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Performance Evaluation of Regional Rural Banks in India

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Kurukshetra University Research Journal ISSN: 0454 – 6962
Volume 57, 2 (2023), 119 – 131

Performance Evaluation of Regional Rural Banks in

India

Ajay Kumar*

Abstract
Banks must be strong and competitive in today's competitive environment.
Regional Rural Banks, established in 1975, have grown to 20,904 branches
in 644 districts across 27 Indian states by March 2016. This study examines
the financial health of Regional Rural Banks (RRBs), established in India
to provide essential banking and financial services to rural communities.
The RRB Ordinance and Act were passed in 1975 and 1976 respectively,
aiming to meet the needs of agricultural and non-farm sectors. The study
examines the financial health of Rural Banks, revealing significant
improvements in performance since their establishment due to the Indian
government's efforts post-merger. The study, analytic and exploratory,
reveals that the performance of Regional Rural Banks in India has
significantly improved since their establishment, largely due to the steps
taken by the Government of India after the amalgamation process.

Keywords: Regional Rural Banks, Amalgamation, Reserve Bank of India

merger, RRB Ordinance.

Introduction
The Regional Rural Banks have approximately 36 years of experience in
the Indian financial sector. Regional peculiarities have been generated as a result
of a 50:15:35 joint shareholding of the federal government, applicable state
governments, and the general purpose of the social banking system. the
emergence of gender. Consider. Construction of financial institutions for the
economic development of the rural population (small and marginalised farmers,
landless rural labourers, rural craftsmen, including small company owners) is
referred to as “rural banking” in India. (A) The Rural Cooperative Bank,

*
Research Scholar, Department of Commerce, Deen Dayal Upadhyaya Gorakhpur University,
Gorakhpur (UP) Email: ajayucek@gmail.com | ORCID Id: 0000-0002-1956-4960
Kurukshetra University Research Journal

established in the early 1900s; (B) The Commercial Bank, associated with the
Rural Bank since the late 1960s; and (C) The Rural Bank, whose construction
process began on October 2, 1975. The Banking Commission's (1972)
recommendation to establish an alternative institution for rural credit. The
Narashimham Group (1975) suggested the creation of new set of banks in order
to give the poor access to affordable financial services. For banking institutions,
RRB has played a significant role in India's rural and semi-urban regions. The
Narasimhan Commission proposed in 1975 to accelerate the growth of regional
banks as a new group of regionally oriented regional banks; developing
agricultural, trade, credit, and other banking systems primarily for small farmers
and small farmers, landless workers, rural artisans, and small entrepreneurs. The
purpose of the RRBs is to promote the expansion of agriculture, trade, commerce,
industry, and other productive activities in rural areas by offering credit and other
facilities, artisans, and small business owners.

Objective of the Study

 Research on the evolution and growth of his RRB in India.
 Assessment of RRB functionality in India.
 To assess the financial performance of India's rural regional banks.
 To research the Indian Regional Rural Banks' growth trends.

Hypothesis of the Study

 India’s RRBs have made a significant quantitative advancement.
 It has been discovered that the qualitative advancements of RRBs are
really amazing.
 The overall performance is really significant.

Significance/ Importance of the Study

The research study is crucial to evaluating the financial performance of
RRBs in India. Policymakers will find the conclusions and findings of this study
useful as they work to improve the performance of RRBs in India.

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 Volume 57, 2 (2023)

Review of Literature
The Kolka Working Group (1984) gave proof that the RRB's branch
network could successfully mobilise significant rural participation. Some of the
most important of the many recommendations made by the group include
NABARD's participation, loan-to-deposit ratio, partnership with the sponsoring
bank, and his RRB training bank staff.
In terms of deposits and advances, the RRB operations in West Bengal
showed distinct tendencies, according to Roy (1994).
The current financial liberalization initiatives, according to Nathan (2002),
have a direct and considerable impact on local lending. Low-interest loans to the
poor in particular and loans from local banks to priority industries generally are
declining.
Bagchi and Hadi’s (2006) study focused on the efficiency of West
Bengal's regional rural banks. There aren't many studies in the literature that
specifically examined the effectiveness of a single regional rural bank.
Sathye (2008) and Mohindra (2011), who used the Frontier and Data
Envelopment Analysis approaches, respectively, to analyse the performance of
RRBs.
Ghouse and Reddy (2017) looked at the financial outcomes of the Indian
RRBs from 2007 to 2017. They discovered that there were noticeable variations
in RRB growth across the trial. Also noted was the RRB's inability to sustain
deposit growth.
Tripura in particular and his RRB in general were evaluated by Das
(2020). It has a goal. Tripura Grameen Bank did well during the research period,
according to the data, in terms of branch expansion, profitability, rural
development, deposit mobilisation, and loan collection.

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Kurukshetra University Research Journal

Research Methodology & Research Design

The only source data used in the current investigation were secondary
data. The National Rural Development Institute (NIRD), RBI, NABARD, Annual
Reports, District Credit Plans, Journals, and Published and Unpublished Reports
of Journals were some of the sources used for the data. This exploratory survey
makes use of the data gathered. The majority of the real data utilised in this study
(RBI) came from the annual reports of the RBI and NABARD. more pertinent
data from publications, meetings, and websites. The analysis is limited to only a
few key topics, such as the RRBs' (Indian Regional Rural Banks) number of
branches, district, deposits mobilised, credits extended, and investments
undertaken.

Performance Indicators and Growth of RRBs

Rural community banks the two main institutions in the rural lending
sector, the cooperative and commercial bank, have been demonstrated to have a
variety of shortcomings. Additionally, it was determined that the regional and
functional deficiencies of the rural loan market could not be promptly addressed
by reorganising or restructuring the two systems.

Table 1: Comparative Performance of RRBs for Two Years (2022 & 2023)
Financial Year
S. (Amount in ` Crore)
Item
No.
2021-22 2022-23
No. of RRBs at End of Financial Year 43 43
Balance Sheet Parameters, As at End of Financial Year
1. Capital 14,880 17,232
2. Reserves 34,359 40,123
3. Deposits 5,62,538 6,08,509
4. Borrowings 73,881 84,712
5. Investments 2,95,665 3,13,401
6. Gross Loans Outstanding 3,62,838 4,10,738

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7. Total Business 9,25,376 10,19,247

8. Total Assets/ Liabilities 7,05,400 7,71,462
Source: NABARD Report

Balance Sheet 2021-22

6 Gross Loans
7 Total
Outstanding
Business

5 Investments 8 Total
Assets/Liabilities
4 Borrowings

1 Capital
3 Deposits
2 Reserves

Figure 1: Performance of RRBs (Balance Sheet, As at End of Financial

Year 2021-22)

Balance Sheet 2022-23

7 Total Business
31% 8 Total
Assets/Liabilities
6 Gross Loans 24%
Outstanding
12%

1 Capital
0%
5 Investments 2 Reserves
10% 1%
4 Borrowings 3 Deposits
3% 19%

Figure 2: Performance of RRBs (Balance Sheet, As at End of

Financial Year 2022-23)

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Kurukshetra University Research Journal

Table 2: Profitability
S. No. Item Financial Year
(Amount in `Crore)
2021-22 2022-23
1. No. of RRBs at End of Financial Year 43 43
Profitability during Financial Year
2. RRBsin Profit 34 37
3. Amount of Profit 4,116 6,178
4. RRBsin Loss 9 6
5. Amount of Loss 897 1,205
6. Net Profit/ Loss 3,219 4,974
7. Accumulated Losses 9,062 9,841
8. Number of RRBs with Acc. Losses 16 15
9. Return on Assets (%) 0.48 0.69
10. Net Interest Margin (%) 3.49 3.76
11. Cost of Management (%) 3.19 3.05
Source: NABARD Report

Table 3: Consolidated Balance Sheet of Regional Rural Banks

Atend – March (Amount in ₹Crore)
S. No. Item
2022 2023
1. Share Capital 14,880 17,232
2. Reserves 34,359 40,123
3. Deposits 5,62,538 6,08,509
3.1 Current 12,042 11,945
3.2 Savings 2,94,438 3,19,572
3.3 Term 2,56,057 2,76,992
4. Borrowings 73,881 84,712
4.1 from NABARD 67,054 73,119
4.2 Sponsor Bank 3,879 3,408
4.3 Others 2,948 8,185

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5. Other Liabilities 19,742 20,885

Total Liabilities/ Assets 7,05,400 7,71,462
6. Cash in Hand 3,119 2,888
7. Balances with RBI 22,174 29,332
8. Balances in Current Account 8,127 7,150
9. Investments 2,95,665 3,13,401
10. Loans and Advances (Net) 3,42,479 3,86,951
11. Fixed Assets 1,256 1,406
12. Other Assets# 32,580 30,333
12.1 Accumulated Losses 9,062 9,841
Source: NABARD Report

Summery/ Observation of the Study (Findings)

As of March 31, 2023, there were 43 RRBs sponsored by 12 Scheduled
Commercial Banks, with 21,995 branches and operations in 26 States and 3 Union
Territories (Puducherry, Jammu & Kashmir, and Ladakh), totalling 30.53 crore
deposit accounts and 2.90 crore loan accounts.
RRBs are absent from the States of Goa and Sikkim. Except for Punjab &
Sind Bank, all public sector banks support one or more RRBs. The only bank in
the private sector that sponsors an RRB is J & K Bank. Rural and semi-urban
areas are home to 92% of RRB branches.

Capital Adequacy
GOI made the decision to inject 10,890 crores in capital into RRBs during
the course of FY 2021-22 and FY 2022-23. Incorporating the proportionate share
capital contributions from State Governments (15%) and Sponsor Banks (35%),
the overall recapitalization assistance to RRBs sanctioned for FY 2021–22 (Phase
I: $8,168 crore) and FY 2022–23 (Phase II: $2,722 crore) was $10,890 crore. In
comparison, all stakeholders invested a total of 8,393 crore in RRBs from 1975 to
FY 2020-21. This means that more capital has been approved for RRBs in the last

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two years (FY 2021-22 & FY 2022-23) than was invested in RRBs throughout a
45-year period (1975 to 2021).

Deposits
Deposits, which made up 78.9% of the funding sources, increased by 8.2%
during the fiscal year 2022–23 and totalled 6.08 lakh crore as of March 31, 2023.
During FY 2022–2023, RRB deposits grew at a slower rate than the 10.1%
average growth rate experienced by all Scheduled Commercial Banks.

Borrowing
Due to the diversification of the RRBs' borrowing sources, the rise in
borrowings accelerated to 14.7% during FY 2022–23. Although they started from
a lower base, borrowings from sources other than NABARD and Sponsor Bank
increased by 177.7% while borrowings from NABARD increased by 9.0%.

Investment
During FY 2022–2023, the growth of the investment portfolio slowed to
6.0%. As of 31 March 2023, the whole investment portfolio, which stood at 3.13
lakh crore, consisted of 67.0% SLR investments and 29.6% bank balances in other
banks’ deposit accounts. The other 3.4% was made up of shares, debentures,
bonds, mutual fund units, and other non-SLR investments.

CD Ratio
Due to the stronger growth in loans compared to the growth in deposits,
the CD ratio increased from 64.5 as of the end of March 2022 to 67.5 (the highest
in more than 15 years) as of the end of March 2023. During FY 2022–23, the
overall average CD ratio of SCBs increased from 71.9 to 75.7.

Assets
The asset quality situation of RRBs improved throughout FY 2022–2023
and as of March 31, 2023, the Gross NPA (%) was at 7.28%, the lowest level in
the preceding seven years. 37 RRBs reported a decrease in the proportion of
GNPA, while 34 of the 43 RRBs reported a decrease in the overall Gross NPA

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(amount). The Net NPA (%) and PCR (%) both saw increases throughout the FY
2022–23 and, as of the end of March 2023, were at 3.2% and 59.2%, respectively.

Loans
As of March 31, 2023, the majority of loans were concentrated in the
Priority Sector (88.3%), particularly in the agriculture sector (68.6%), but during
the fiscal year 2022–2023, the proportion of loans in the Priority Sector and
agriculture loans in the total loan portfolio slightly decreased as RRBs gradually
diversified into other sectors, such as MSME, Housing, and retail.

Costs and Margins

The lowest repo rate in history, of 4%, was in effect at the start of FY
2022–2023. Over the course of the year, the repo rate was gradually raised to 6.5%
by adding 250 bps. The yield and cost ratios of RRBs likewise underwent a
reversal as a result of the market's interest rate reversal. During FY 2022–2023,
the Yield on Assets grew by 27 basis points, but the Cost of Funds nearly
stagnated. As a result, during FY 2022–2023, the Net Interest Margin (NIM)
increased from 3.49% to 3.76%.

CRAR
Prior to the start of the current tranche of recapitalization process in FY
2021–2022, the combined CRAR of RRBs was 10.2% as of March 31, 2021.
Since then, it has progressively risen to 12.7% as of March 31, 2022, and 13.4%
as of March 31, 2023. Along with the capital assistance from the stakeholders, the
increase in RRB profitability in FY 2021–22 and FY 2022–23 also helped to boost
CRAR.

Owned Funds
In terms of liabilities, the owned funds of RRBs, which include share
capital and reserves, increased by 16.5% during the fiscal year 2022–2023 and
totaled 57,356 crores as of March 31, 2023. As a result of the capital infusion from
stakeholders, the share capital increased by 15.8%; nevertheless, internal accruals
from profits caused the reserve amount to increase by 16.8%. As a result, as of 31

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March 2023, held funds were 7.4% of the total resources, up from 7% as of 31
March 2022.

Profitability
In FY 2022–23, RRBs reported their highest-ever combined net profit of
4,974 crore. After many years of losses, 4 RRBs turned around in the fiscal year
2022–2023. Six RRBs were lost in FY 2022–23, mostly for the reasons listed
below: As there is an inverse relationship between bond value and yields, when
the repo rate was raised by 250 bps in FY 2022–2023, the market value of the
investment portfolio (SLR securities under AFS and HFT) of RRBs with low CD
ratios decreased. These RRBs were forced to budget for the depreciation that led
to Mark to Market Losses (MTM Losses).

Problems of RRBs
RRBs had a quick expansion of their branch network and an increase in
the amount of business, however these institutions through a very challenging
evolutionary process as a result of the following issues.
 Extremely constrained operational area.
 High risk because only the target group is exposed.
 The idea that RRBs are poor man's banks is widespread.
 Growing losses as a result of unprofitable levels of operations in
branches situated in underdeveloped regions.
 As a turnover strategy, transition to specialised investment banking 6.
Step-motherly attitude from sponsor banks, heavy dependency on
sponsor banks for investment opportunities with low returns, excluding
exceptions.
 Low quality assets are a burden of government subsidies programmes
and lack customer information.

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Recommendations for Improvement of RRBs

 Government should pursue the defaulters with vigour rather than making
politically expedient announcements like debt waivers.
 The RRBs must exercise extreme caution and cut operating costs
because, according to our study, these costs have driven up banks'
overall spending.
 The RRBs must prioritise the microcredit programme and support the
development of self-help groups.
 The RRB must improve effective credit administration through credit
appraisal, loan progress monitoring, and successful loan recovery.
 The RRB may ease up on its lending policies and make things simpler
for borrowers from villages.

Conclusion
As a result, the rapid development of RRB has significantly contributed to
a decrease in regional differences in the adoption of banking services in India.
The RRB has been effectively utilised to grow departments, mobilise credit
ratings, enhance rural areas, and implement deposit ratings in the most vulnerable
rural areas. take. In order for rural households, especially those in underserved
rural areas, to take advantage of a convenient deposit and at significantly lower
prices for weaker rural areas, as well as from the creation of jobs in rural areas
and cost reductions that bring savings to rural areas, RRB successfully realises its
goals. As a result, RRB offers the most reliable banking network. The government
should put in place measures to help rural banks become more viable. The
development of agriculture, trade, and industry depends on the distribution of
credit to small, marginal farmers and socioeconomically disadvantaged groups of
the population, which is the main goal of Regional Rural Banks. Due to its
restricted business flexibility, lower loan size, and significant risk in loans and
advances, its commercial viability is currently being questioned. Its commercial
feasibility was nevertheless appealing despite its constrained company enterprise
flexibility, reduced mortgage levels, and unfavourable personal loan and advance

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rates. worth. Rural banks strive to eliminate the opaque business practises that
create an unfair dynamic between bankers and customers. Bankers must interact
with their clients more frequently to address this problem.

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