Regional Rural Banks- A Perspective

Regional Rural Banks- A Perspective

                                                            S. B. Singh

                General Manager, Bank of India  & Chairman Aryavart Bank, Lucknow

 Regional Rural Banks (RRBs) are one of the most important instruments of rural economic growth established through parliamentary enactment known as “Regional Rural Bank Act 1976” though five RRBs were established on 2^nd October, 1975 on the pilot basis under the provisions of the ordinance passed on 26^th September 1975.  RRBs are having presence in remote rural areas having 53 Banks with 21871 branches across India having deposit base of Rs 434,444 lac crores and advance of Rs 261,953 lac crores as on 31-03-2019. The contribution of RRBs in financial inclusion and social security schemes is highly commendable.

Projected Financial Performance

RRBs are facing issues of operational efficiencies reflected in their poor financial ratios. The net profit and loss of all the RRBs put together is loss of Rs 651.73 Crs as on 31-03-2019 which has increased to more than Rs 1100 Crs during the year 2019-20 as per the provisional figure mainly because of provisions for pension liabilities. The situation on profitability front is likely to remain or may deteriorate due to unfunded pension liability which has to be fully provided for by 2022-23 at the rate of 20% on annual basis. The impending wage revision from 01-11-2017 will further add to the woes on the profitability front.  Because of these losses, some of the RRBs have defaulted on their capital requirement leading to highly muted credit growth. The capital infusion provided to RRBs is on the retrospective balance sheet e.g. the Banks, which have defaulted on capital requirement as on 31-03-2020 will be given capital infusion only to the extent of minimum capital requirement as on 31-03-2020 during 2020-21 without any provision for growth capital. This impedes the business growth of the Banks. The thinning of margins is further adding to the pressures on profitability due to increasing competition from private banks, small finance banks and payment banks. The poor financial ratios lead the banks to be classified as “Focus RRBs” by NABARD and “PCA RRBs” by Reserve Bank of India thereby restraining them from concessional refinance and withdrawal of credit guarantee cover by credit guarantee institutions thereby further limiting their growth potential.

The Capital Adequacy Ratio of all RRBs put together was at 11.40% as on 31-03-2019 against 12.40 % as on 31-03-2018 mainly because of partial pension funding. Considering the impact of unfunded pension liability and impending wage settlement, the overall financial performance in terms of operating ratios is likely to deteriorate in foreseeable future of three to four years. To improve the financial performance of the Banks they require huge capital infusion nor only for maintaining minimum capital requirement but also for growth capital.

Long Term Structural Reforms

RRBs have experienced various structural reforms over their existence of slightly more than forty years. The RRBs started with the concept of one district, with local staff and state related salary structure thus having low cost structure with local feel. During these years, the RRBs rose to 196 in number and then started the phase of consolidation bringing the number of RRBs to 53 as on 31-03-2019, which is likely to come down to 38. There have been three rounds of amalgamations in the last fifteen years which has contextually changed the perception of the RRBs. All the core concepts have been bid farewell which were one district operation having changed to multi district and in some cases one RRB for one state, local staff recruitment has been taken over by all India recruitment  in clerical and officers cadre and salary structures have been aligned with public sector banks coupled with pensionary benefits. No doubt these changes in RRB have been necessitated due the changing socio-economic and legal framework of the economy and society. The recent round of amalgamation has started in 2018-19 and is likely to be completed during 2020-21, which will make the Banks big enough to survive at their own provided some structural and managerial decisions are being taken by the stakeholders and regulators:

I-                   Level playing field should be ensured and RRBs must be aligned to changes of financial sector. RRBs are still on Basel I whereas industry is talking in terms of Basel 3.5 and 4. Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) must draw the clear road map for this imminent change, which will significantly increase the capital requirement of these RRBs.

II-                Top management of the Bank (Chairman and General Managers) are from sponsor Banks. Time has come for market recruitment for the post of Chairman and elevation of General Manager from local RRB cadres. Sponsor Banks can exercise control through Board Nominated Directors. This will provided much needed functional autonomy to RRBs.

III-              IT infrastructure have to be improved though some south based banks have their robust IT systems but most of the RRBs are suffering on this count. Most of the RRBs are having sponsored bank managed Data Centres. This may be aligned on the lines of Cooperative Banks where same system is being shared by cooperatives of the state which may be managed by NABARD and /or any other agency on sharing basis for all the RRBs across the country. Another alternative is compulsion on sponsor bank for simultaneous implementation of IT package in RRBs in line with sponsor Banks as most of the RRBs don’t have mobile, internet or point of sale facilities even in this technology driven era and are denting the business of RRBs against the much sought after government agenda of increasing digital payments. Most of the RRBs are not having even Anti Money Laundering Software and CKYC which was mandated by the regulators long back.

IV-             RRBs should be provided with repo and reverse repo facility which will improve their fund management and yield in a significant manner otherwise these RRBs are adopting fixed deposit route to manage their liquidity, which is costly in terms of revenue.

V-                RRBs are experiencing multiple controllers and regulators which must be rationalized.

VI-             For operational purposed RRB may be classified as Small Finance Banks as there are significant gaps in regulatory communications on RRBs. RBI has not issued updated Master Circulars / Directions despite regular follow up by RRBs and NABARD during half yearly review which is represented by RBI also. We are still receiving decade old reference of RBI circular whereas entire top management of the RRB is changed in three years on average, which is on deputation.

The above policy initiatives may lead to strengthening of the RRBs in years to come.

Legislative and Administrative Requirement

The restructuring and amalgamation exercise of the RRBs, which has happened during the last fifteen years, have been undertaken through administrative decisions by Department of Financial Services, Ministry of Finance in consultation with the State Governments and the Sponsor Banks. With proposed 38 RRBs after the current round of amalgamation, these banks may witness one more round of amalgamation for making these RRBs national in character by merging all RRBs of the same sponsored Bank in one single RRB, which will significantly reduce the number of RRBs further with increased operational area and make the RRBs bigger in size and economically viable. This change may require legislative approval as this will change the basis fabric of RRB Act. The current round of amalgamation is likely to be completed in 2020-21. The suggested time line for sponsor bank wise merger can be between 2021-22 and 2022-23, the sooner the better. The second alternative is state wise merger of the RRBs with each state having one RRB which has happened in some of the sates to provide uniformity. The merger with sponsor Bank can also be thought of as the third alternate but it will trigger closer of various branches in the name of rationalization as has been experienced in the case of merger of public sector banks and will be detrimental to the rural and agri lending.

To conclude, it is high time for the organizational, operational and managerial restructuring of the RRBs otherwise they may become like the Cooperative Banks, which were controlling the majority agri based rural lending business across India till eighties or early nineties of the last century and are now struggling for their survival barring few as timely action could not be initiated for addressing the problem of their decreasing share in agriculture lending. The competition in rural financial landscape is continuously intensifying with increasing expansion of lending and deposit taking non-banking financial companies, micro finance institutions, small finance banks and payment banks which has further fueled by increasing orientation of public and private sector banks towards rural lending due to focused attention of governments for rural development through doubling of farmers income by 2022-23. Therefore it is high time to chart a clear road map for the Regional Rural Banks for their long term efficient contribution to the rural and agriculture sector of the economy in the national interest.  

(The view expressed are personal view of the writer.)