JAIPURIA INSTITUTE OF MANAGEMENT, JAIPUR

Growth and Development of Regional Rural Banks:

CASE STUDY of Two Major RRBs

PGDM 2008-10

PROJECT REPORT

Submitted to:
Prof. S. P. Garg

Submitted by:

Swati Saxena

Suniti Badaya

Swapnil Mathur

Index

1
Topic
Page

Introduction of RRBs
3

Developments in RRBs
4-5

List of Amalgamated RRBs

6-8

Case study of two major RRBs

9-13

Recommendation & Suggestion

14-16

Conclusion
17

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Introduction:

Regional Rural Banks were established under the provisions of an Ordinance promulgated on the
26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional
credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural
semi-urban areas and grant loans and advances mostly to small and marginal farmers,
agricultural labourers and rural artisans. The area of operation of RRBs is limited to the area as
notified by GoI covering one or more districts in the State. RRBs are jointly owned by GoI, the
concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State
Cooperative Bank); the issued capital of a RRB is shared by the owners in the proportion of
50%, 15% and 35% respectively.
SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in
13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total
number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking
in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote
rural areas.
Apart from SBI, there are other few banks which functions for the development of the rural areas
in India. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited

The Haryana State Cooperative Apex Bank Ltd. commonly called as HARCOBANK plays a
vital role in rural banking in the economy of Haryana State and has been providing aids and
financing farmers, rural artisans, agricultural labourers, entrepreneurs, etc. in the state and giving
service to its depositors.

NABARD
National Bank for Agriculture and Rural Development (NABARD) is a development bank in the
sector of Regional Rural Banks in India. It provides and regulates credit and gives service for the
promotion and development of rural sectors mainly agriculture, small scale industries, cottage
and village industries, handicrafts. It also finances rural crafts and other allied rural economic
activities to promote integrated rural development. It helps in securing rural prosperity and its
connected matters.

Sindhanur Urban Souharda Co-operative Bank

Sindhanur Urban Souharda Co-operative Bank, popularly known as SUCO BANK is the first of
its kind in rural banks of India. The impressive story of its inception is interesting and inspiring
for all the youth of this country.

United Bank of India

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United Bank of India (UBI) also plays an important role in regional rural banks. It has expanded
its branch network in a big way to actively participate in the developmental of the rural and
semi-urban areas in conformity with the objectives of nationalisation.
Syndicate Bank was firmly rooted in rural India as rural banking and has a clear vision of future
India by understanding the grassroot realities. Its progress has been abreast of the phase of
progressive banking in India especially in rural banks.

Reform Process:

RRBs started their development process on 2nd October 1975 with the formation of a single
bank (Prathama Grameen Bank). As on 31 March 2006, there were 133 RRBs (post-merger)
covering 525 districts with a network of 14,494 branches. RRBs were originally conceived as
low cost institutions having a rural ethos, local feel and pro poor focus. However, within a very
short time, most banks were making losses. The original assumptions as to the low cost nature of
these institutions were belied. When the reform process in the banking sector was initiated,
RRBs were taken up for a close look. The GoI in consultation with RBI and NABARD started
the reform process thru’ a comprehensive package for RRBs including cleansing their balance
sheets and recapitalising them. Extant lending restrictions were removed and space and variety
available for investment of their surplus funds was expanded. Simultaneously, a number of
human resource development and Organisational Development Initiatives (ODI) were taken up
by NABARD with funding support of the Swiss Development Corporation (SDC) and with the
tools of training and exposure visits, ODI, technology support, computerization and use of IT,
system development, etc. for business development and productivity improvement. By end
March 2005, there was a remarkable improvement in the financial performance of RRBs as
compared to the position prevailing in 1994-95. The number of banks reporting profits went up
to 166 of the 196 RRBs. As on 31 March 2006, of the total 133 RRBs (post merger), 111 posted
profits and 75 of these RRBs were sustainably viable organisations having no accumulated losses
as also posting current profits. GoI initiated the process of structural consolidation of RRBs by
amalgamating RRBs sponsored by the same bank within a State as per the recommendations of
the Vyas Committee (2004). The amalgamated RRBs were expected to provide better customer
service due to better infrastructure, computerization of branches, pooling of experienced work
force, common publicity / marketing efforts, etc. and also derive the benefits of a large area of
operation, enhanced credit exposure limits and more diverse banking activities. As a result of the
amalgamation, the number of RRBs was reduced from 196 to 133 as on 31 March, 2006 and to
96 as on 30 April 2007. Thus, under the amalgamation process, 145 RRBs have been
amalgamated to form 45 new RRBs.

District Coverage
RRBs covered 525 out of 605 districts as on 31 March 2006. After amalgamation, RRBs have
become quite large covering most parts of the State in many cases. Assam Gramin Vikas Bank,
an amalgamated RRB, covers 25 districts, the highest in the country, while five other
amalgamated RRBs cover 10 or more districts each. However, 40 RRBs covered two districts
and 16 RRBs covered a single district each in 2005-06. Increased coverage of districts by RRBs
makes them an important segment of the Rural Financial Institutions (RFI) for financial
inclusion.

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Branch Network
The number of branches of RRBs increased to 14,494 as on 31 March 2006 from 13,920
branches as on 31 March 1989. The network of the 45 amalgamated RRBs (as on April 2007)
was quite large and diverse varying from 85 to 680 branches. The Uttar Bihar KGB, an
amalgamated RRB, has 680 branches, followed by Baroda Eastern UPGB with 539 branches.
The branch network of stand-alone RRBs varied between 8 and 242 as on 31 March 2006.

RRB's Potential Role in Financial Inclusion

Post-merger RRBs represent a powerful instrument for financial inclusion. Their outreach vis-à-
vis other scheduled commercial banks particularly in regions and across population groups
facing the brunt of financial exclusion is impressive, as observed from an analysis of Basic
Statistical Returns of the RBI and indicated in the following paragraphs. With merger infusing
the much needed financial strength in RRBs coupled with the local feel and familiarity they
command, RRBs are in a unique position to play a decisive role in financial inclusion.

RRBs as Self Help Promotion Institutions (SHPI)

RRBs have not only provided financial services to the SHG-Bank Linkage Programme, but have
also played a significant role as SHPIs. As many as 104 RRBs (31 March 2006) are also
functioning as SHPIs with grant assistance from NABARD. Non-availability of good NGOs is a
matter of concern especially in North-Eastern, Central and Eastern Regions. RRBs can play a
vital role as SHPIs in such areas. The foregoing paragraphs conclusively indicate that RRBs are
well positioned to play a major role in financial inclusion particularly in areas / regions with high
rates of financial exclusion. RRBs were originally created to cater to neglected sections / areas as
they were expected to have sound financial management combined with local feel and
familiarity. With the amalgamation of RRBs, they have acquired the critical mass in terms of
financial strength to widen and deepen their outreach. With the requisite strength having been
developed, RRBs are the best suited vehicles to widen and deepen the process of financial
inclusion. However, utmost care must be taken to ensure that in the process of fulfilling the
socio-economic objective of financial inclusion, RRBs' do not again fall into the vicious circle of
deteriorating financial performance and deviation from their mandate. RRBs may be provided
adequate promotional and developmental assistance to contribute substantially to financial
inclusion in a way that the business generated out of inclusion efforts add positively to their
performance.

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LIST OF REGIONAL RURAL BANKS

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TWO MAJOR REGIONAL RURAL BANKS ARE:

1. ANDHRA PRAGATI GRAMIN BANK (SPONSORED BY SYNDICATE BANK)

2. ASSAM GRAMIN VIKASH BANK (SPONSORED BY UNITED BANK OF
INDIA)

ANDHRA PRAGATI GRAMIN BANK:

Scheduled Bank Established under Regional Rural Bank Act, 1976; Sponsored by
Syndicate Bank, Owned by Government of India, Government of Andhra Pradesh And
Syndicate Bank. Andhra Pragathi Grameena Bank was established on 1st June, 2006 after
amalgamation of 3 RRBs namely Rayalaseema Grameena Bank (established on 06.08.1976),
Sree Anantha Grameena Bank (established on 01.11.1979) and Pinakini Grameena Bank
(established on 11.6.1982). These Regional Rural Banks were established under the provisions of
RRB Act, 1976 and formed as a new entity called Andhra Pragathi Grameena Bank with its
Head Office at Kadapa. The bank is operating in Kadapa, Anantapur, Kurnool, Nellore and
Prakasam districts of Andhra Pradesh and having Regional Offices in each District Head
Quarters. The bank is catering to the needs of rural poor covering Agriculture, Small Industries,
Village Artisans, Small business besides catering to the needs of Non Priority sector also.
The Bank is having a total business of Rs. 6482.43 crores as on 30.09.2009. The bank is assisting
the SHGs in a massive way and financed to more than 97907 SHGs with outstanding SHG
advances of Rs. 693.23 crores. The bank is progressing with all-round development and
introducing new products to cater the needs of the people in its service area. The Bank is
improving customer service by computerising all its branches. The bank has been propagating
innovations in Rural Banking and also has been receptive to new ideas. The Government of
Andhra Pradesh awarded 'BESTBANK’ award on 17.1.07.

The paid up capital of the bank is rs. 300 lakhs, contributed by the government of India, sponsor
bank (syndicate bank), and the government of Andhra Pradesh in the ratio of 50:35:15
respectively. As a part of restructuring process of RRBs, an additional share capital of
Rs.3934.26 lakhs was infused by the shareholders in the ratio mentioned above.

BUSINESS HIGHLIGHTS FOR THE HALF YEAR 2009-10

1. Andhra Pragathi Grameena Bank occupied No.1 position among 5 RRBs in Andhra Pradesh
with 360 branches in 5 districts. VIZ., Kadapa, Anantapur, Kurnool, Nellore and Prakasham
districts. The net profit of the Bank for the half year ended 30.09.09 is Rs. 99.31 crores.

2. Total business crossed Rs.6482.43 crores.

3. Deposits crossed Rs. 3037.71 crores. The average deposits of the Bank increased by Rs. 425
crore with a growth rate of 18.72% over the previous year.

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4. Advances crossed Rs. 3278.88 crores. The average advances increased by Rs. 322.00 crore
with a growth rate of 12.70% over the previous year.

5. Bank has customer base with 32.03 lakhs deposit accounts and 9.98 lakhs borrowal accounts.

6. Priority sector advances reached to a level of Rs.2811.48 crores, constituting 85.75% of total
advances. Agriculture advances touched a level of Rs.2505.24 crore, constituting 76.41% of
Priority Sector advances.

7. 399312 Kisan Credit Card accounts are outstanding with a loan amount of Rs.1247.71 crore.

8. Actively participated in the scheme of achieving 100% Financial Inclusion in all the 5 districts
– Kadapa, Kurnool, Anantapur, Nellore and Prakasam.

9. Bank has computerized all its 360 branches with Total Branch Mechanisation and 98% of its
business is computerized.

The highest number of 6.21 lakh Pragathi Janatha Zero Balance SB accounts (No-Frill accounts),
are opened under total Financial Inclusion.

97907 SHGs loan accounts are outstanding with loan amount of Rs.693.23 crores. Provided
additional financial assistance to the SHGs under the special Dairy Development Project.

1. 307 Farmers Clubs (including 45 Women Farmers’ Clubs) are functioning. During the year 39
new Farmer Clubs are opened.

2. Per branch business and Per-employee business stood at Rs. 18.05 crores and Rs. 3.51 crores
respectively.

3. Opened 4 new branches by upgrading the extension counters during the half year.

FUTURE PLANS

The Bank is aiming to cross the following mile-stones in the present year (2009-10).

1. Achieve a business level of Rs.7500 crores.

2. Planning to open 10 more branches during the current year in the in the area of operation of
the bank in tune with the policy of Govt. of India.

3. Aiming to convert to CBS platform from TBM for online facility and also for introduction of
ATMs to provide the best customer service.

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4. Extending FCNR (B) facility to the customers under AD-ii category.

5. Planning to enter into Government Agency transactions during the current financial year.

ASSAM GRAMIN VIKASH BANK:

Assam Gramin Vikash Bank was formally launched on the 16th of January 2006. It is an
amalgamation of Pragjyotish Gaonlia Bank, Lakhimi Gaonlia Bank, Cachar Gramin Bank and
Subansiri Gaonlia Bank, all sponsored by United Bank of India.with its Head Office at
Guwahati. The Bank covers 25 out of 27 districts of the State through its strong network of 355
branches. While AGVB’s genesis has its roots in the interest of the customers, stakeholders and
the staff, the broader objectives of the amalgamation are:

» Better customer service from better infrastructure, branch computerization, pool of

experienced work force, unified publicity and marketing efforts.
» Reaping economies of scale with larger area of operation, enhanced credit exposer limits.
» Opportunities for diverse banking activities, leading to higher business growth.

The Gramin Vikash Bank is a multidimensional financial institution with an undiluted

commitment to rural credit dispensation. As the largest scheduled Commercial Bank in
Assam, we have largest network of branches traversing the entire state of Assam.

Looking back at the post amalgamation period, it is noteworthy that the metamorphosis of the
RRBs with different cultures and practices, into a single large entity with shared culture has been
extremely smooth. The advent of AGVB had a positive impact, particularly in the areas of
Business growth and operational matters.

REGULAR SCHEMES:

Savings Bank Account Universally popular and multipurpose.

Recurring Deposit Account Planned savings for future expenses.
Current Deposit Account Facilitates smooth business transactions.
Fixed Deposit Account Term deposit for uniform growth with monthly income
option.
Basic Savings Bank Account Zero Balance A/c for the underprivileged section of the
society.

SPECIAL (CUSTOMISED) SCHEMES:

Lakhpati Deposit Scheme : Become a Lakhpati at your choice by depositing a small fixed sum
every month for a pre determined period ranging from 01 to 10 years. Interest at Term Deposit
rates. Loan facility available.

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Re-investment Plan Certificate : High Yielding Term Deposit. Park your surplus fund to reap
the benefit of quarterly compounded interest. Loan facility available. Investment option from 01
to 10 years.

Asomi Siddhidata Scheme : A combination of Term Deposit with a built in Over Draft facility.
Avail cash against your Term Deposit by simply writing a cheque. Automatic renewable.

Asomi Flexi Deposit Scheme: Recurring deposit with flexibility in amount of monthly
installment. A monthly Deposit account which empowers the depositor to determine the amount
of monthly installment to be deposited in any month. Loan facility available.

Asomi Tax Savers Term Deposit Scheme: Investment in the scheme enables the depositor for
exemption under section 80C of the Income Tax Act, 1961.Deposit Tenure 5 to 10 years. Lock in
period 05 years.

SUCCESS STORY:
INNOVATIVE SCHEME FOR PISCICULTURE - FINANCED BY LAKHIMI GAONLIA
BANK:

Assam is the land of natural resources. There are many type of water-bodies like Beels (natural
water areas) and ponds throughout the state but there has been no concerted effort for
pisciculture in a scientific manner. The demand for fish can not be met with the meager quantity
produced in the State. As a result, the State has to import fish from Andhra Pradesh siphoning
out a sizeable amount from the State. To contribute towards meeting the deficit in fish supply by
way of producing fish locally, the Bank has taken a special plan to provide financial support to
the entrepreneurs to produce fish on commercial basis.

DAIRY DEVELOPMENT WITH VENTURE CAPITAL FUND - FINANCED BY

LAKHIMI GAONLIA BANK:

There is a Dairy Development Society namely Kamdhenu Dugdha Unnayan Samity having 60
members with 2-3 cross bred cows. As the members are unable to keep more cows of their own
the Bank had approached the Society and decided to finance the members to purchase more
cows. To create awareness among the members the bank organized two awareness camps in the
last part of 2005 with the help of NABARD. Before bank finance the average daily milk
production was 500 litres and after completion of the project daily production will be 1500 to
2000 litres as estimated. If this production is continued throughout the year the business
community in particular and the people in general will not feel the shortage of milk any longer.

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FINANCING HEALTH CARE UNITS BY - LAKHIMI GAONLIA BANK:

Bank identified some potential entrepreneurs who would establish modern health care units at
Jorhat and financed three such units so far through Jorhat branch:

1. Cataract & IOL Hospital Pvt. Ltd- Unit Chandra Prova Eye Hospital, Jorhat:

2. Sanjivani Hospital, Jorhat:

3. J.K.Bora Institute of Health Care & Research:

JOINT LIABILITY GROUP FINANCING BY - LAKHIMI GAONLIA BANK

The village Tengani, about 30 KMs away from District Head Quarter Town Golaghat, is situated
inside the Nambar Reserve Forest. There is no all weather roads or railway communication from
the village to any nearby towns or market place. Jamuguri Branch of Lakhimi Gaonlia Bank, is
located at a distance of 7 kms. away from the village. In the month of May, 2004, the President
and the Secretary of the Village Unnanyan Committee came to the said Branch to enquire about
loan facility for their members. It is worthwhile to mention that they could not be accommodated
with any Crop Loan or Kisan Credit Card since they did not posses ownership or any right as
lessee or share copper on the land they cultivate. Therefore, it was decided to accommodate their
need in alternative way by forming Joint Liability Groups (JLGs) among them. To start with, the
Bank officials visited the village and organized sensitization meeting with the villagers and also
had one-to-one interaction with 5 to 6 influential members of each group to appraise of their
motivation, commitment and competence. The branch formed 10 Joint Liability Groups among
them comprising 44 members and granted Crop Loan for Rs.1.04 lakh for raising Sali paddy and
vegetables during the financial year 2004-05. After harvesting, they repaid the Bank dues in full
out of their income from the sale proceeds of their produces.

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Recommendations & Suggestions:

RRBs should extend their services into unbanked areas and increase their credit to deposit (CD)
ratio. As on 31 March 2006, 37 RRBs had CD ratio of less than 40%, 44 RRBs between 40% and
60% and 52 RRBs above 60%. The CD ratio variations ranged from 20% to 116%. As RRBs
operate with branches in remote, interior and tribal-dominated areas, they have a special role to
play in financial inclusion, particularly those having CD ratio of less than 40%. The post-merger
scenario of RRBs poses a series of challenges for them and needs to be addressed. The following
areas would require attention from the point of view of financial inclusion.
• Setting exclusive targets for microfinance and financial inclusion,
• Providing funding support &
• Providing technology support

No further merger of RRBs

There is a need for policy refinement regarding further merger of RRBs. The Vyas Committee
had recommended merger of all RRBs in the same State. Currently, RRBs of the same sponsor
bank are merged at State-level. By April 2007, the number of RRBs was reduced to 96. If
sponsor banks are to have the requisite initiative to support their RRBs fully, they would need
assurance that there will be no further mergers. The Committee is of the view that further merger
of all RRBs at State-level is not required. It may also not be desirable if there has to be a firm
reinforcement of the rural orientation of these institutions with a specific mandate on financial
inclusion. The Committee, therefore, recommends that the process of merger should not proceed
beyond the level of sponsor bank in each State.

Recapitalisation of RRBs with negative Net Worth

Recapitalisation of RRBs with negative net worth has to be given a serious consideration as it
would facilitate their growth, provide lenders a level of comfort and enable their achieving
standard capital adequacy ratios. As on March 2004, 98 RRBs were in need of Rs. 3,050 crore
for making the net worth positive. The position, as on 31 March 2006, is that 40 RRBs would
require Rs.1,718 crore.

Widening network and Expanding coverage

As on 01 April 2007, RRBs were covering 535 districts. They may be directed to cover all
unbanked areas in these districts, taking the village as a unit, either by opening a branch
(wherever feasible) or through the BF / BC model in a time bound manner. As on 01 April 2007,
87 districts in the country were not covered by RRBs and their area of operation may be
extended to cover these districts.

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Strategic microfinance plan with NABARD support
RRBs have the potential and capability to emerge as niche operators in microfinance. They are
playing a major role in the SHG - Bank Linkage Programme especially also as SHPIs. It is
significant that as an institution they have the expertise and potential to fulfill both the
requirements of SHGs - formation plus nurturing and financial service provisions (credit plus).
Their dual role has special meaning in areas which face severe financial exclusion and which do
not have a sufficient presence of well performing NGOs. However, to upscale the programme to
a level where it can really make a visible impact, RRBs need handholding particularly in the
areas of training, promotion and development. NABARD may provide required assistance.
NABARD should prepare a strategic action plan RRB-wise, for promotion and credit linkage of
SHGs. RRBs may be asked to form, nurture and credit link at least 3,000 SHGs in all districts
covered by them in North-Eastern, Eastern and Central Regions. A Memorandum of
Understanding (MoU) may be signed by RRBs with NABARD for a period of 5 years – with
NABARD providing the promotional and development assistance out of the “Financial Inclusion
Promotion and Development Fund” and RRBs forming, nurturing and providing financial
services to SHGs. RRBs may accomplish the task with the support of individual rural volunteers,
BFs, their staff members, etc. NABARD may closely monitor the programme - with focus on
qualitative aspects.

Separate credit plan for excluded regions

The Committee recommends that RRBs operating in predominantly tribal areas and having high
levels of exclusion may prepare annual credit plans having a separate component for excluded
groups, which would integrate credit provision with promotional assistance such as agricultural
services and BDSs for the farm and nonfarm sectors respectively including entrepreneurship
development and formation and strengthening of producer’s organisations like dairy
cooperatives. Refinance and promotional support may be provided by NABARD to RRBs on a
large scale for implementation of these credit plans.

Computerisation
With a view to facilitate the seamless integration of RRBs with the main payment system, there
is a need to provide computerisation support to them. Banks will be eligible for support from the
Financial Inclusion Funds on a matching contribution of 50% in regard to districts other than
tribal districts and 75% in case of branches located in tribal districts under the Tribal Sub Plan.

Strengthening Boards of Management

Further, now that RRBs are being merged and are becoming large size entities, it is necessary
that their Boards of Management are strengthened and powers delegated to them on policy and
business operations, viz. introduction of new liability and credit products, investment decisions,
improving market orientation in raising and deployment of resources, non-fund based business,
career progression, transfer policy etc.

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Tax Incentives
From 2006-07, RRBs are liable to pay income tax. To further strengthen the RRBs, profits
transferred to reserves could be exempted from tax till they achieve standard capital adequacy
ratios. Alternately, RRBs may be allowed tax concessions to the extent of 40% of their profits, as
per provisions under Sec. 36 (1) (viii) of the income tax act.

NABARD to support HR development in RRBs

RRBs should serve, with the support of NABARD, GoI, RBI and the sponsor banks, as active
financial inclusion players especially in areas with high levels of financial exclusion. In order to
build up the skills and expertise of the personnel of RRBs, NABARD has played a crucial role
since the inception of RRBs. But for the efforts of NABARD and initiative of sponsor banks
besides RRB managements themselves in HR development and in implementation of the reform
package, the changes in business performance of RRBs would not have been possible. The work
could be accomplished by NABARD working in close tandem with GoI and RBI besides the
sponsor banks. NABARD would continue to give special priority to RRBs to train their staff
through the training institutions like the Bankers Institute of Rural Development (BIRD) at
Lucknow and the Regional Training Colleges at Mangalore and Bolpur, specially set up for
meeting the training requirements of RRBs. NABARD may design suitable training programmes
to enable RRBs to meet the challenges in the post merger environment. This training may also
cover members of the Board of the RRBs. This support should be provided by NABARD
working in close tandem with GoI, RBI and the sponsor banks.

Implementation of RBI initiatives for financial inclusion

All the recent circulars relating to financial inclusion, viz., no frills accounts, GCC, One Time
Settlement (OTS) for loans up to Rs. 25,000, use of intermediaries, etc., should be implemented
by RRBs.

Local Area Banks

The Finance Minister, in his August 1996 Budget, announced the concept of Local Area Banks
(LAB) and following this, the RBI issued guidelines and sought applications for setting up
LABs. Only 6 LABs were licensed to operate by RBI, of which 4 are currently functioning.
Though the overall performance indicators of functioning LABs appear to be healthy, there have
been a few instances of LABs having to close down. Keeping in view the inherent potential of
LABs, RBI may consider revisiting the same and keep the option open to allow new LABs to
come into operation, especially in districts / regions manifesting high levels of exclusion without
compromising on regulatory prescriptions. LABs can integrate well with local financial markets
and offer a host of financial services including savings, credit, remittances, insurance, etc.

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Conclusion:
The reforms of the RRBs were no different from the reforms of the commercial banks. The same
set of policies was implemented, and the same set of standards set to calibrate their performance.
Not surprisingly then, the RRBs started aping the commercial banks in their activities – banks
relocated to more promising areas; investments in government securities and PSU bonds and
debentures increased while banks were hesitant to increase their loan portfolios; credit was
extended mainly under non-priority sector heads so that the proportion of priority sector loans
declined despite the dilution of the priority sector definition in several ways; interest rates on
lending were deregulated which resulted in high interest rates charged by the RRBs; credit to
deposit ratio became less than half of the pre-reform levels indicating increased net transfer of
resources from the rural poor to the urban rich; regional imbalances aggravated; and the small
borrowers, the principal clients of the RRBs were overwhelmingly sidelined. By the beginning of
the present decade, the carefully built structure of rural development banking in India had all but
collapsed.
The formation of zonal and state RRBs by merging the various RRBs would be a welcome
move. At present, the mergers of RRBs are taking place entirely with a view to improve
profitability. Several sponsor banks have announced their plans to merge the different RRBs
sponsored by them in a state (for example, the United Bank of India merging its RRBs in West
Bengal and Assam), while the more profitable RRBs are being merged with the parent bank (the
merger of Chikmagalur Kodagu Grameena Bank – a RRB, with its parent Corporation Bank).
Before the process gathers momentum, and many more RRBs are amalgamated so that further
branch rationalization is possible and dislocation of the RRB staff is made easy, it is important
that the authorities intervene to create the proposed state level RRBs, liberate the RRBs from the
overlordship of the sponsor commercial banks, ensure that the majority ownership of the RRBs
remain under state control, set up independent governance structure(s) for the RRBs and restore
functional autonomy to these banks. The purpose of the ownership reform of the RRBs must be
the same as for the other aspects of RRB policy: to foster a bank-led equitable rural growth.

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