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1. Introduction to RRBs
2. Objectives of regional rural banks
3. Credit delivery system
4. Ownership of RRBs
5. Reform process of RRBs
6. RBI assistance
7. The effect of RRBs on economic development
8. Evaluation of RRBs
9. Recent Measures
10. Suggested Remedies

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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 was sponsored by Syndicate Bank,
State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India.
The total authorized capital was fixed at Rs. 1 crore which has since been raised to Rs. 5 Crore.

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.

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 monitor their
performance and to attend their problems.

Objectives of regional rural banks

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 freeing of rural masses from acute poverty,
unemployment, and socio-economic backwardness.

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• RRBs are oriented towards meeting the needs of the weaker sections of the rural
population consisting of:
– Small and marginal farmers,
– Agricultural labourers,
– Artisans,
– Small entrepreneurs
– Mobilize deposits from rural households
• The institution of Regional Rural Banks was created to meet the excess demand for
institutional credit in the rural areas, particularly among the economically and socially
marginalized sections.
• RRBs are expected to make credit available to rural households besides inspiring
• To take the banking services to the doorstep of rural masses, particularly in hitherto
unbanked rural areas.
• To make available institutional credit to the weaker sections of the society who had by
far little or no access to cheaper loans and had perforce been depending on the private
money lenders.
• To mobilize rural savings and channelize them for supporting productive activities in
rural areas.
• To create a supplementary channel for the flow the central money market to the rural
areas through refinance
• To generate employment opportunities in rural areas and bringing down the cost of
providing credit to rural areas.

With these objectives in mind, knowledge of the local language by the staff is an
important qualification to make the bank accessible to the people.

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

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financing farmers, rural artisans, agricultural labourers, entrepreneurs, etc. in the state and giving
service to its depositors.


Indicator 31.03.200 31.03.200 31.03.200

No. of RRBs 196 196 133
No. of districts covered 518 523 525
No. of branches 14446 14484 14494
No. of Staff 69249 68912 68629
Owned funds 5438 6181 6647
Deposits 56350 62143 71329
Borrowings 4595 5524 7303
Investments 36135 36761 41182
Loans outstanding 26114 32870 39713
Credit-deposit (CD) ratio 46% 53% 56%
Loans issued 15579 21082 25427
No. of RRBs having 90 83 58
Accumulated losses 2725 2715 2637
No. of RRBs in profit 163 166 111
Net NPA (%) 8.55% 4.84% 3.99%
Recovery (%) (as on 30 June) 73% 78% 80%
Per branch productivity 5.71 6.56 7.66
Per staff productivity 1.19 1.38 1.62

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

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Reform process of RRBs

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".

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

RBI assistance
– With a view to facilitate RRBs operations, the RBI gave RRBs direct access to refinance
assistance at a concessional rate of three per cent below the bank rate.

– Allowed to maintain a lower level of SLR than commercial banks.

– Allowed to pay half per cent more interest on all deposits except those of three years and

– Sponsor banks IDBI, NABARD, SIDBI, and other FIs are statutorily required under the
RRBs Act to provide managerial and financial assistance to RRBs

The effect of RRBs on economic development

• 111 RRBs out of total 133 registered profit in the year 2005-06.

• CD Ratio has been increasing from 46% on 31 March 2004 to 53% on 31 March 2005
and further to 56% on 31 March 2006.

• Recovery percentage has been improving from 73% during 2003-04 to 80% during 2005-

• Net NPAs have declined from 8.55% on 31 March 2004 to 3.99% on 31 March 2006.

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• Loans disbursement registered an impressive 35% annual growth in 2004-05 and 21% in

• Per branch productivity has increased from Rs. 5.71 crore on 31 March 2004 to Rs. 7.66
crore on 31 March 2006.

• Per staff productivity has increased from Rs.1.19 crore on 31 March 2004 to Rs.1.62
crore on 31 March 2006.

• There has been a decline in the total number of staff.

Bank Group Rural Offices Semi-urban Offices Urban / Metro Total


No % to No % to No % to No % to
Total Total Total Total

RRBs 11824 37 2284 15 537 02 14645 21

SCBs other than RRBs 20143 63 13335 85 21846 98 55324 79

Total 31967 100 15619 100 22383 100 69969 100

Population group and bank group wise(march 2005)

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Evaluation of RRBs
The Committee constituted by the RBI in June 1977 to valuate the performance of RRBs
concluded that with some modifications in their organisation and structure. The Committee to
Review Arrangements for Institutional Credit for Agriculture and Rural Development which
inter alia examined the role of RRBs in the rural development work, suggested the following:

• Preference for opening bank branches than commercial banks

• The eligible business of commercial banks’ rural branches may be transferred to RRBs.

• The losses in initial years of RRBs may be met by shareholders and equity capital should
also be raised.

• The various facilities provided by sponsor banks should continue for 10 yrs in each case

• Concessionary refinance by RBI should be continued

• The control, regulation, and promotional responsibilities should be transferred from the

Regulatory control
RRBs are allowed up to December 31, 2000 to maintain cash reserves at 3 per cent of their
demand and time liabilities

A number of measures were taken since 1995 not only to make RRBs viable but also to enable
them to function effectively.

Apart from recapitalisation and infusion of equity, the measures include: Deregulation of interest
rates on advance and deposits of above one year maturity; rationalization of branches; and
relaxation of norms relating to investments by RRBs.

In 1998-99 NABARD introduced several policy measures for improving overall performance.
They are:

– Quarterly / half yearly review of RRBs especially weak ones by the sponsor banks

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– Merger of RRBs coming under a sponsor bank and operating in contiguous areas

– Off-site surveillance

– Framing of Appointment and Promotion rules (1998) for the staff of RRBs

Introduction of Kissan Credit Cards for provision of credit to farmers.

Recent Measures
It is only in the past few years that the unwanted effects of reform measures on rural banking
have begun to be recognized in certain official quarters. That the improved performance of the

• 163 out of 196 RRBs were earning profits in 2003-4- was largely a result of the banks
abrogating their credit intermediation role rather than a sign of their genuine health and
vibrancy is pitifully obvious.
• Among RRBs which are making absolute profit, the credit-deposit ratio should not be
lower than 75%, and for those which are making profits but still have accumulated
losses, an increasing trend of the ratio should be ensured and their investment portfolio
should get reduced accordingly.
• The priority sector lending by RRBs has been declining and as per the latest figures,
priority sector lending to agriculture and other allied activities comes to about 57% of the
total lending. The RBI should apply proper checks to ensure that the present level of 57%
of lending by the RRBs to the priority sector is not allowed to decline further.
• The Committee recommends that the RRBs should take steps for compiling and
maintaining data regarding credit facility extended to small and marginal farmers and
other weaker sections of the society to monitor that credit facilities being provided by
RRBs reach the targeted beneficiaries.
• On the issue of NPAs of the RRBs, the Committee expressed its dissatisfaction at the
current levels. ``While the official statistics highlights the decline in NPAs from 34
percent in March 1996 to 18.34 percent in March 2001, the level of NPAs in absolute
terms had declined only marginally from Rs 3232 crores to Rs 2990 crores.

Very few of the above recommendations were, in fact, accepted by the RBI/ GOI. From the year
2003-4, the RBI revised upwards the lending target for priority sector to 60 percent of the total
advances for the RRBs. Ambitious overall credit targets were laid down for the RRBs by the
Union Government. The farm credit target for the RRBs at Rs 11,900 crore for the fiscal year
2005-06 is 40 percent higher than Rs 8,500 crore target set during the fiscal year 2004-5. But
little else happened. In reviewing the action taken by the RBI/GOI on the proposals of the

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Estimates Committee (2002-3), the Committee in 2004-5 finds that `no specific action has been
taken’ on most of the major recommendations.

Suggested Remedies
Some of the steps to make RRBs participation more effective in rural areas are:

1. Efforts for poverty eradication must comprise a package of appropriate technologies,

development of skill, services and asset creation. The responsibilities of banks will be
to provide financial support to the beneficiaries for creation of productive assets by
involving themselves whole heartedly in borrowers, or organization of a system for
supply of inputs or marketing of produce.

2. All the existing minor irrigation schemes should be passed on to the RRBs for
implementation in proportion to their branch network.

3. With the shift in the lending policy from the credit worthiness of the borrower to the
credit worthiness of the purpose, RBI directives that collateral security/third party
guarantee need not be insisted upon in respect of small loans, should be effectively
implemented to facilitate flow of credit to the poor.

4. The follow up of credit must be done and necessary arrangements should b made in
case of entrepreneur faces problems of supply of raw materials and/or in the sale of
his product.

5. For proper understanding of the concept of Rural Development and poverty

eradication plan, workshops/seminars should be conducted at block level every year.

6. The credit deposit ratio is generally above 10% and in most cases it is more than
15%. Thus, to augment their resources, state Governments must direct all the rural
based agencies, e.g. Gram Panchayats, Krishi Upaj Mandies, Marketing Societies etc.
to keep their funds with RRBs.

7. In the programme like the IRDP, which would virtually involve preparing viable
projects/schemes for each family to be assisted, it is also the more imperative that
banks, more particularly RRBs, and the State Governments machinery work in total

8. The machinery set up by the State Government for recovery purpose is quite
inadequate to cope up with the cases referred. Stringent measures must be taken to
ensure repayment of loans in case of willful defaulters.

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Economics of Rural Banking: K. Someshwar

Rural Credit Market: Anita Gill

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