Regional Rural Banks– Some Reflections

                                    Regional Rural Banks– Some Reflections                             

The landscape of Regional Rural Banks (RRBs) has undergone transformation in their history of forty five plus years, which were first established in 1975 as joint venture of the Government of India, State Governments and Sponsor Banks. These banks were primarily meant for serving the unbanked semi-urban, rural, tribal and hilly areas of the country with focus on agriculture lending. This was the phase of green revolution and Indian agriculture was becoming capital intensive due to use of high yielding variety seeds, chemical fertilizers and farm mechanization. These bank flourished in their first phase of thirty years expanding the branch and bank network having network of 14,527 branches and 196 Banks in 2004. This rapid expansion led to increased establishment costs by way of increased employee strength and increase in salaries due to pay parity with public sector banks. The vitiated recovery culture due to natural or otherwise calamities, and various debt waiver promises impacted the financial health of the RRBs adversely. This led to the consolidation phase of the RRBs from 2005-2020.

RRBs strength has come down from 196 in 2004 to 43 in 2020. These RRBs have become a major force of financial intermediation in rural, tribal and hilly areas of the counties serving as the instruments of socio-economic change. As on 31-03-2022, there are 43 RRBs with a branch network of close to twenty two thousand with ninety five thousand plus employee base handling deposits and advances of Rs 9.25 Lakh Crores. These RRBs have collectively posted net profit of Rs 3,219 Crores in 2021-22 with betterment of financial ratios.

Let’s now analyze the present challenges of the RRBs:

I-                   With more than forty five years of existence, the major issue with RRBs is the outsourced management from sponsor bank in the form of chairmen and general managers.

II-                 Limited career progression of RRB employees, which is limited to the Assistant General Manager level resulting into top level managerial vacuum.

III-              Poor capital adequacy of the RRBs as these banks are still following BASEL I norms of provisioning.

IV-              Higher risk weight for retail loans upto Rs 7.5 Crores in comparison to public sector banks (PSBs) and private sector banks.

V-                Rationalization of priority sector targets for RRBs, which is presently 75% of adjusted net bank credit.

VI-              Assimilative issues in RRBs after amalgamations.

Various options have been floated by various stakeholders for strengthening of the RRBs from the organizational perspective, which include:

I-                   Appointment of the Chairman of the RRB by Financial Services Institutions Bureau in the pay scales of Executive Director of PSBs where business mix is more than twenty five thousand crores of rupees and upto fifty thousand crores of rupees and in the pay scale of Managing Director & Chief Executive Director where business is more than fifty thousand crores of rupees.

II-                 Elevation of RRB employees to the cadre of General Manager in gradual manner. Assistant General Manager cadre was introduced in RRBs on Mitra Committee recommendation in 2012-13. Now it is high time to upgrade it to the level of Deputy General Manager on priority to improve internal managerial capabilities of RRBs.

III-               Phased migration of RRBs to upgraded versions of Basel to improve the capital base of these banks as RRBs have now become the important stakeholder in financial landscape of the country.

IV-              Rationalization of risk weights of loan ticket size upto Rs 7.50 Crores in line with PSBs.

V-                RRBs were meant primarily for lending to priority sector, but priority sector targets must be rationalized for better profitability of the banks.

RRB Consolidation

Any reform agenda for RRBs, normally starts with consolidation. The consolidation agenda normally falls under following options:

i-                   Merger of RRBs with sponsor Banks is the most discussed option. From the operational perspective as Chairman of one of the RRBs, I don’t find much merit in this alternative as there is overlapping of branches on same centres of RRBs and their sponsor banks, which will ultimately lead to reduction in branches. With increasing penetration of technology has reduced the dependence on physical branches, but rural, tribal, hilly and semi-urban areas, which are the catchment of RRBs, still depend heavily on physical branches. The majority clientele of these RRBs is not yet matured for digital banking.

ii-                 Formation of National Rural Bank of India is floated as second option, merging all the RRBs across the country. We have seen mergers in the recent past of two to three banks leading to various business, financial and human resource issues, which are lingering for the last couple of years. The merger of these banks into national bank may experience following challenges:

A-    Managerial Issue: The merger of these banks will pose serious issues as these employees are serving in limited geographies. Exposing them to all India   exposure will have serious challenges in terms of human resource capabilities, which at the top level are so far outsourced from sponsor banks.

B-    Technological Issues: Different banks are in different stages of technological upgradation with differentiated products and accounting systems. This will be a huge challenge from technological perspective.

C-    Cultural Assimilation:  Cultural assimilation is one of the major issues in such large and complex organizations, which have been in independent existence for the last forty to forty five years. These cultural assimilative issues have seen major business dent, if not handled properly.

Considering the issues and intricacies involved, I propose as under:

a-     Merger of RRBs within the State: Majority of states have one RRB, but still a couple of states are having more than one RRB and Andhra Pradesh, West Bengal and Uttar Pradesh having three RRBs. Let’s start by merging the RRBs within the state on the concept of one state one RRB as step one.

b-    Merger of RRBs of sponsor Bank: The second step should be merger of RRBs of the sponsored banks across the states, which will consolidate the RRBs in twelve as there are twelve sponsor banks.

c-     Merger of North Eastern Regions: Seven RRBs of north east are having deposit and advances business of close of forty thousand crores, these RRBs are sponsored by only two sponsor banks- State Bank of India and Punjab National Bank. State Bank has sponsored RRBs of Arunachal Pradesh, Meghalaya, Mizoram and Nagaland whereas Assam, Manipur and Tripura are sponsored by Punjab National Bank. Inter-state RRB merger can be piloted from these states.

Once the Banks achieve maturity in times to come, further view may be taken on the experience gained.  

S.B.Singh

Chief General Manager, Bank of India

(The views of the author are personal)