Regional Rural Banks losing ground to private banks amid tech challenges

The increasing presence of private sector banks has made the situation more challenging as RRBs fight the battle with outdated tools while other banks have advanced technology and basic infrastructure

Lalit Singh, a farmer in Aligarh, Uttar Pradesh, who was a dedicated customer of a Regional Rural Bank (RRB), recently moved his account to a private sector bank.

“Since the RRB did not offer internet banking, it made things difficult for me. Although I was a long-time customer of the RRB, the facilities are better at other banks,” he explained.

A branch manager from an RRB in western Uttar Pradesh said their sponsor banks have emerged as their primary competition. The increasing presence of private sector banks has made the situation more challenging, as RRBs are left to fight the battle with outdated tools while other banks have advanced resources in terms of technology and basic infrastructure.

"Small finance banks have made the competition tougher," said an RRB executive who requested anonymity.

 

In western Uttar Pradesh, many RRB branches lack security guards despite holding cash reserves of around Rs 10 lakh. Staffed by just a manager and a cashier, these branches often operate in subpar conditions. The cash rooms are poorly maintained, with faded walls and an unpleasant odour. Some branches even have a single room doubling as a washroom. Air conditioning remains unaffordable, with only basic coolers provided.

A recently appointed RRB manager in western UP said customers expect ATM cards and cheque books immediately, which the RRB is struggling to provide promptly. "In private banks, customers receive all the basic tools within hours. In contrast, for us, we are required to visit regional or main offices to collect ATM cards and cheque books, then we hand them over to customers, which takes a lot of time,” he rued.

As a result, many of the customers of the RRB branch have shifted to its sponsor bank, though the branch is suitably located near a Mandi, which sees heavy cash transactions.

Genesis

RRBs were established in September 1975 to provide sufficient banking and credit facilities for agriculture and other rural sectors. These were envisaged as low-cost institutions combining the local feel and familiarity of cooperatives with the professionalism of commercial banks. The first RRB was Prathama Bank, with its head office in Moradabad, Uttar Pradesh. It was sponsored by Syndicate Bank with an authorised capital of Rs 5 crores.

Apart from providing banking facilities to rural and semi-urban areas, RRBs assist in proliferating government schemes and help in the disbursement of wages to workers under the rural job guarantee scheme and distribution of pensions.

As of March 31, 2023, there were 43 RRBs sponsored by 12 Scheduled Commercial Banks, operating 21,995 branches across 26 states and 3 Union Territories (Puducherry, Jammu & Kashmir, and Ladakh). These RRBs manage 30.53 crore deposit accounts and 2.90 crore loan accounts.

All public sector banks, except Punjab & Sind Bank, sponsor one or more RRBs, while J&K Bank is the only private sector bank that sponsors an RRB. Ninety-two per cent of RRB branches are located in rural or semi-urban areas.

The largest public sector lender, State Bank of India (SBI), sponsors the most RRBs (14), followed by Punjab National Bank (9) and Canara Bank (4). Bank of Baroda, Bank of India, and Indian Bank sponsor three each; Central Bank of India sponsors two RRBs, while UCO Bank, J&K Bank, Indian Overseas Bank, Union Bank of India, and Bank of Maharashtra sponsor one each.

As of FY23, there are six loss-making RRBs in the country: Assam Gramin Vikash Bank, Dakshin Bihar Gramin Bank, Ellaquai Dehati Bank, J&K Grameen Bank, Manipur Rural Bank, and Paschim Banga Gramin Bank.

Conversely, 7 RRBs turned profitable in FY 2022-23: Uttar Bihar Gramin Bank, Madhya Pradesh Gramin Bank, Madhyanchal Gramin Bank, Vidarbha Konkan Gramin Bank, Nagaland Rural Bank, Odisha Gramya Bank, and Utkal Grameen Bank.

Digital deficit

RRBs in India are facing significant challenges with technology, which affects their competitiveness with other banks. A 2022 National Bank for Agriculture and Rural Development (NABARD) report highlighted that RRBs need to enhance their loan recovery processes through technology, policy improvements, and best practices.

"As farmers become more digitalised, they look for internet banking. We are serving the third generation of farmers, and the new generation demands digital banking and other advanced services. When we fail to provide these, they move to small finance banks or other Scheduled Commercial Banks. Sustaining our generational customers is a real challenge," another RRB banker said on condition of anonymity.

Atul Kumar Goel, Managing Director of Punjab National Bank, told Business Standard that the state-owned bank is working extensively on upgrading RRBs' technology. “Although our vendor supports them with technology, the costs are borne by the RRBs. We help them reduce costs because the same vendor works on a larger scale for us,” he added.

In 2023, Finance Minister Nirmala Sitharaman emphasized the need for RRBs to upgrade their digital capabilities and increase penetration under the Pradhan Mantri Mudra Yojana. A senior finance ministry official at that time stated banks should map RRBs with Micro, Small, and Medium Enterprise clusters and focus on expanding the network of rural branches in areas identified by the Ministry of MSME.

Way forward

During FY22 and FY23, the government infused Rs 10,890 crore of capital into RRBs. This amount surpassed the total capital infusion of Rs 8,393 crore by all stakeholders from 1975 until FY21.

A senior RRB executive who does not wish to be named said despite recapitalisation efforts, RRBs have struggled to improve due to several factors. “A significant burden of non-performing assets (NPAs) has persisted, leading banks to focus their efforts on reducing these problematic loans. Additionally, issues of mismanagement and a lack of professionalism have impeded progress. Improvements in monitoring are also necessary, although the situation has improved considerably compared to earlier times,” he added.

In June 2024, bank employee associations demanded before Finance Minister Nirmala Sitharaman to merge RRBs with their respective sponsor banks to ensure overall efficiency and viability of the banking sector.

“Competition among public sector banks and RRBs is leading to the wastage of scarce financial resources by offering the same types of services. Despite this, a large chunk of our rural population is being denied the benefits of technology-driven, up-to-date banking products. Merging RRBs with sponsor banks will ensure delivery of a uniform product range to the entire clientele, accelerating the growth of the rural economy and prioritising sector lending, which is crucial for the government's plan for robust Indian economic growth,” said a joint statement addressed to Sitharaman by the All India Bank Officers’ Confederation and the All India Bank Employees Association, representing more than 6 lakh bank employees.

The joint statement further added that merging RRBs with their sponsor banks will update the skills of RRB employees to modern banking practices and effectively address staff shortages in both RRBs and the sponsor banks.

However, R Gandhi, former deputy governor of RBI, said he doesn’t think merging RRBs is a good idea. “The very idea behind RRBs is that they will concentrate more on agriculture and rural finance, whereas SCBs are universal banks and engage in many other activities and maintain high corporate portfolios,” he added.

Krishnan Sankarasubramaniam, former Managing Director and Chief Executive Officer at Punjab & Sind Bank, concurred with Gandhi, saying RRBs need an immediate technological upgrade. “Merging with the parent bank presents a challenge, as the cost of operations would increase substantially, and the RRB's focus on rural areas might diminish. Therefore, it might be better to keep the RRBs as they are and focus on enhancing their technology,” he added.

On August 19, Sitharaman is scheduled to review the performance of RRBs and may come out with a future course of action.

Lalit Singh will be keenly watching.

AT A GLANCE
 

Inception: RRBs were established in September 1975
 

Purpose: To provide sufficient banking and credit facilities for agriculture and other rural sectors
 

How: Low-cost institutions combining local feel of cooperatives with professionalism of commercial banks
 

Other purposes: Proliferating govt schemes and helping in disbursement of wages to workers under rural job guarantee schemes and distribution of pensions
 

RRB universe: As of March 31, 2023, there are 43 RRBs sponsored by 12 scheduled commercial banks
 

Network: 21,995 branches in 26 states and 3 Union territories; 92% of RRB branches are in rural or semi-urban areas
 

Reach: 305.3 million deposit accounts and 29 million loan accounts
 

Sponsors: All public sector banks, except Punjab & Sind Bank, sponsor one or more RRBs; J&K Bank is the only private sector bank that sponsors an RRB