The irrelevance of regional rural banks

Scope of their survival is diminishing. Even as the overall business of rural financial institutions has generally been looking up, they are struggling to scale up business volumes

The regional rural banks (RRBs), set up in the mid-1970s to provide financial services to agricultural workers and labourers, have been struggling right from the beginning. Several of them are now facing an existential crisis due to dwindling business and soaring bad assets. Bids made from time to time to prop them up through various means of handholding by the Union and state governments and the sponsoring commercial banks, which jointly own the RRBs, have failed to produce the desired results. Consequently, many of them have either collapsed or got merged with their parent banks. While the number of RRBs has nearly halved — from 82 to 43 — their non-performing assets have more than doubled — from 2.05 per cent to 4.68 per cent — in the past one decade. This, notably, has happened at a time when the overall business of the rural financial institutions has generally been looking up as indicated by the surge in the share of commercial banks in agricultural loans from 65 per cent in 2010-11 to 76 per cent in 2021-22. The volume of the credit disbursed by the RRBs, on the other hand, has shrunk from 13 per cent to 11 per cent during this period.

This, evidently, is an indication of the growing irrelevance of the RRBs, which were conceptualised originally as institutions having the characteristics of cooperatives in terms of familiarity with rural issues and commercial banks in terms of professional functioning and resource mobilisation ability. There has been no dearth of measures taken by the government to make them commercially viable. These included merging some stand-alone RRBs with larger units to cut their overhead costs and scale up the business volumes, and induction of funds to expand their capital base. The latest tranche of over Rs 4,000 crore towards recapitalising the RRBs was released last fiscal year. Though the impact of this measure is yet to be seen, the outlook is far from inspiring. For, some of the basic deficiencies of the RRBs, such as limited business activity, swelling operational costs, and lack of internet banking facilities, remain unaddressed. Most people in rural areas, therefore, prefer to deal with commercial banks. The RRBs have, consequently, been left primarily with the government-sponsored business of servicing the official schemes involving direct benefit transfers.
 

This aside, most of the RRBs are ineligible for being listed on the stock exchanges because they do not meet the required pre-conditions. According to the guidelines, the RRBs need to have earned an operational profit of over Rs 15 crore in three out of the previous five financial years, besides a net worth of at least Rs 300 crore and a capital adequacy ratio of above 9 per cent to qualify for listing on the bourses. What is worse, some of the RRBs, even today, have not fully digitised their operations. Nor have they managed to expand their business operations beyond farm-related activities by reaching out to micro, small and medium enterprises located in the rural belt to offer them banking services. Under the circumstances, the best course for most RRBs is to either merge with their sponsoring banks — which is possible only in the case of economically viable entities — or close down. They have very little space to survive as stand-alone financial enterprises.