regional rural banks - indian banking law

8/9/2019 Regional Rural Banks - Indian banking law

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Regional Rural Banks

Dr. PrashantS. Desai,Assistant Professor of Law,

NLSIU


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•

Exploitation of Rural people in India such as smalland marginal farmers, landless agricultural laborers,artisans and socially and economically backwardcastes and c lasses, in the name of credit facility by

informal sectors.• Both formal and informal financial institutions and

agencies meet the credit needs of the rural masses

in India.• The informal sector advances loans at very high

rates of interest; the terms and conditions attachedto such loans have given rise to an elaboratestructure of intimidation of both economic and non-economic conditions in the rural population ofIndia.


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• The supply of total formal credit is inadequate andrural credit markets are imperfec t and fragmented.

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The distribution of formal sector credit has beenunequal, particularly with respect to region andclass, caste and gender in the country side.

• The Banking Commission (1972) recommended toestablish an alternative institution for rural credit andultimately Government of India established RRBs asa separate institution basically for rural credit on the

basis of the recommendations of the WorkingGroup under the chairmanship of M. Narashimham.


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• In order to provide access to low-cost bankingfacilities to the poor, the Narashimham Committee(1975) proposed the establishment of a new set of

banks as institutions which “combine the local feeland the familiarity with rural problems which thecooperatives possess and the degree of businessorganization, ability to mobilize deposits, access tocentral money markets and modernized outlookwhich the commercial banks have”.


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• Regional Rural Banks were established under theprovisions of an Ordinance promulgated on the 26 thSeptember 1975 and RRB Act, 1976 with anobjective to ensure sufficient institutional credit foragriculture and other rural sectors.

• The RRBs mobilize financial resources from rural /

semi-rural areas and grant loans & advances mostlyto small and marginal farmers, agricultural labourers& rural artisans.

• The area of operation of RRBs is limited to the areaas notified by Government of India covering one ormore distric ts in the state.


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• Mandates

1. To take banking to the doorsteps of the ruralmasses, particularly in areas without bankingfacilities;

2. To make available cheaper institutional credit tothe weaker sections of society, who were to be theonly c lients of these banks;

3. To mobilize rural savings and canalize them for

supporting productive activities in the rural areas;4. To generate employment opportunities in the rural

areas

5. To bring down the cost of providing c redit in ruralareas.


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• Func tions1. To provide financial facility to small & marginal

farmers, agricultural labourers, co-operative

societies for agricultural purposes or otherpurposes related to agriculture.2. To grant loans and advances to artisans, small

entrepreneurs, persons of small means engaged intrade, commerce etc .

3. To relieve the rural masses from the c lutches ofmoney lenders


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4. To provide easy credit facility to weaker sections ofthe society

5. To establish branches in unbanked rural areas6. To take the banks to the doorsteps of the poorest

people in remote areas

7. To provide banking services to the rural communityat a relatively lower cost by adopting a differentstaffing pattern, wage structure and bankingpolicies.


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• SponsorshipEac h RRB is sponsored by a nationalized bankknown as sponsoring bank which provides all sorts of help to these RRBs. The sponsoring bank will assistthe RRB in its establishment, rec ruitment and trainingof personnel. They may also provide managerial

and financial assistance with mutual agreement


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• Capital ResourcesEach RRB may have an authorized capital of Rs. fivecrore divided into one lakh shares of Rs. 100 eachand issued capital of Rs. 1 crore to improve theirliability.

• Management

The management of each RRB is vested in ninemember BoD, headed by a Chairman. Thechairman is appointed by the C entral Govt. Thechairman is a paid servant of the sponsoring bankwhile the members are honorary.


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Functioning and performance of RRBs

• The KelkarCommittee (1986)• Enhancement of authorized capital of RRBs from Rs.

1 Crore to Rs. 5 Crore and paid-up share capitalfrom Rs. 25 lakhs to Rs. 1 Crore;• Appointment of Chairman of RRBs by the

concerned sponsor bank in consultation withNABARD;

• Provision of assistance to RRBs in greater measureby sponsor banks in training RRB staff & giving

financ ial assistance to RRBs in their first five years oftheir existence;


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• Provision for amalgamation of RRBs in consultationwith all the concerned parties.

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Empowering the sponsor banks to monitor theprogress of RRBs and also to arrange for theirinspection, internal audit etc .

• Though the progress of implementation was tardythe amended Act came into force only by the endof 1988.


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• NABARD (1986)• Published “A study on RRBs viability”, which was

conducted by Agriculture Finance Corporation in1986 on behalf of NABARD.

• The study revealed that viability of RRBs wasessentially dependent upon the fund managementstrategy, margin between resources mobility & theirdeployment & on the control exercised on currentand future costs with advances.

• The proportion of the establishment costs to total

cost and expansion of branches were the criticalfactors, which affected their viability.


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•

Initiatives by NABARD during 1998-99• To undertake quarterly / half yearly reviews of the

RRBs by the sponsor banks coming under their jurisdiction.

• The sponsor have been advised to explore thepossibility of the merger of RRBs coming underthem.

• To evolve an early warning system as part of thesupervisory function of the NABARD, an off-sitesurveillance system has been introduced tosupplement on-site inspection.


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• The appointment & Promotion Rules (1998) havebeen framed by the GOI in consultation withNABARD for the staff of RRBs

• The Kisan Credit Cards have been introduced in theRRBs to facilitate the provision of credit to farmers

• The RRBs have been encouraged to adopt self-helpgroups for canalling c redit to the poor on asustainable basis.


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• The Committee on Financial Systems, 1991(Narasimham Committee) stressed the poorfinancial health of the RRBs to the exclusion of everyother performance indicator.

• The low equity base of these banks didn’t cover forthe loan losses of most RRBs.

• The Committee suggested that the RRBs should bepermitted to engage in all types of banking businessand should not be forced to restrict their operationsto the target groups, a proposal which was readilyaccepted, which marked a major turning point inthe functioning of RRBs.


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• Policy Initiatives during 2010-11• Subsequent to review of the financial status of RRBs

by the Union Finance Minister in August, 2009, it was

felt that a large number of RRBs had a low C apitalto Risk weighted Assets Ratio (CRAR).• A committee was therefore constituted in

September, 2009 under the Chairmanship of Dr K CChakrabarty, Deputy Governor, RBI to analyse thefinancials of the RRBs and to suggest measuresincluding re-capitalisation to bring the CRAR of RRBs

to at least 9% in a sustainable manner by 2012.• The Committee submitted its report in May, 2010.


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• The following points were recommended by thecommittee:

1. RRBs to have CRAR of at least 7% as on 31 March2011 and at least 9% from 31 March 2012 onwards.

recapitalisation requirement of Rs.2,200.00 crore for40 of the 82 RRBs. This amount is to be released in’two instalments in 2010-11 and 2011-12. .

2. The remaining 42 RRBs will not require any capitaland will be able to maintain CRAR of at least 9%on 31 st March 2012 and thereafter on their own.

3. A fund of Rs.100 crore to be set up for training and

capacity building of the RRB staff.


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• The Government of India recently approved therecapitalization of RRBs to improve their CRAR in thefollowing manner:

• Share of Central Government i.e. Rs.1, 100 crore willbe released as per provisions made by theDepartment of Expenditure in 2010-11 and 2011-12.

However, release of Government of India share willbe contingent on proportionate release of StateGovernment and Sponsor Bank share.


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•

A capacity building fund with a corpus of Rs.100crore to be set up by Central Government withNABARD for training and capacity building of theRRB staff in the institution of NABARD and other

reputed institutions.• The functioning of the Fund will be periodically

reviewed by the C entral Government. An Action

Plan will be prepared by NABARD in this regard andsent to Government for approval.• Additional amount of Rs.700 crore as contingency

fund to meet the requirement of the weak RRBs,particularly those in the North Eastern and EasternRegion, the necessary provision will be made in theBudget as and when the need arises.


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Policy Initiatives during 2010-11 [cont’d]

• Regional Rural Bank Service Regulations 2010 issuedby GOI based on the recommendations ofAmaresh Kumar Committee.

• Regional Rural Bank Appointment and PromotionRules 2010 also notified by GOI

• Technology Innovation through Core banking

Solutions (C BS) put on RRBs to provide hassle free &any where banking services to their clients.• Financial inclusion as envisaged by GOI in rural

areas.• Continuance of the interest subvention scheme was

announced in the Union budget 2010-11.


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• Problems (Weakness) of RRBs1. Very limited area of operations2. High risk due to exposure only to the target group3. Public perception that RRBs are poor man’s banks4. Mounting losses due to non-viable level of

operations in branches located at resource-poor

areas.5. Switch over to narrow investment banking as a

turn-over strategy


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• Heavy reliance on sponsor banks for investmentavenues with low returns barring exceptions, step-motherly treatment from sponsor banks

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Chairman of RRBs appointed as BoD by sponsorbanks under the direction of Regional Managers.• Burden of government subsidy schemes and

inadequate knowledge of customers leading to lowquality assets

• Unionized staff with low commitment to profitorientation and functional effic iency

• Inadequate skills in treasury management for profitorientation


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• Inadequate exposure and skills to innovateproducts limiting the lending portfolios

• Inadequate effort to achieve desired levels ofexcellence in staff competence for managing theaffairs and business as an independent entity

• Serious undermining of the Board by compulsions to

look up to sponsor banks, GOI, NABARD and RBI formost decisions

• RRB hampered by an across the board ban on

recruitment of staff.


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•

Recommendations• Government should encourage and support banks

to take appropriate steps in rural development.•

Efforts should be made to ensure that the non-interest cost of credit to small borrowers is kept aslow as possible.

• Policy should be made by govt. for opening morebranches in weaker & remote areas of state.

• Productivity can be improved by controlling thecosts and increasing the income.

• To partic ipation cost, subsidy should be adjustedtowards the end of the transaction for which loanassistance is sanctioned.


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• Govt. should take firm action against the defaultersand shouldn’t make popular announcements likewaiving of loans.

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The RRBs have to make an important change intheir decision making with regard to theirinvestments.

• The RRBs have to be very careful and reduce theoperating expenses, because it has been foundfrom the studies that these expenses haveincreased the total expenditure of the banks.

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The RRBs have to give due preference to the micro-credit scheme and encourage in the formation ofself help group.


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• Cooperative societies may be a llowed to sponsor orco-sponsor with commercial banks in theestablishment of the RRB.

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A uniform pattern of interest rate structure should bedevised for the rural financial agencies.• The RRB must strengthen effective credit

administration by way of credit appraisal,monitoring the progress of loans and their effic ientrecovery.

• The credit policy of the RRB should be based on the

group approach of financing rural activities.• The RRB may relax their procedure for lending and

make them easier for village borrowers.

regional rural banks - indian banking law

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