By Tanya Patwal, Amity Law School, Delhi.
In India, especially the rural areas, majority of the population had no basic banking facility and had no financial services provided to them. Despite 14 private banks being nationalised in 1969, commercial-turned-national banks couldn’t cater to the rural credit needs. Thus, under an ordinance passed in 1975 on the recommendation of the Narasimham Committee and even before the Regional Rural Banks Act of 1976 came into existence, Regional Rural Banks (RRBs) were set up to provide credit for agricultural and rural activities. All Regional Rural Banks are authorized to carry on to transact the business of banking as defined in the Banking Regulation Act 1949. The following are important points explaining the formation and function of the RRBs in India:
- Under the Ordinance of 1975, five regional rural banks were set up in the first phase. The first, Prathma Bank, was set up in Moradabad (U.P.) on 2nd October 1975. It was sponsored by Syndicate Bank. Four other banks were set up in Gorakhpur (U.P.), Malda (West Bengal), Bhiwani (Haryana), and Jaipur (Rajasthan). The ordinance was then replaced by the Regional Rural Banks Act, 1976.
- RRBs are jointly owned by the Central Government, State Government and a Sponsor Bank (any Public Sector Bank by which the RRB is sponsored). The authorized capital of Regional Rural Banks is Rs. 5 crores which is contributed by Central Government, State Government and the Sponsor Bank in ratio of 50:15:35.
- Power of managerial and operational supervision in an RRB is vested with the Sponsor Bank. Regulatory and Performance monitoring is done by RBI and NABARD. The actions are generally governed by the RRB Act.
- The organisational structure of an RRB may differ from place to place but the hierarchy in the decision-making is as given below:
- Board of Directors
- Chairman and Managing Director
- General Manager
- Chief Manager/Regional Manager
- Senior Manager
- Manager
- Officer.
- The various functions performed by RRBs are as follows:
- Providing credit and banking facilities in rural and semi-urban areas.
- Carrying out government schemes like MGNREGA, pension schemes, etc.
- Providing loans to small businesses, farmers, artisans and agricultural labourers to act as capital for ventures.
- Reduce cost of credit by charging lower interest.
- RRBs were originally conceived as the solution to rural banking issues and as low cost institutions. However, rural economies soon became insufficient for the banks and they started incurring losses. This led to the first phase of amalgamation of RRBs in 2005 on the recommendation of the Vyas Committee. The second such amalgamation resulted in 56 RRBs by 2016 as compared to 196 in the 1990s.
- RRBs in India face multiple issues in their work. They are slow and the procedures are long and time consuming, making people switch to family, moneylenders, etc. Another issue pertains to the workforce. Initially, locals were encouraged to work in the banks, however now, with there being in place a common Board for recruitment, non-residents also come to work for the RRBs. Some people are reluctant to work in the rural areas, while many are unable to inspire familiarity and comfort among the locals. Rich people of the area do not like to deposit money with RRBs due to their restrictive credit policies, thus resulting in lesser credit and beneficiaries for these Banks. Yet another issue is that when we take into consideration, the poverty rate, on a pan-India basis, we cannot decide on a single scale to measure the same. This has resulted in many poor people, belonging to different regions, not being able to gain proper benefits from the RRBs.
- In 2015, the RRB Act was amended. RRBs were permitted to raise capital from sources other than Central and State governments or their Sponsor Banks.
- RRBs have had a very distinct implication on the rural economy. It was a brilliant idea and it’s inception has resulted in the rise of Self Help Groups(SHGs), who are a group of people who come together to pool in their savings and act as lenders whenever one of the members require a loan. This rise is contributed to the willingness of the RRBs to invest in microfinance, i.e., focussing on the poor and weaker sections. Yet another benefit is the rise of co-operatives in the society. Co-operatives are a group of people who come together to do business with each member being an important part of the cooperative. There are no leaders here. AMUL is an example of a cooperative. RRBs have also succeeded in extending their branch network and made significant progress in the mobilization of deposits. Apart from helping SHGs, they have themselves become Self Help Promotional Groups.
- Till now, Regional Rural Banks in India have undergone several changes in their formation and functions. One of the reasons why RRBs lag behind and incur losses, are the relatively traditional methods they follow to function, which in turn, stem from their lower capital and the high cost of trying to reach out to the rural masses. With modern technology coming up, if RRBs use mobile phones and other technology to expand their reach, we could see better performance on their part. All banks should set up particular targets that suit the area they operate in, and the goals should be set pragmatically, trying to lower the overhead expenses. Collaborations with co-operatives would be one such way. Similarly, RRBs should try and expand their reach to tribal areas.
If RRBs upgrade themselves and are in sync with the modern concept of banking, albeit within their scales, they could be more productive than they are now.