Regional Rural Banks (RRBs)

• The nationalization of the banks in 1969 boosted the

confidence of the public in the Banking system of the
country.
• However, in the early 1970s, there was a feeling that
even after nationalization, there were cultural issues
which made it difficult for commercial banks, even under
government ownership, to lend to farmers.
• This issue was taken up by the government and it set up
Narasimham Working Group in 1975. On the basis of this
committee’s recommendations, a Regional Rural Banks
Ordinance was promulgated in September 1975, which
was replaced by the Regional Rural Banks Act 1976.
 Regional Rural Banks (RRBs)
• Genesis of Regional Rural Banks
• Regional Rural Banks came into existence on Gandhi Jayanti in 1975
with the formation of a Prathama Grameen Bank. The rural banks had
the legislative backing of the Regional Rural Banks Act 1976 . This act
allowed the government to set up banks from time to time wherever it
considered necessary.
• The RRBs were owned by three entities with their respective shares as
follows:
• Central Government → 50%
• State government → 15%
• Sponsor bank → 35%
• Regional Rural Banks were conceived as low cost institutions having a
rural ethos, local feel and pro poor focus. Every bank was to be
sponsored by a “Public Sector Bank”, however, they were planned as
the self sustaining credit institution which were able to refinance their
internal resources in themselves.
 Regional Rural Banks (RRBs)
• Problems with Regional Rural Banks
• But the original assumptions were belied as within a very
short time, most banks were making losses. The RRB
concept was based upon the policy that they would lend
only to the weaker sections of rural society, charging lower
interest rates, opening branches in remote and rural areas
and keep a low cost profile. But the commercial motivation
was absent.
• Initially the banks expanded and by the end of year 1985
RRBS had opened 12606 branches. During this period their
credit deposit Ratio (C.D.R) expanded very fast.
• In 1976 it was 165% and gradually declined to 104 % in
December 1986. The Credit Deposit Ratio continuously
declined thereafter.
 Regional Rural Banks (RRBs)
• Problems with Regional Rural Banks (contd):
• Later, the questions started being raised about the viability of these
banks.
• The Khusrau Committee of 1989, noted that the weaknesses of
RRBs are endemic to the system and non-viability is built into it,
and the only option was to merge the RRBs with the sponsor banks.
The objective of serving the weaker sections effectively could be
achieved only by self-sustaining credit institutions. RRBs were
finding themselves unable to sustain because of the mounting
losses due to imprudent commercial policy. Thus, Khusrau
Committee (aka Agricultural Credit Review Committee) said that
the RRBs have no justifiable cause for continuance and
recommended their mergers with sponsor banks.
• But by that time, the branch network had expanded so large, the
government decided not to merge the RRBs with sponsor Banks.
 Regional Rural Banks (RRBs)
• Recommendations of Narsimham Committee on RRBs
• The Narsimham Committee in 1990s also reiterated that the RRBs
should be merged with the sponsor banks.
• By 1993, 172 of the 196 RRBs were recorded unprofitable. The paid up
capital which was Rs. 25 Lakh at that time was not able to absorb the
loan losses of most of the RRBs. The loan recovery was around 40%.
• The First Narasimham Committee recommended that the RRBs should
also be permitted to engage in all types of banking business and
should not be forced to restrict their operations to the target groups.
• The Narasimham committee also recommended that there should be
mergers of the RRBs with their sponsor bank, BUT the “sponsor banks
might decide whether to retain the identities of sponsored RRBs or to
merge them with rural subsidiaries of commercial banks to be set up
on the recommendation of the committee”. The first recommendation
of letting the RRBs do all businesses was accepted by the government.
 Regional Rural Banks (RRBs)
• Recommendations of Narsimham Committee on RRBs
• Some measures were taken by the Reserve Bank of India
also. It allowed the RRBs to relocate their branches if they
were making losses at one location for more than 3 years.
They were also allowed to finance the non-target groups to
the extent not exceeding 40 percent of their incremental
lending. This limit was subsequently enhanced to 60 percent
in 1994. As a result, the RRBs diversified into a range of non-
priority sector (NPS) advances, including jewel and deposit-
linked loans, consumer loans and home loans
• Some efforts were done by NABARD with funding support of
the Swiss Development Corporation (SDC). It took a number
of HR and Organizational Development in these banks.
 Regional Rural Banks (RRBs)
• Turnaround of RRBs
• The above discussion makes it clear that most RRB were making loss
and had deviated from the original idea that had created them. But
there were some profit making RRBs also.
• Some reforms led the rise in the number of the profit making RRBs
but most of them were having a low credit deposit ratio. This was
coupled with the decreasing percentage of loans to small and
marginal farmers out of the total loans disbursed by the RRBs. The
RRBs NPA level was high.
• In the early 2000s there was no prescribed CRAR (capital to risk
weighted asset ratio) for the RRBs.
• In 2005, based upon the recommendation of an internal working
group the RRBs were asked to maintain a capital to risk weighted
asset ratio at 5% and over the period of time they were expected to
align themselves to Basel I standards. However, the major reform was
to merge the RRBs with the sponsor banks.
 Regional Rural Banks (RRBs)
• There were 196 RRBs sponsored by 27 SCBs and one State
Cooperative Bank were operating in the country with a network
of 14,484 branches spread over 523 districts as on March 31,
2005. The government started the process of consolidation and
amalgamation in 2005, bringing the number down to 82 in
2010.
• As of March-end, 2011, the total number of RRBs stood at 82.
This number fell to 64 in March 2013. As of March 2014, the
number of RRBs has been reduced to 57. After the 2014
elections, the new NDA government has put hold on further
amalgamation of the Regional Rural Banks.
• The focus of the new government is to improve their
performance and exploring new avenues of investments in the
same. Government is also contemplating to allow the RRBs for
increasing the pool of investors to tap capital for RRBs.
 Regional Rural Banks (RRBs)
• Regulation of RRBs
• Regional Rural Banks are regulated by National
Bank for Agriculture and Rural Development
(NABARD).
• Certain important developments have taken place
in the last few years in the Regional Rural Banking
aimed at financial stability and strengthening the
capital structure including recapitalization of weak
RRBs, consolidation of RRBs by amalgamation and
imposition of Minimum Capital Adequacy Measure
of 9% on an ongoing basis with effect from March
31, 2014 as well as amendments to RRB Act.
 Co-operative Banks in India
• Introduction:
• Cooperation means to live, think and work together to
achieve a common goal through the cooperative
principles. It provides a group of people with one or
more common economic needs, voluntarily accepting
to combine their human and material resources and to
use them for mutual benefit, through a company /
organization managed by the group in itself in the
democratic line.
• Subsequently, any organization formed by a group of
people working together to achieve the goals for which
it is formed through cooperative principles is called a
cooperative society.
 Co-operative Banks in India
• History of co-operative banks in India
• The cooperative movement was started in India to
encourage and promote savings and mortgage in order
to help for the development of people with few
resources, such as farmers, artisans and other segments
of society.
• During the British Government, based on Sir Frederick’s
recommendations, Nicholson (1899) and Sir Edward
Law (1901), paved the way for the creation of credit
unions in rural and urban areas.
• Under this law, only primary credit companies were
allowed to register and without credit and federal
primary credit union organizations were excluded.
 Co-operative Banks in India
• After independence, during the first 3 years, i.e. until
1949, it was not possible to achieve significant
development. It was mainly due to the problem created
by the partition and the absence of a concrete program
for national reorganization. However, the leaders of free
India could see the importance of the cooperative
movement for a successful democracy. The importance
was given to strengthen the cooperative structure of
the country and different provisions were made
through a different five-year plan.
• While the initial Five Year plans couldn’t shape up the
co-operative banks to function, it was given greater
importance from then on.
 Co-operative Banks in India
• The 6th five year plan aimed at the following:
1. Rebuild the policies and the cooperative so that it can
generate the economic development of people
2. Extend cooperation activities in the areas of food
processing, poultry breeding, milk production, fisheries and
many other related fields.
3. Provide training and guidance necessary for the
development of qualified and efficient personnel.
• The Seventh Plan has also given more importance to the
growth and expansion of cooperative societies to ensure
public participation and achieve its main objective, that is,
the movement towards social justice must be faster and
must focus more on employment and the alleviation of
poverty.
 Co-operative Banks in India
• What are co-operative banks?
• A cooperative bank is a financial entity that belongs to its members,
who are both owners and customers of their bank.
• Cooperative banks are often created by people belonging to the same
local or professional community who share a common interest.
• Cooperative banks generally provide their members with a wide
range of banking and financial services (loans, deposits, bank
accounts, etc.).
• Cooperative banks differ from the action bank by their organization,
their objectives, their values and their governance.
• In most countries, they are controlled by banking authorities and
must comply with prudential bank regulations, which place them on
an equal footing with shareholder banks. Depending on the countries,
this control and supervision can be implemented directly by state or
delegated entities in a cooperative federation or a central
organization.
 Co-operative Banks in India
• Characteristics of a co-operative bank
• All cooperative banks share common characteristics
as described below:
1. Customer Owned Entities
• In a cooperative bank, the needs of the clients meet
the needs of the owners, since the members of the
cooperative bank are both, i.e. the customer and the
owner. As a result, the cooperative bank’s first goal is
not to maximize profits but to provide the best
products and services available to its members. Some
cooperative banks operate only with their members,
but most of them also allow non-member customers
to benefit from their banking and financial services.
 Co-operative Banks in India
• Characteristics of a co-operative bank (contd):
2. Democratic Member Control
• Cooperative banks are owned and controlled by members, who
democratically elect the board of directors. Members usually have
the same voting rights, in accordance with the cooperative
principle of “one person, one vote”.
3. Profit Allocation
• In a cooperative bank, a significant portion of annual profits, profits
or surpluses are generally allocated to build up reserves. Part of
this benefit can also be distributed to members of the cooperative,
with legal and legal limitations in most cases. In general, benefits
are allocated to members through the employer’s dividend, which
is related to the use of cooperative products and services by each
member, or through an interest or dividend, which is related to the
number of shares subscribed by each member.
 Co-operative Banks in India
• Co-operative banking in the Indian context
• The structure of the cooperative bank in India is divided into a short-
term structure and a long-term structure. Although the short-term
structure is three levels, the structure of long-term cooperative banks
is two-tier, as follows:
• Short Term Co-operative structure
• A state cooperative bank works at the highest level (i.e. it works at
the state level).
• The Central Cooperative Bank operates at an intermediate level (e.g.
District Bank Cooperatives Ltd. District-level works)
• Primary credit unions at the grassroots level (at village level)
• Long Term Co-operative bank structure
• State agricultural cooperatives and rural development banks
(SCARDB) at the highest level.
• Primary cooperative banks for agriculture and rural development
(PCARDB) at the district or block level.
 Co-operative Banks in India
• Part played by co-operative banks in India
• Cooperative banks in India play an important role
in rural financing. Even the activity of cooperative
banks in urban areas has increased phenomenally
in recent years due to the sharp rise in the
number of popular cooperative banks.
• Cooperative banks should carry out some tasks,
i.e. extend all types of credit lines to customers in
cash and in kind, to anticipate consumer loans,
extend banking services in rural areas, mobilize
deposits, control the use of loans, etc. The needs
of the cooperative bank are different.
 Co-operative Banks in India
• Cooperative banks in India fund rural areas under:
• Agriculture
• Livestock
• Milk
• Nursery
• Personal finance
• Cooperative banks in India finance urban areas by virtue of:
• Self-employment
• Industries
• Small-scale units
• Home finance
• Consumer finance
• Personal finance
 Co-operative Banks in India
• Types and functioning of Co-operative Banking
System in India
• Cooperative banks are small units that operate
in urban and non-urban centres. They finance
small debtors in industrial and commercial
sectors as well as professional and salary classes.
• Regulated by the Reserve Bank of India, they are
governed by the Banking Act of 1949 and bank
laws (cooperative societies) operate in 1965. The
structure of the cooperative bank in India is
divided into the following 5 categories:
 Co-operative Banks in India
•Primary Co-operative Credit Society
•The primary credit cooperative society is an association of borrowers and
non-borrowers residing in a particular locality. The company’s funds
derive from the share capital and members’ deposits and loans from
cooperative central banks. The debt powers of members and society are
fixed. Loans are granted to members for the purchase of livestock,
fodder, fertilizers and pesticides.
•The RBI has asked co-operative societies not use the word 'Bank' in their
names as it violates the Banking Regulation Act.
•"It has come to the notice of Reserve Bank of India (RBI) that some co-
operative Societies are using the word "Bank" in their names. This is a
violation of Section 7 of the Banking Regulation Act, 1949’, the central
bank said (Dec. 2017 circular)
•It further said that such societies have neither been issued any licence
under the Act nor are they authorised by the RBI for doing banking
business.
•"The insurance cover from Deposit Insurance and Credit Guarantee
Corporation (DICGC) is also not avail able for deposits placed with these
 Co-operative Banks in India
• Central Co-operative Banks
• These are federations of primary credit societies in a
district and are of two types:
• those that have membership only in primary
societies and
• those that belong to companies and individuals.
• The bank’s funds consist of equity capital, deposits,
loans and bank overdrafts of state-run cooperative
banks and joint ventures. These banks provide loans
to associated companies within the limits of the
company’s debt capacity.
 Co-operative Banks in India
• State Co-operative Banks:
• The state cooperative bank is a federation of
the central cooperative bank and acts as
custodian of the cooperative banking structure
in the State.
• Its funds are obtained from the social capital,
deposits, loans and overdrafts of the Reserve
Bank of India. State-owned cooperative banks
lend money to cooperative central banks and
to primary companies and not directly to
farmers.
 Co-operative Banks in India
• Land Development Banks:
• The banks for the development of the territory are organized
in 3 levels, that is to say; State, central and primary level and
meet the long-term credit requirements of farmers for
development purposes.
• They oversee state development banks, the main land
development banks located in the districts and areas of Tehsil
in the state.
• They are governed by the state government.
• Recently, the supervision of banks for land development has
been taken over by the National Bank of Agriculture and Rural
Development (NABARD). The sources of financing of these
banks are the obligations underwritten by central and state
governments. These banks do not accept deposits from the
general public.
 Co-operative Banks in India
• Urban Co-operative Bank:
• The term Urban Cooperatives Banks (UCB), although
not formally defined, refers to primary cooperative
banks located in urban and semi-urban areas.
• Until 1996, these banks were authorized to lend
money for non-agricultural purposes only. This
distinction is not satisfied today.
• These banks traditionally focused on communities,
localities and workplace groups. Basically, they lend
to small borrowers and businesses. Today, its
operating environment has greatly increased.
 Co-operative Banks in India
• Functions of Co-operative Banks
• Co-operative banks also perform the basic banking functions of the
banking sector, but differ from commercial banks in the following
aspects:
• Commercial banks are companies under the Companies Act of 1956,
or the public sector bank under a separate law from the parliament,
while cooperative banks have been established under the laws of
cooperative societies of different states.
• The structure of the commercial bank is the banking structure while
the cooperative banks have a configuration of three tiers, with the
State Cooperative at the Apex level, the central / district cooperative
bank at the district level and the primary rural Cooperatives.
• Only some of the sections of the 1949 Banking Regulation Act (fully
applicable to commercial banks) are applicable to cooperative
banks, with the sole result of partial control by RBI cooperative
banks.
• Cooperative banks operate according to the principle of cooperation
 Co-operative Banks in India
• Conclusion : The concept of cooperation is as old as humanity
and forms the basis for domestic and social life. Cooperation is
just a group instinct in human beings that allows us to live with
others, work with others and help each other in moments of
stress and tension. Without cooperation, the social and
economic progress would not be possible. It’s impossible for
anyone civilization to thrive unless cooperation completes
competition in human society, if there is one. This is because
human beings have developed of group life and, therefore,
naturally respond to group and social stimuli. Thus, the
cooperative spirit is innate and intrinsic in human beings.
• It is with this in mind that the current system of Co-operative
banking has evolved itself over the years and is still in the
process of getting better by adapting to the changing world
scenario as well as catering to the needs of people at the
national level.
 Scheduled Commercial Banks
• The scheduled commercial banks are those
banks which are included in the second
schedule of RBI Act 1934 and which carry out
the normal business of banking such as
accepting deposits, giving out loans and other
banking services.
• The major difference between Scheduled
Commercial Banks and Scheduled Cooperative
Banks is their holding pattern, since
cooperatives are registered under the
Cooperative Societies Act as cooperative credit
institutions.