Nineteen rural banks merged into eight 71 left

RBI unhappy at not being kept in the loop finance ministry says it adhered to RRB Act

The government seems to be preparing the ground for the merger of public sector banks (PSBs). After asking small banks to coordinate with large ones on key areas, it has now merged 19 regional rural banks (RRBs) into eight entities, despite reservations by the Reserve Bank of India (RBI). It plans to merge more rural banks by the end of this financial year.

RBI has expressed its displeasure at the move, saying the finance ministry didn’t keep it in the loop while going ahead with the mergers. The ministry, however, argued it followed the Regional Rural Banks Act, which didn’t mandate consultation with the central bank on such mergers.

In the second round of consolidation of RRBs, the government has, for the first time, merged RRBs under different sponsor banks.

The number of RRBs has been reduced to 71, against 82 at the end of the last financial year. The government plans to reduce this number to 64 by March-end and to 48 over a longer period.

Currently, the number of PSBs stands at 26.

Before the first phase of consolidation started in 2005, the number of RRBs was 196.

“Today, many RRBs have less than 50 branches. They can never be viable, as technology adoption costs are very high. We want to ensure they are of a reasonable size so that they have economies of scale,” said a finance ministry official.

About two months earlier, the ministry had written to all commercial banks, dividing these into seven groups. Each group comprised a large bank as a coordinator for two to three small banks on issues such as human resources, e-governance, internal audit, fraud detection and recovery.

Senior bankers said both moves — the merger of RRBs and setting up bank pools — would make it easier for the government to consolidate commercial banks. Though finance ministry officials said the government wouldn’t force banks to merge, large coordinating banks frequenting small banks in their pool has led to rumours of consolidation in banking circles.

“The groups were formed keeping the CBS (core banking solution) platform in mind. The merger of RRBs has also happened within the same CBS group. All these measures would enable consolidation of commercial public sector banks,” a senior banker told Business Standard.

After the merger, some large RRBs have turned as big as some small public sector banks. Some states would now be left with just one RRB. The ministry wants each RRB to have at least 400 branches. In 2011-12, RRBs opened 914 branches; they plan to open 1,845 branches in 2012-13.

RRBs have been merged in Bihar, Karnataka, Madhya Pradesh, Odisha, Uttar Pradesh and Uttarakhand. UCO Bank, State Bank of Mysore, Central Bank of India, Bank of India and State Bank of India are the new sponsor banks.