50 years of RRBs: A story of reform and transformation in rural India

After consolidation, creating a national rural bank holding company, an apex body to oversee governance, capital support, and technology integration across RRBs can be considered

A set of financial institutions recently celebrated its 50th anniversary, quietly. 

Among them was India’s first regional rural bank (RRB), Prathama Gramin Bank, which was established on October 2, 1975 in Moradabad, Uttar Pradesh. Sponsored by Syndicate Bank (which was merged with Canara Bank in April 2020), its goal was to promote financial inclusion and develop the rural economy by providing credit to small and marginal farmers, rural artisans, agricultural labourers, and small businesses neglected by commercial banks. 

Away from skyscrapers and fintech hubs, this is among the RRBs that have been transforming the lives of millions in India’s hinterland for half a century. 

Born out of the government’s vision to democratise credit and access to banking, RRBs are the unsung heroes of India’s inclusive growth story. Their evolution over the past five decades mirrors the changing face of rural India — from agrarian struggles to digital aspirations. 

However, as India transitions into a digital-first economy, and commercial banks – both public and private sector – penetrate deep into rural areas, the relevance and sustainability of RRBs is in question. 

The story of RRBs began on September 26, 1975, when the Government of India issued an ordinance to establish a new category of banks, catering specifically to the rural economy. The ordinance culminated in the Regional Rural Banks Act, 1976, a landmark legislation that institutionalised rural banking. Prathama Gramin Bank was set up before the Act was passed. The ordinance had paved the way for its birth. 

The first five RRBs were set up in October 1975 to celebrate Mahatma Gandhi’s vision of self-reliant villages. It was the beginning of a hybrid banking model that blended the financial strength of commercial banks with the community roots of cooperative institutions. 

The move followed recommendations from the Narasimham Committee on Rural Credit (1975), which had underscored the need for low-cost, accessible banking in rural India. The first round of bank nationalisation was in 1969, and a massive drive for rural branch expansion followed, but the poorest and most remote regions remained underserved due to high operational costs and cultural barriers. The RRBs were created to fill that void. 

The goal was simple, yet ambitious: To provide low-cost banking in rural and semi-urban areas, particularly in districts underserved by nationalised banks. The employees are recruited locally, which helps these banks address the problem of language and cultural barriers. 

The RRB model is built on a unique tripartite ownership structure: The central government owns 50 per cent; the state governments, 15 per cent; and the sponsor bank, 35 per cent. 

This model was designed to balance accountability, regional representation, and professional management. The sponsor banks provide not only capital but also managerial and technical support — including staff training, audit systems, and access to technology. 

The RRBs initially operated within tightly defined district boundaries. For many rural families, an RRB passbook was their first brush with formal banking. The small blue booklet symbolised dignity, safety, and the promise of credit without exploitation. 

From five in 1975, the number of RRBs touched 196 by 2005, each catering to specific regional needs. However, with their number, their administrative and financial inefficiencies also increased. The challenges ranged from the small scale of operation to overlapping jurisdictions with their sponsor banks, and high non-performing assets (NPAs) due to the limitations of a rural economy reliant on agriculture. 

To address this, there have been rounds of amalgamations and consolidations. In phase one (2006-10), the number of RBBs was less than halved, to 82. Currently, there are 28 RRBs operating across 26 states and two Union territories, following the completion of the fourth phase of amalgamation that began in May 2025. They cover 700 districts with a network of 22,000 branches. Close to 92 per cent of these branches are located in rural and semi-urban areas, managing about 313.3 million deposit accounts and 30.3 million loan accounts. 

I don’t have the latest balance sheet data, but in the 2024 financial year, RRBs recorded the highest-ever net profits – Rs 7,571 crore. All of them were well capitalised; the gross NPAs were 6.15 per cent and net NPAs, 2.4 per cent. 

Nearly 90 per cent of the RRB business originates from rural and semi-urban areas, with agriculture and small enterprises accounting for the bulk of their loan portfolios. Not many RBBs manage to get government deposits or bulk deposits from large corporations. They have to depend on the household savings of rural families. More than 60 per cent of RRBs maintain a credit deposit ratio of above 80 per cent, reflecting how local deposits are recycled into local development. 

RRBs play a critical role in the implementation of major government schemes such as the Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, and MUDRA loans, among others. They have also successfully linked at least 1.57 million self-help groups and financed 165,000 joint liability groups, promoting entrepreneurship and women’s empowerment. 

These programmes have significantly reduced dependence on informal moneylenders for rural folks and empowered women. RRBs offer loans at much cheaper interest rates compared with other banks and non-banking financial companies. They are the foot soldiers of India’s financial inclusion revolution. 

From manual ledgers to biometric banking, RRBs have come a long way, technologically. All RRBs today operate under core banking solution (CBS) and offer NEFT ((National Electronic Funds Transfer), RTGS (Real Time Gross Settlement), and RuPay card services. CBS is a centralised software system that allows banks to manage essential functions, such as account management, transactions, and loans, from a single platform. 

Back in 2009, the KC Chakrabarty Committee on “Recapitalisation of RRBs for improving CRAR (capital to risk weighted assets ratio)” had recommended recapitalisation of 40 of 82 RRBs then to strengthen their capital adequacy ratio to 9 per cent by March 31, 2012. It recommended a recapitalisation of Rs 2,200 crore for 40 RRBs, and the creation of a Rs 100 crore training fund and Rs 700 crore contingency fund — steps that have since improved resilience but not eliminated systemic vulnerabilities. 

The process continued. In March 2020, the Cabinet Committee on Economic Affairs gave its approval to continue with the recapitalisation of RRBs for yet another year beyond FY20. It also approved the utilisation of Rs 670 crore as central government share for the RRB recapitalisation scheme (50 per cent of the total recapitalisation support of Rs 1,340 crore). 

As RRBs turn 50, the road ahead demands structural and strategic innovations. One suggestion worth considering is the creation of a National Rural Bank Holding Company, an apex body to oversee governance, capital support, and technology integration across all RRBs. This could reduce sponsor bank interference and streamline policymaking. 

It’s also time for the RRBs to embrace data analytics, artificial intelligence-driven credit scoring, and digital lending platforms to remain relevant in an increasingly tech-first financial world. Collaborative models with fintechs could help extend microcredit more efficiently. 

But modernisation must not erode the original spirit of these institutions — proximity, empathy, and trust. For millions of rural Indians, the local gramin bank is not just a lender but a lifeline. RRBs are more than financial intermediaries — they are the social and economic heartbeat of rural India. Their journey from a modest beginning in 1975 to a digitally empowered 2025 is a story of resilience, reform, and transformation of rural India. 

PS: This column is taking a Christmas break and will return in January. Merry Christmas and a Happy New Year. 

  The writer, a Consulting Editor of Business Standard, is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in  X: @TamalBandyo