Unprofitable, growing bad assets: The tale of existential crisis at RRBs

Source– The post is based on the article “Unprofitable, growing bad assets: The tale of existential crisis at RRBs” published in the Business Standard on 3rd November 2022.

Syllabus: GS3- India Economy

Relevance– Financial institutions

News- The article explains the concept of RRBs. It also explains the financial condition of RRBs.

What are RRBs?

RRBs are jointly owned by the central government, state governments and sponsoring banks.

They were set up in 1975 with the intent of bringing financial services and products to agricultural workers and labourers.

What are the steps taken by the government for RRBs?

Last month, the finance ministry issued draft guidelines setting the criteria for the listing of regional rural banks on the stock exchange.

The guidelines included listing banks that have earned an operating profit of more than Rs 15 crore in three out of the past five financial years, a net worth of Rs 300 crore and a capital adequacy ratio above the required 9 per cent in the past three years.

The government has amalgamated various standalone RRBs at different points in time to cut overhead costs. A decade ago, there were 82 RRBs. Since then, their number has reduced to 43.

What is the financial condition of RRBs?

There has been a steady decline in the number of profit-making RRBs from 75 in FY11 to 34 in FY22. Only 20 have made a profit of over Rs 15 crore in the past three years.

Between FY11 and FY22, net NPAs have doubled from 2.05% to 4.68%.

Agriculture sector borrows more from commercial banks than the RRBs. The share of institutional credit by the commercial banks for agriculture and allied activities has increased from 65 per cent to 76% between FY11 and FY22. While, the share of RRBs in the total credit has remained constant between 11 per cent and 13 per cent.

In FY22, institutional credit in the RRBs marginally declined to 11% from 12% in the previous year.