Strengthening rural economy via revamped regional rural banks

The significance of a robust and diverse rural economy is noteworthy in a country like India. However, often highlighted, the gap between financial institutions and the local individuals in an economy can often impede the country's socio-economic development. This is mainly a challenge in rural and semi-urban regions in the country, where the trust in financial services is often suboptimal. Under this context, focused region banks in rural areas have long existed to bridge such gaps. These are referred to as Regional Rural Banks (RRBs).

Regional Rural Banks have been around in the Indian financial landscape for over three decades. The establishment of such regional rural banks can be viewed as a one-of-a-kind experiment and experience in increasing the efficacy of India's rural credit delivery system. With the Central Government, the concerned State Government, and the sponsoring bank all owning joint shares, an effort was made to incorporate commercial banking into the broader policy thrust toward social banking while considering regional differences in various parts of the country. The necessity for a more robust institutional system for providing rural credit led to the formation of the RRBs.

The Narsimham committee conceived RRBs in 1975 as a new set of regionally centred rural banks that would combine the local feel and experience with pastoral difficulties that cooperatives have with commercial banks' professionalism and broad resource base. Following that, the RRBs were established under the RRB Act of 1976. The Sponsor Bank, the Central Government, and the relevant State Government own 50:15:35 of their equity. It was envisaged that RRBs would be instrumental in developing into professional rural financial institutions that provide financial assistance to small scale farmers, agricultural labour, artisans, and other entrepreneurs to promote the rural economy.

In terms of geographic coverage, clientele outreach, and business volume, in addition to contributing to the enhancement of the rural economy, these banks have played a vital role in institutionalising financial structure in the country's rural areas. The tremendous expansion of its retail network in rural areas has been an essential element of its performance since its inception. Since their formation, they have further established deep roots and have been an inseparable part of India's rural lending framework. However, since the 1980s, when the RRBs were just five years old, their financial stability has been a source of concern. Several committees have looked into their financial stability and potential reorganisation. Several reforms have been made over the years for better financial outcomes for the underserved individuals aiming to seek financial assistance in the rural parts of the country. These efforts have also led to the establishment of newly formed RRB accounts for direct benefit transfer payments, which have limited business potential but result in high financial costs and a drain on human resources. For government-sponsored enterprises, adequate remuneration for RRBs may be permitted. Pension payments should also be possible through RRBs.

In a recent announcement, the centre underlined a revamp plan for these establishments for more credit infusion and better developmental outcomes for the rural enterprises and entrepreneurs. These include more consolidation, a bourse listing, and addressing critical operational difficulties, including permitting all RRBs to offer internet banking.

At present, there are forty-three RRBs in various states of the country. The revamp plan aims for each state to have its own significant regional rural bank. There is also room for more consolidation and capital raising through the markets. The government is also developing a programme to consolidate regional rural banks (RRBs) into a holding company to be better governed and raise capital from the market.

Furthermore, the plan hints at establishing a standard framework for RRBs to provide internet banking to their consumers. About 19 RRBs currently offer internet banking, while 37 have mobile banking licences. Only RRBs with a minimum statutory capital to risk-weighted assets ratio (CRAR) of greater than 10 per cent are permitted to offer internet banking under current laws. The National Bank will lead this particular aspect of the Agriculture and Rural Development (NABARD) programme.

These focussed policy interventions for the better performance of the can be instrumental in effectively providing financial assistance and banking services relevant in the current times. Providing revamped banking services to rural and semi-urban communities, performing government functions like as paying Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) workers' wages, distributing pensions, providing non-banking services such as lockers, debit and credit cards, mobile banking, internet banking, Unified Payments Interface (UPI) through regional rural banks can contribute extensively in the development of the agricultural sector, incentivising region-focussed employment opportunities, encouraging rural people to save, taking deposits, and putting the money to constructive use. Lastly, creating a vibrant rural economy backed by solid financial institutions can further bolster the country's recovery process from the current shocks and vulnerabilities.

This blog has been co-authored by Bhakti Jain and Srijata Deb.