Related Study on Rural Banking
8 The Performance of Regional Rural Banks (RRBs) in India: Has Past Anything to Suggest for Future?
- Research Officer in the Department of Economic Analysis and Policy, Reserve Bank of India and presently working from the Patna office of the Bank. The views expressed here are of the author and not necessarily of the institution to which he belongs.
- Discussions with Shri S.S.Mishra have been enlightening for the author.The author would like to thank an anonymous referee for valuable suggestions. The Author gratefully acknowledges the encouragement and inspirations of Dr. Narendra Jadhav, Dr. R.K.Pattnaik and Shri S. Ganesh. Biswa Swarup Misra
- Since their inception, regional rural banks (RRBs) have taken deep roots and have become a sort of inseparable part of the rural credit structure in India. The financial viability of the RRBs has, however, been a matter of concern since the 1980s, just five years after their existence. A number of committees have gone into the issue of their financial viability and possible restructuring. This study follows a deductive approach.
- First the extent of the problem of the loss making RRBs has been studied to analyze if the problem is confined to some particular sponsor banks or States. Subsequently, an attempt is made to enquire as to factors that influence the performance of the RRBs and the role-played by the sponsor banks. The empirical analysis has been couched in terms of profit and loss making RRBs for a reasonably long (10-year) period to draw robust policy inferences.
Introduction
Regional Rural Banks have been in existence for around three decades in the Indian financial scene. Inception of regional rural banks (RRBs) can be seen as a unique experiment as well as experience in improving the efficacy of rural credit delivery mechanism in India. With joint share holding by Central Government, the concerned State Government and the sponsoring bank, an effort was made to integrate commercial banking within the broad policy thrust towards social banking keeping in view the local peculiarities. The genesis of the RRBs can be traced to the need for a stronger institutional arrangement for providing rural credit. The Narsimham committee conceptualized the creation of RRBs in 1975 as a new set of regionally oriented rural banks, which would combine the local feel and familiarity of rural problems characteristic of cooperatives with the professionalism and large resource base of commercial banks. Subsequently, the RRBs were set up through the promulgation of RRB Act1 of 1976.
Their equity is held by the Central Government, concerned State Government and the Sponsor Bank in the proportion of 50:15:35. RRBs were supposed to evolve as specialised rural financial institutions for developing the rural economy by providing credit to small and marginal farmers, agricultural laborers, artisans and small Entrepreneurs. Over the years, the RRBs, which are often viewed as the small mans bank, have taken deep roots and have become a sort of inseparable part of the rural credit structure2. They have played a key role in rural institutional financing in terms of geographical coverage, clientele outreach and business volume as also contribution to development of the rural economy3.
A remarkable feature of their performance over the past three decades has been the massive expansion of their retail network in rural areas. From a modest beginning of 6 RRBs with 17 branches covering 12 districts in December 1975, the numbers have grown into 196 RRBs with 14,446 branches working in 518 districts across the country in March 2004. RRBs have a large branch network in the rural area forming around 43 per cent of the total rural branches of commercial banks. The rural orientation of RRBs is formidable with rural and semi urban branches constituting over 97 per cent of their branch network. The growth in the branch network has enabled the RRBs to expand banking activities in the unbanked areas and mobilize rural savings.
The mandate of promoting banking with a rural focus, however, would be an enduring phenomenon only when the financial health of the RRBs is sound. With built-in restrictions4 on their operations, it is common to expect that the financial health of the RRBs itself would be a matter of concern. As regards their financial status, during the year 2003-04, 163 RRBs earned profits amounting to Rs.953 crore while 33 RRBs incurred losses to the tune of Rs.184 crore. Ninety RRBs had accumulated losses as on March 31, 2004. Aggregate accumulated loss of RRBs amounted to Rs. 2,725 crore during the year 2003-04. Of the 90 RRBs having accumulated loss, 53 RRBs had eroded their entire owned funds as also a part of their deposits.
Furthermore, non-performing assets (NPAs) of the RRBs in absolute terms stood at Rs.3, 299 crore as on March 31,2004. The percentage of gross NPAs was 12.6 during the year ending March 31, 2004. While 103 RRBs had gross NPAs less than the national average, 93 had NPAs more than it. Given the multi agency share holding, this study makesan attempt to enquire into such factors that influence the performance of the RRBs and the role played by sponsor bank in a broader scenario. The problem has been approached in a deductive pattern. First, an attempt is made to identify the extent of the problem of loss making RRBs and see if they are confined to some particular sponsor banks or States. If the problem banks and States could be identified that would help in focussing the attention for an enduring solution.
Subsequently, a model-based approach has been pursued to identify the factors that are responsible for the problems faced by the RRBs. This study contributes to the literature on RRBs primarily in two ways. First, the issues concerning RRBs are an area that is less visited empirically (econometrically) compared to the vast literature on commercial banks.
Whatever studies have emerged on the topic, they have primarily relied on exploratory analysis done for a particular year or on a group of RRBs to draw inferences. This kind of an approach has a serious limitation in that the findings are guided by the choice of the year of analysis or the particular RRB(s) in question.
To overcome this problem, one needs to consider, as attempted in this paper, a reasonably long period for analysis where extreme observations would be evened out so that one gets results that are more dependable. This study is an attempt rather than a few RRBs and a ten-year period for empirical analysis so that results are broad based and robust.
Second, given the attention at the policy level to restructure the RRBs, it is necessary that the behavior of RRBs be analyzed separately for the profit and loss making ones, than all RRBs bunched together so that it helps in policy formulation. Such an approach has been followed in this study.The rest of the paper is organised in six segments. Section I provides a brief review of the course for restructuring and financial viability of RRBs suggested by different committees over the years.
Section II reviews briefly the different factors identified in the literature that affects the financial performance of commercial banks and also the extant literature on factors affecting performance of RRBs. A birds eye view of the spatial distribution of the performance of RRBs across the States and sponsor banks is given in section III. The methodology of the empirical analysis is discussed in Section IV. Section V discusses the empirical results.
URL – http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/73534.pdf