  • Sponsor Bank: 35%
• Regulation:  RRBs are Scheduled Commercial Banks (Government Banks) regulated by the RBI and supervised by NABARD.
• Sources of Funds: Include owned funds, deposits, and borrowings from NABARD, Sponsor Banks, and institutions like SIDBI and the National Housing Bank.
  • Priority Sector Lending (PSL) Target: RRBs must allocate 75% of their total outstanding advances to PSL , compared to 40% for Scheduled Commercial Banks.

Challenges in Consolidation of RRB

• Integration Complexity: Merging multiple banks requires intricate integration of diverse technological systems and operational procedures.
• Regional Disparities: Ensuring consistent service delivery across diverse rural regions can be a significant challenge.
• Workforce Adjustments: Restructuring the workforce during consolidation can be a sensitive process.

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Way Forward

• The consolidation of Regional Rural Banks is a strategic move to enhance the rural banking sector’s efficiency and competitiveness. 
• By creating larger, more robust institutions, the government aims to address the challenges faced by RRBs in competing with private sector banks and Small Finance Banks (SFBs).
• To ensure the success of this initiative, it is crucial to carefully implement the consolidation process and monitor its impact on RRBs’ financial health and service delivery to rural communities.

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