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:
Dr. Vyas Committee
Dr. Vyas Committee (2001) was formed to examine the relevance of Regional Rural Banks (RRBs) in the rural credit system and suggest ways to make them viable.
Recommendation of Vyas Committee:
- Consolidation of RRBs: The committee recommended consolidating RRBs to achieve economies of scale and improve their financial health.
- Strengthening Governance: The committee suggested strengthening the governance structure of RRBs by empowering their boards and management.
- Technology Adoption: The committee emphasised the need for RRBs to adopt technology to improve their efficiency and reach.
- Focus on Priority Sectors: The committee recommended that RRBs should continue to focus on lending to priority sectors like agriculture, small and marginal farmers, and rural artisans.
- Human Resource Development: The committee stressed the importance of investing in the training and development of RRB staff.
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- 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.
November 7, 2024
