SYLLABUS RELEVANCE

(Government Policies & Interventions; Economy)

TOPIC: RRBS TO EXTEND CREDIT FOR MSMES

Why is it in the news?
I) RRBs will soon extend credit for education, housing and even small
businesses in rural India.
II) To provide credit to rural consumers, the government is planning to
leverage the 15,000-odd strong network of the 43 Regional Rural Banks
(RRBs) in the country by asking them to expand their portfolio by adding new
segments.
III) Rural banks, for instance, would be asked to look beyond crop loans and
also provide loans for tractors, small businesses, education and housing
loans in rural areas.
Background
I) This push to the RRBs by the government comes at a time when
the Department of Financial Services has flagged concerns about public-sector
banks having slowed lending to education loans. This is due to higher
defaults and the continuing struggle of the Micro Small and Medium Enterprise
(MSME) sector.
II) MSME has suffered the most in the wake of the Covid-19 pandemic and
national and local lockdowns.
EASE reforms
I) The initiatives and targets will be part of the Enhanced Access & Service
Excellence (EASE) reforms being undertaken by the Centre.
II) EASE reforms were launched in 2018 for the public sector banks and
are currently in their fifth phase.
The rural advantage
Providing RRBs a new mandate may serve two purposes:
I) It will help them expand their business by leveraging their huge rural
network and local understanding.
II) It will also enhance credit access to rural consumers for purposes such as
education, housing and micro businesses.
MSME Sector In India
I) The Micro Small and Medium Enterprises (MSMEs) sector is a major
contributor to the socio-economic development of the country.
II) In India, the sector has gained significant importance due to its contribution
to the Gross Domestic Product (GDP) of the country and exports.
III) The sector has also contributed immensely with respect to
entrepreneurship development especially in semi-urban and rural areas of
India.
Financial challenges Faced by MSME Sector in India
I) Mounting NPAs of MSMEs:
# According to the RBI, bad loans of MSMEs now account for 9.6 per cent of
gross advances of Rs 17.33 lakh crore as against 8.2 per cent in 2020.
# The MSME sector was among the most pandemic afflicted sectors.
Thousands of MSMEs either shut down or became sick after the government
announced a nationwide strict lockdown.
# Restructuring schemes and packages didn’t benefit thousands of units which
were already in default.
II) Non-availability/Delays of Funds:
# Mounting losses and debts, non-availability of proper financial help and
delays from the government, reluctance from the banks for the funding, etc.
# MSMEs in India typically rely on NBFCs for their financing needs, which in
itself has been enduring a liquidity crunch since September 2018.
Steps taken to revive the position:
I) To revive activity, the RBI and the government introduced several measures
including the Emergency Credit Line Guarantee Scheme (ECLGS) which
provided Rs 3 lakh crore of unsecured loans to MSMEs and businesses.
II) The RBI also extended the scheme of one-time restructuring of loans to
MSMEs without an asset classification downgrade and permitted bank lending
to NBFCs for on-lending to agriculture, MSMEs and housing to be classified as
priority sector lending (PSL).
III) ASPIRE scheme, Credit Guarantee Scheme, Credit Linked Capital Subsidy
Scheme (CLCSS), Zero Defect Zero Effect model, etc.
SOME ADDITIONAL INFORMATION
Regional Rural Banks (RRBs)
I) Regional Rural Banks Act, 1976:
# Regional Rural Banks (RRBs) were set up as government-sponsored,
regional based rural lending institutions under the Regional Rural Banks Act,
1976.
# The RRBs were established as per the recommendations of the Narasimham
Committee to cater to the rural credit needs of the farming and other rural
communities.
# The Prathama Grameen Bank was the first bank to be established on 02nd
October 1975. The Syndicate Bank became the first commercial bank to
sponsor the Prathama Grameen Bank RRB.
II) Operation:
# Regional Rural Banks (RRBs) are government owned scheduled commercial
banks of India that operate at regional level in different states of India.
# The area of operation is limited to the area notified by the government of
India covering, and it covers one or more districts in the State.
III) Ownership
# The equity of the Regional Rural Banks is held by the stakeholders in a fixed
proportion. This proportion is 50:35:15, distributed as:
a) Central Government – 50%
b) Sponsor Bank – 35%
c) State Government – 15%
IV) Aim:
They were created to serve rural areas with basic banking and financial
services. However, RRBs also have urban branches.
V) Functions:
RRBs perform various functions such as providing banking facilities to rural and
semi-urban areas, carrying out government operations like disbursement of
wages of MGNREGA workers and distribution of pensions, providing para-
banking facilities like locker facilities, debit and credit cards, mobile banking,
internet banking, and UPI services.
VI) Objectives of RRBs:
# To provide cheap and liberal credit facilities to small and marginal farmers,
agriculture labourers, artisans, small entrepreneurs and other weaker
sections.
# To save the rural poor from the moneylenders.
# To act as a catalyst element and thereby accelerate the economic growth in
the particular region.
# To cultivate the banking habits among the rural people and mobilize savings
for the economic development of rural areas.
# To increase employment opportunities by encouraging trade and commerce
in rural areas. To encourage entrepreneurship in rural areas.
# To cater to the needs of the backward areas which are not covered by the
other efforts of the Government.
# To develop underdeveloped regions and thereby strive to remove the
economic disparity between regions.
# Identify the financial need, especially in rural areas.