Regional rural banks may also be allowed to turn into SFBs: SBI Research

Regional Rural Banks (RRBs) should be given the option to graduate into small finance banks (SFBs) in line with cooperative banks or be granted on-tap licenses to become SFBs, State Bank of India (SBI) Research said in its report.

“In keeping with the fast-paced changes in the banking space and to facilitate growth, a scheme for voluntary transition of Urban Co-operative Banks (UCBs) into SFBs was introduced in September 2018. RRBs may also be permitted to graduate into SFB in line with Cooperative banks or granted on-tap license to RRBs to become SFBs”, the report said.

In fact, some of the large RRBs are bigger than the SFBs currently operating in the market. India’s largest RRB in terms of size of business - Baroda UP Bank (Rs 72,015 crore) is bigger than the largest SFB (AU SFB) which has business (deposits + advances) size of Rs 70,588 crore as of March 2021.

The research report is also advocating that there is a need to have uniformity in regulations across RRBs, Co-operative Banks and even public sector banks and several regulations for RRBs need to be updated with changing times. Currently, RRBs are subjected to hybrid regulation: a combination of using specific outcomes to mandate rule-based regulations. “We believe it might thus be better to clearly separate the outcome-based regulation from rule-based regulation”, SBI Research report said.

Currently, there are 43 RRBs as of FY21, sponsored by 12 scheduled commercial banks. They have 21,856 branches catering to 283 million depositors and 26 million borrowers in 26 states and three union territories.

The research report has also suggested that internet banking transactions rights, which has become one of the necessities in today’s day and age, for RRBs should be made ex-ante and not ex-post. Currently, RRBs are granted internet banking rights purely based on maintaining minimum statutory capital to risk weighted assets ratio (CRAR) at > 10 per cent and non-performing assets at <7 per cent.

Further, the business and investment rules of RRBs that were set two and a half decades back, need to be aligned in accordance with best practices and in sync with cooperative banks and even public sector banks, the report said. It has also pitched for bringing RRBs under the fold of the Central Repository of Information on large Credits (CRILIC).

“In December 2019, Urban Co-operative Banks with asset sizes of Rs 500 crore were brought under the framework of CRILC. RRBs have assets of Rs 3.34 trillion as of March, 2021, but are strangely not covered under the fold of CRILC. With a view to strengthening offsite supervision, early recognition of financial distress in large accounts, RRBs may be brought under the fold of CRILC,” the report added.