FinMin puts amalgamation of regional rural banks on hold

At present, central govt, state govts and sponsor banks like SBI and PNB provide capital

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RRBs were set up in 1975, to create an alternative channel to the cooperative credit structure and ensure sufficient institutional credit for the rural and agriculture sectors

The Centre has put on hold further amalgamation of regional rural banks (RRBs), as these face challenges in meeting capital adequacy norms. It is expected the focus will now be on improving their performance and exploring a new class of investors to raise capital for these.

In a communiqué to the heads of public sector banks, the finance ministry said there was a need to tap other sources of capital for RRBs. No fresh proposal of amalgamation of RRBs should be taken up, it added.

Currently, the central and state governments and sponsor banks such as State Bank of India and Punjab National Bank provide capital to RRBs — while the Centre provides 50 per cent, the state government provides 15 per cent and the sponsor bank 35 per cent. While Centre and sponsor banks have been infusing capital, state governments have been found wanting in providing their share.

A Bill to amend the RRB Act is being considered by the parliamentary standing committee on finance. The amendments are aimed at increasing the pool of investors to tap capital for RRBs.

A senior public sector official said now, the focus would be on improving the performance of RRBs, including their profitability. Further amalgamation on this front should happen only after examining the viability of the exercise, the official added.

 

As of March-end, 2011, the total number of RRBs stood at 82; this fell to 64 in March 2013 and 57 in March 2014.

National Bank for Agriculture and Rural Development (Nabard), the regulating body for rural banks, has said agricultural credit disbursement by RRBs has been short of the target. The low disbursal of farm credit by RRBs was due to amalgamation and capital adequacy limitations, as these banks had to maintain a capital adequacy ratio of at least nine per cent, it said, adding RRBs didn’t have any source of capital other than paid-up capital.

RRBs were set up in 1975, to create an alternative channel to the cooperative credit structure and ensure sufficient institutional credit for the rural and agriculture sectors.

RRBs have presence throughout the country. P Chidambaram during his first innings as finance minister under United Progressive Alliance (UPA) took steps including recapitalization, and restructuring to improve the functioning and financial health. It was also meant to attain economies of scale and ensure better managerial control.