After consolidation, regional rural banks are helping India's growth story

Lenders play a significant role in assimilating the financially weaker sections of the society

The journey of regional rural banks (RRBs), which started with five of them on October 2, 1975, has been phenomenal. These banks are jointly owned by the Centre, state governments and sponsor banks in the proportion 50 : 15 : 35. The sponsors are state-run, private and cooperative banks; managerial support is provided to RRBs by deputing the chairman and other senior functionaries. These banks have a presence in all states of the country, except Goa, Sikkim and a couple of Union territories.

 

The number of RRBs increased to 196 in the expansion phase, followed by a multi-phased consolidation spread of two decades. With the concept of “One State, One RRB” becoming a reality from May 1 this year, the number of RRBs will come down to 28. They will have a branch network of more than 22,000, which is second only to State Bank of India. But frequent consolidation exercises while imparting agility to these organisations have also created assimilative issues.

 

The Mitra Committee, set up in 2012, brought major changes from the human resources (HR) and organisational perspective. It also provided much needed objectivity and transparency.

 

The Department of Financial Services (DFS) issued guidelines for the selection of RRB chairmen. The DFS and the National Bank for Agriculture and Rural Development have been following up with sponsor banks on the technological upgrade of RRBs so that these are on a par with the latter.

 

RRBs have diversified product offerings, which were once confined to the agrarian customer base. The Reserve Bank of India has provided RRBs access to repos, reverse repos and money markets. With the focus on financial inclusion, these RRBs have played a significant role in assimilating the financially excluded sections into the mainstream of the economy.

 

With the latest round of consolidation of RRBs, they may become the largest banks in some states in terms of branch network with significant increase in their balance sheets. Some of them will be bigger than small finance banks, a few private banks and may even come near the smallest state-run banks in overall business. These changes will open new opportunities and challenges to these new entities.

 

Opportunities

 

• RRBs can become bankers for their respective state governments
• With bigger balance sheets, they have the potential to become universal banks
• Serving their states, they can develop better expertise with local manpower
• The command area of these banks is rural and semi-urban centres, which are the major contributors to India’s growth story
• Consolidation will provide economies of scale and scope, add to their revenues

 

Challenges

 

• Managerial capability is a challenge as the chairman and most general managers are on deputation from sponsor banks
• RRBs are on Basel-I norms, which will be inconsistent with their increasing size and business complexity
• Migration to higher Basel versions will require huge capital requirements
• Poor risk and compliance culture is another concern as is their technological dependence on sponsor banks
• The organisational structure of RRBs requires reconsideration as the business of some banks will more than double

 

RRBs have already seen multiple rounds of consolidation and they have successfully come out of those challenges. India is on the cusp of transformation, from being a developing to a developed economy that will offer tremendous potential to these banks. The command areas of these RRBs are rural and semi-urban centres, which are the epicentres of growth both in terms of employment generation and productivity enhancement. RRBs are poised to unleash a new phase of growth in rural and semi-urban centres of the country.

 

---

The writer is executive director, Indian Bank. Views expressed are personal. The column has been edited for space