Notification on One State, One RRB likely next week, says M Nagaraju

Corporate bonds face challenges in attracting subscriptions, especially if they have lower credit ratings, said DFS secy

Finance Minister Nirmala Sitharaman announced a host of financial sector reforms in the 2025-26 Budget. M NAGARAJU, secretary in the Department of Financial Services, elaborates on the thinking behind the proposed reforms in an interview with Harsh Kumar and Asit Ranjan Mishra in New Delhi. Edited excerpts:

 

Amongst the various announcements in the Budget related to your sector, which do you consider the most significant? 

I can’t say that one initiative is more important than another, as they all hold significance, which is why they were announced by the finance minister. However, if I had to highlight one with considerable impact, it would be foreign direct investment in the insurance sector. This move is likely to have a substantial effect on the industry.

 

What is the current status of the ‘One State, One RRB’ initiative, and when can we expect it to be completed? 

We will issue a notification on this shortly, likely by next week. Each state will have one regional rural bank (RRB) established. Regarding Goa, since it currently does not have an RRB, we may consider opening one. If they decide to establish it, we will explore the possibilities.

 

However, if they already have all the nationalised banks, we need to evaluate the necessity of an RRB in that context.

 

What is the intention behind the partial credit enhancement facility for corporate bonds announced in the Budget? 

Corporate bonds face challenges in attracting subscriptions, especially if they have lower credit ratings. When bonds are backed by a government institution like the National Bank for Financing Infrastructure and Development, the cost of raising funds decreases considerably, leading to higher ratings and increased investor confidence. This, in turn, enhances subscription levels.

 

Our goal is to deepen the corporate bond market, which has been a focus for the past 20 years. While we’ve discussed this issue extensively, progress has been limited. However, this initiative will directly impact the corporate bond market.

 

The finance minister also proposed a Grameen credit score by public sector banks.

It’s crucial to address the challenges faced by farmers, especially women in rural areas when it comes to accessing financial services. Many of them lack a formal credit history, which makes it difficult for them to secure loans from banks. This is a major issue, as I’ve heard from several farmers who are frustrated by their inability to access credit due to a lack of presence in the existing financial system.

 

To tackle this problem, we need to design a credit scoring system specifically tailored for these communities. This new score should consider the unique circumstances and financial behaviour of rural residents, rather than using the standard metrics that don’t reflect their reality. It’s essential to work with companies that understand these nuances and can help create a more inclusive financial environment for farmers. This way, we can empower them to access the resources they need to thrive.

 

Will the enhanced Kisan Credit Card (KCC) limit worsen the asset quality of banks? 

Not at all. The KCC will not impose any burden. Of the total 77.2 million KCC accounts, only about 8 million will be impacted, specifically those with borrowings of 300,000 and above. Most of these borrowers have a strong track record of repayment efficiency, so there will be no burden on the banks.

 

The government is emphasising credit for micro, small and medium enterprises (MSMEs). How confident are you about the recovery rates of such schemes? Is non-performing assets a worry for such loans? 

We recognise the vital role that MSMEs play in the country — not only in terms of employment, which is crucial but also in contributing significantly to gross domestic product and exports.

 

Recently, we issued guidelines for the virtual credit guarantee scheme, allowing MSMEs to borrow up to Rs 100 crore for working capital and new machinery. We also plan to launch another credit guarantee scheme for MSMEs soon.

 

We are confident that MSMEs will be able to borrow more after being covered by these guarantees, ensuring that banks will not incur losses or face concerns regarding delays or non-payment.

 

How confident is the government about the deposit-credit ratio for public sector banks? 

Banks lend based on their deposit mobilisation, which is a core objective of the banking industry. If banks do not meet their deposit targets, they have alternative options for raising funds to support their growth plans. We have advised banks to utilise all available resources to mobilise more deposits. Recently, we have observed a slight uptick in bank deposits.

 

What’s the expansion plan for India Post Payments Bank, which was announced in the Budget? 

The postal department has plans to expand its network so that postmen can provide additional banking services. Currently, they can only receive funds, but they aim to broaden their offerings. While I don't have specific details on the plan, it is clear that expansion is a priority.

 

What is the purpose of the proposal to establish a forum for regulatory coordination and development of pension products?

Currently, the various functional partners are managed by different agencies, and there is no common platform for them to coordinate their actions, share insights, or learn from one another. This is the purpose of the forum we aim to establish.