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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.
The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs. Initially, five RRBs were set up on October 2, 1975 which were sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. The total authorised capital was fixed at Rs. 1 crore which has since been raised to Rs. 5 Crore.
There are several concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest rates and refinancing facilities from NABARD like lower cash ratio,lower statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks, managerial and staff assistance from the sponsoring bank and reimbursement of the expenses on staff training. The RRBs are under the control of NABARD. NABRAD has the responsibility of laying down the policies for the RRBs, to oversee their operations,provide refinance facilities, to mointor their performance and to attend their problems.
1) Role of Regional Rural Banks in Economic Development
The importance of the rural banking in the economic development of a country cannot be overlooked. As Gandhiji said "Real India lies in villages," and village economy is the backbone of Indian economy. Without the upliftment of the rural economy as well as the rural people of our country, the objectives of economic planning cannot be achieved. In fact, the real growth of Indian economy lied in the emancipation of rural masses from acute poverty, unemployment, and socio-economic backwardness. Keeping this end in view, various important plans and programmes of rural development have been conceived and implemented by the government of India since the commencement of first five-year plan from 1951-56. But an appraisal of the achievement of these programmes clearly reveals that much programmes failed to achieve the desired objectives due to the backward economic condition and lack of adequate finance to the poor people in the rural areas. Hence, bank and other financial institutions are of vital importance for development of rural economy of a country. The present study is a modest attempt to make an appraisal of the credit needs of the rural people and the way Regional Rural Bank, i.e., Arunachal Pradesh Rural Bank, has been extending its service to meet the same in the state of Arunachal Pradesh. It deals with the performance evaluation of Arunachal Pradesh. Rural Bank (APRB) for the economic development of the state. Further, an attempt has also been made to study the growth and performance of Scheduled Commercial Banks with special emphasis on Regional Rural Banks (RRBs) in Indian and North-East Region.
2) Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focussed upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country.
SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is 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.
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 finance 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
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 have 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.
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, 59 under the amalgamation process, 145 RRBs have been amalgamated to form 45 new RRBs.
Performance under "Doubling of Agriculture Credit" : RRBs
More importantly, the performance of RRBs under GoI's initiative on doubling of agriculture credit in three years (from base year 2003-04) and greater coverage of small and marginal farmers, have been impressive. They disbursed agriculture loans of the order of Rs. 12,404 crore during 2004-05 registering a phenomenal annual growth of 64% against the targeted 30%. During 2005-06, agriculture credit flow stood at Rs. 15,223 crore with a growth of 23%. Thus, RRBs have achieved the target of doubling of agriculture credit in 2 years. RRBs financed 18.58 lakh new farmers in 2004-05 and another 17.03 lakh new farmers in 2005-06.
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.
India Economic Development
Agriculture, services and manufacturing industries all contribute to the development of the Indian economy. The IT outsourcing, software and call center/ BPO industries in particular have helped propel Indian economic development in recent years. Economic development in India depends on the various sectors that constitute the Indian economy - these are primarily the agriculture, services and manufacturing industries.
India is rated as one of the top economies in the world in terms of the purchasing power parity of the gross domestic product by leading financial entities of the world such as the International Monetary Fund, the World Bank, and the CIA (as referenced in the CIA World Factbook).
As far as agriculture is concerned, India is in the second largest in volume of output. Certain connected sectors of the agricultural sector have played a major role in the development of the Indian economy by providing employment to a number of people in the forestry, fishing and logging industries.
During 2005, the agricultural sector contributed 18.6% to the entire GDP, and at least 60% of the total labor force working in India was employed in the agricultural sector. Production volume has gone up in Indian agriculture at a consistent rate since the 1950s. Much of this improvement can be credited to the various five-year plans that were instituted for the development of Indian agriculture. Developments in irrigation processes, as well as various modern technologies used have contributed to the overall improvement of agricultural processes.
Substantial amounts of research and development have been carried out in the agricultural sphere in India by organizations such as the Indian Agricultural Research Institute, the Indian Agricultural Research Statistics Institute, and the Indian Council of Agricultural Research.
In the industrial arena, India is 14th in volume of factory output. Economic developmental roles are also being played in the areas of gas, mining, electricity and quarrying. All these sectors contribute significantly to the GDP, and provide jobs to India's citizens.
India is regarded as the 15th best economy in terms of work production by the services sector. A sizeable amount of the Indian workforce is also employed by the service sector. In the ten-year period between 1990 and 2000, the rate of growth has been 7.5%, which is more than the 4.5% rate during the 30-year period from 1951 to 1980. Sectors such as information technology (IT), software development, call centers, IT outsourcing, business process outsourcing (BPO), and other IT-enabled services have been the biggest contributors in the services sectior of the Indian economy.
Regional Rural Banks: The Past and the Present Debate
The institution of Regional Rural Banks (RRBs) was created to meet the excess demand for institutional credit in the rural areas, particularly among the economically and socially marginalised sections. Although the cooperative banks and the commercial banks had reasonable records in terms of geographical coverage and disbursement of credit, in terms of population groups the cooperative banks were dominated by the rural rich, while the commercial banks had a clear urban bias. In order to provide access to low-cost banking facilities to the poor, the Narasimham Working Group (1975) proposed the establishment of a new set of banks, as institutions which "combine the local feel and the familiarity with rural problems which the cooperatives possess and the degree of business organization, ability to mobilize deposits, access to central money markets and modernized outlook which the commercial banks have". The multi-agency approach to rural credit was also to subserve the needs of the input-intensive agricultural strategy (Green Revolution) which had initially focused on `betting on the strong' but by the mid-seventies was ready to spread more widely through the Indian countryside. In addition, the potential and the need for diversification of economic activities in the rural areas had begun to be recognized, and this was a sector where the RRBs could play a meaningful role. The RRBs Act, 1976 succinctly sums up this overall vision to sub-serve both the developmental and the redistributive objectives:
The RRBs were established "with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto"
Regional rural banks need a shot in the arm
V. Jagan Mohan
RRBs have done well in mobilising deposits and infusing the thrift habit among the rural masses.
The latest policy pronouncements of the Government have been largely agriculture and rural centric. The constitution of a Farmers Commission is one among them. Rural credit is emerging as a focal issue and this can be gleaned from the fact that the Government earmarked Rs 15,000 crore in the Interim Budget to revitalise the co-operative structure. In this context, regional rural banks (RRBs), which operate in around 476 districts of the country, too need further strengthening.
In the early 1970s, the Government observed that despite a wide banking network and developmental initiatives in the first 25 years since Independence, a critical gap still existed in meeting the credit needs of the rural poor. To find a solution, the Government appointed a working group on rural credit, the Narasimham Committee, in July 1975. The committee observed that the cost structure of commercial banks, the attitude of bank employees and the lack of a professional approach in the co-operative credit system were the main stumbling blocks to rural credit.
The committee also observed that the deposits collected by banks from rural areas were not totally deployed there. The panel, therefore, recommended the creation of a new set of regionally-oriented rural banks which would combine a co-operative's local feel and a commercial bank's business acumen.
The Government accepted these recommendations and, accordingly, the ordinance of Regional Rural Banks, 1975 was promulgated on September 26, 1975. This was replaced by the Regional Rural Banks Act, 1976 on February 9, 1976. The mandate of these rural financial institutions were to: take banking to the doorsteps of the rural masses, particularly in areas without banking facilities; make available cheaper institutional credit to the weaker sections of society, who were to be the only clients of these banks; mobilise rural savings and canalise them for supporting productive activities in rural areas; generate employment opportunities in the rural areas; and bring down the cost of providing credit in rural areas.
With partnerships with the Central Government (50 per cent), State governments (15 per cent) and commercial banks (35 per cent), the number of RRBs rose from just six in 1975 to 196 by 1987, covering 476 districts. They financed only the weaker sections of the rural community - small and marginal farmers, agricultural labourers, small traders, and so on.
Along with commercial banks, RRBs participated enthusiastically in poverty alleviation schemes (IRDP, for example) and disadvantaged area (drought-prone regions and deserts) development programmes. They quickly became an important and integral part of the rural credit system. However, their financial viability was initially overstretched by policy rigidities coupled with a low capital base in an environment of inadequate infrastructure and deeper social and economic disparities.
As at end-March 2003, there were 196 RRBs spread over 23 States/Union Territories and with a network of 14,350 branches, accounting for 44.5 per cent of the total rural network of all scheduled commercial banks (including RRBs). The rural and semi-urban branches of RRBs constitute 98 per cent of their network. Their deposits and advances as on March 31, 2003, were Rs 49,078 crore and Rs 22,028 crore respectively.
Thus, RRBs have done well in mobilising rural deposits and infusing the thrift habit in their clients. The bulk of the loans from RRBs have been to priority sectors, which accounted for over 70 per cent of the total. Agriculture alone took up 46 per cent of the priority sector advances. The involvement of RRBs in providing credit support to small and retail trade and other non-farm rural activities is better than that of co-operatives and commercial banks.
As on March 31, 2002, the outreach of RRBs in terms of number of deposits and advances was 50.02 million and 11.94 million respectively. The per-employee accounts handled by RRBs were 885 against the national average of 464 in the banking industry. Similarly, the staff and branch network of RRBs, though respectively 6.7 per cent and 21.8 per cent of the national network, served 11.5 per cent of the total deposit accounts and 21.8 per cent of credit accounts of the banking industry.
The Indian economy grew at an estimated 3.7 per cent in 2002-03 against 5.6 per cent the previous year. This was largely because of the negative growth of 4.4 per cent in the agriculture sector. This steep fall in GDP highlights the vulnerability of the Indian economy to the performance of the agricultural sector. This is despite other macroeconomic indicators and sectors gaining in strength.
The Tenth Plan (2002-2007) has set an ambitious average GDP growth of 8 per cent per annum. To achieve this, it is important to revitalise and revamp not only the agricultural sector but also rural financial institutions. An annual average growth of 7 per cent from this sector alone in the next five years is crucial for achieving the GDP target.
The Task Force on Rural Credit for the Tenth Plan has projected institutional credit flow to agriculture and allied activities at Rs 7,36,570 crore for 2002-2007, which is more than treble (320 per cent) the credit flow (Rs 2,29,853 crore) during the Ninth Plan (1997-2002).
The agriculture sector is emerging as part of the new economic order arising out of globalisation and implementation of the Agreement on Agriculture (AoA) under the World Trade Organisation (WTO). If some agreement is reached at the WTO negotiations, the agriculture sector in the country would be poised for a radical transformation. To withstand the global competition, enhanced productivity and sustainability of the sector has become imperative.
With the demand for food increasing at more than 2 per cent per annum, the financial, land and water resources in the rural sector have come under severe strain. At the same time, agriculture is a matter of livelihood and food security, with nearly 650 million people depending on it. In this context, productivity augmentation in agriculture and other allied sectors, expansion of rural credit, poverty eradication, infrastructure and development and export competitiveness of agricultural products have assumed high priority in the nation's development agenda. It is in this context that the Rs 50,000-crore outlay has also been proposed by the Government to be implemented by Nabard.
The Rural Non-Farm Sector (RNFS) has emerged as a key focus area for creating employment in the rural sector and to enable migration from the over-stretched farm sector. The strategy of rural institutions would have to include strengthening the credit delivery system for increasing RNFS employment.