Regional Rural Banks (RRBs) – Their functions and the way forward

Updated On : Dec 2022

Regional Rural Banks conduct banking activities for the rural regions at the district level in the states and may cover multiple districts within a state. Established with the purpose of providing easily accessible banking and credit facilities to the rural population and mobilising financial resources from the urban areas to rural districts of India, RRBs are a crucial part of the financial industry.

In the late 20th century, banking was more accessible to the urban crowd with limited access to the rural population. Regional Rural Banks (RRB) were established as government-sponsored, regional based rural lending institutions to balance the economic development and equally distribute banking in the urban and rural areas of India.

They were first launched in 1975 with the Ordinance for establishing Regional Rural Banks passed on September 26, 1975. The Regional Rural Banks Act (RRB Act) was passed in 1976.

Some distinct features of RRBs are:

• RRBs have the characteristics of both a commercial bank and a co-operative bank. It has the professionalism and ability to mobilise financial resources like a commercial bank and is familiar with rural problems like a co-operative bank.

• RRBs ensure adequate credit for agriculture and other rural sectors.

• Like any commercial bank, RRBs have a board of directors, a chairperson, a managing director, a manager, regional managers, and other staff.

• According to the RRB Act 1976, RRBs provide financial assistance to farmers, Medium and Small Enterprises (MSMEs), local craftsmen, and artisans for agriculture, industries, trade, commerce, and their economic development.

• RRBs are owned by the stakeholders in a fixed proportion of 50:35:15, with the central government owning 50%, the sponsor bank owning 35%, and the state government owning 15%.

• 75% of the total bank credit has to be provided to the Priority Lending Sector (PLS). Short-term loans at a low rate of interest are extended to the priority sector.

• RRBs cannot extend large or long-term loans to their customers.

Functions of Regional Rural Banks:

• Accept Deposits
  RRBs accept deposits from their bank account holders. Deposits can be made in current or savings accounts, in fixed or recurring forms.

• Loan Extension
  RRBs extend loans and credit services to the Priority Sector (PS) classified under Priority Sector Lending (PSL). The priority sector comprises people and sectors like -

  • Small and marginal farmers

  • Craftsmen and artisans

  • Local traders

  • Medium and small-scale businesses

  • Education

  • Housing

  • Renewable energy

• Wage disbursement
  RRBs perform a vital task of distribution of wages under the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), the Pradhan Mantri Gram Sadak Yojana (PMGSY). RRBs also distribute the pensions provided under the poverty alleviation and pension schemes of India.

• Other functions of RRBs
  Like commercial banks, RRBs provide agency services to their customers, such as foreign exchange, bill payments, and money wire transfers. Utility services like ATMs, UPI, debit card issuance, locker facilities, etc. are also provided by RRBs.

Challenges faced

While RRBs were established to provide equal access to financial services in urban and rural areas, they had been struggling to be financially sustainable, facing several challenges such as -

• Limited activities and a focus on mainly offering government schemes like direct benefit transfer in rural areas.

• Inadequate finance, as they depend on NABARD for finances for their operations, led to no deposits, as poor rural people cannot save.

• Poor loan recovery while overdue and pending payments are high.

• It has not been able to play a significant role in poverty alleviation due to a lack of economic infrastructure, poor marketing strategies, and poor customer knowledge.

• Low internet banking because existing regulations allow RRBs with a minimum statutory capital to risk-weighted asset ratio (CRAR) of more than 10% to offer internet banking.

Way Forward

To be financially sustainable, as advised by the government, RRBs have to first and foremost move towards digitisation. Some of the steps suggested for a positive change are -

• Have a Core Banking System (CBS) and offer internet banking services to customers expand their credit base further and enhance their outreach and profitability.

• Increase their efficiency and touch various other dimensions of banking, like providing loans to merchants, MSMEs that could increase their profitability.

• Create a clear roadmap in a time-bound manner to strengthen the RRBs further and support the post-pandemic economic recovery.

• Conduct a workshop for RRBs to share best practices with each other.

• Merge of RRBs with sponsor banks once these branches reach a certain level of business.

RRBs with their objective of providing cheap and liberal credit facilities and act as a catalyst to accelerate the economic growth of the rural population, are a crucial part of the Indian financial industry. However, it is important to meet the challenges by stepping up towards bN transformation and becoming financially sustainable.

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