The irrelevance of regional rural banks

Source: The post is based on the article “The irrelevance of regional rural banks” published in the Business Standard on 9th November 2022. 

Syllabus: GS 3 – Indian Economy.

Relevance: About regional rural banks (RRBs).

News: Several of the regional rural banks (RRBs), are now facing an existential crisis due to dwindling business and soaring bad assets.

About the present status of RRBs

The RRBs set up in the mid-1970s to provide financial services to agricultural workers and labourers. Many of them have either collapsed or got merged with their parent banks.

The overall business of rural financial institutions has generally gone up in the last decade. But the performance of RRBs does not go up. For instance, a) The number of RRBs has nearly halved from 82 to 43, b) RRBs non-performing assets have more than doubled from 2.05% to 4.68%, c) The volume of the credit disbursed by the RRBs, on the other hand, has shrunk from 13% to 11%. But the share of commercial banks in agricultural loans increased from 65% in 2010-11 to 76% in 2021-22.

What are the steps taken by the government to improve RRBs?

a) Merged some stand-alone RRBs with larger units to cut their overhead costs and scale up the business volumes, b) Inducted funds to expand their capital base, c) Over Rs 4,000 crore has been provided towards recapitalising the RRBs in last fiscal year.

Why there is a growing irrelevance of the RRBs?

-The RRBs have been left primarily with the government-sponsored business of servicing the official schemes involving direct benefit transfers.

-RRBs have 1) Limited business activity, 2) Swelling operational costs, 3) Lack of internet banking facilities, 4) Some of the RRBs, even today, have not fully digitised their operations, and 5) Many of them do not expand their business operations beyond farm-related activities such as reaching out to micro, small and medium enterprises located in the rural areas and offer them banking services.

So, most people in rural areas, therefore, prefer to deal with commercial banks.

-Further, most of the RRBs are ineligible for being listed on the stock exchanges because they do not meet the required pre-conditions. This is because, the RRBs need to have earned an operational profit of over Rs 15 crore in three out of the previous five financial years, besides a net worth of at least Rs 300 crore and a capital adequacy ratio of above 9 per cent to qualify for listing on the stock exchange.

What will be the better course of action for RRBs?

The best course for most RRBs is to either merge with their sponsoring banks or close down. They have very little space to survive as stand-alone financial enterprises.