Road ahead for RRBs: Why consolidation is key to improving rural banking

All stakeholders in RRBs must aim to improve their efficiency and competitiveness. Smaller, loss-making banks should be allowed to be subsumed by sponsor banks or any other commercial bank

First batch of Regional Rural Banks (RRBs) were established in 1975 following the recommendations of a working group. The idea was to establish regionally focused banks, familiar with local issues, to extend banking services to rural areas. RRBs are owned jointly by the Government of India, the state government concerned, and the sponsoring commercial bank with an equity holding of 50, 15 and 35 per cent, respectively. While the Reserve Bank of India (RBI) regulates RRBs, the National Bank for Agriculture and Rural Development (Nabard) supervises them. As reported by this newspaper last week, the Union government is contemplating consolidation among RRBs. It is likely to move to the “One State, One RRB” model, which will reduce the number of RRBs from 43 to about 30. The objective is to improve efficiency in RRBs and avoid competition with the sponsor bank.

While there is indeed a need to improve the efficiency of the RRBs, they are unlikely to pose big competition to their sponsor banks or any other bank because of their limited size and focus. According to available numbers, the consolidated balance sheet of the 43 RRBs was worth about Rs 7.7 trillion as of March 2023. For comparison, the balance sheet of State Bank of India at the end of last financial year was worth over Rs 61 trillion. The role of RRBs in the agricultural sector has also remained fairly limited despite over 90 per cent of their branches being located in rural areas. The RBI data, for instance, shows the share of RRBs in the flow of credit to the agricultural sector is just 11-12 per cent. Over 75 per cent of agricultural credit is provided by scheduled commercial banks. In terms of operations, the aggregate profits of the RRBs have improved but the loss-making ones have accumulated losses of over Rs 9,800 crore. RRBs were given recapitalisation assistance worth Rs 10,890 crore in 2021-22 and 2022-23, and that was higher than the capital infused by all stakeholders over the last 45 years. Clearly, better availability of capital over the years would have helped RRBs grow and serve the purpose for which they were established. However, despite the capital infusion, nine RRBs didn’t meet the minimum capital requirements at the end of March 2023. The number was 16 in 2020-21.

Further, things have changed significantly over the years and full-service commercial banks are now in a much better position to provide banking services even in rural areas. Therefore, the government’s consolidation process should also look at the possibility of closing the RRBs that have been in losses. The assets and human resources can be absorbed by the sponsor banks. In fact, with a smaller scale and limited investment in technology, it will become increasingly difficult for RRBs to compete with commercial banks over the long run. With their large balance sheets and profits, some commercial banks are making significant investment in technology to enhance the customer experience. With the use of the Unified Lending Interface, for example, commercial banks will be in a much better position to extend small-sized loans in rural areas. Some non-banking financial companies are also performing well in various segments, such as financing farm equipment, in rural India. Thus, all stakeholders in RRBs must aim to improve the efficiency and competitiveness of RRBs with adequate capital. Smaller and loss-making banks should be allowed to be subsumed by sponsor banks or any other commercial bank.