MASTER OF BUSINESS ADMINISTRATION (SEM 2)

Vidyasagar University

A detailed study and Project Report

On

India’s Rural Banking and Its Future

(MBA 207)

Prepared for the partial fulfilment of MBA degree from

Vidyasagar University, West Bengal

Under the guidance of

Dr. Tarak Nath Sahu

(Professor, Department of MBA, Vidyasagar University)

Submitted By

Shovan Maiti
(Univ. Roll –VU/PG/20/09/04-IS, No -0022, Session -2020-2022)
 DECLARATION

I declare that this project is prepared by me and the

resultant project report was carried out under the
guidance of Prof. Tarak Nath Sahu (Professor,
Vidyasagar University). I hereby declare that this
project report is an independent and original work.
The matter in this report is based on the information
collected by me.
 ACKNOWLEDGEMENT

This project would not have been possible if I did not have the
support of many individuals. Therefore I would like to take this
opportunity to extend my sincere gratitude to all of them. It gives me
an immense pleasure to acknowledge all who have encouraged and
supported me, enabling successful completion of this work.

First of all I am immensely thankful to our MBA department’s

respected Prof. Tarak Nath Sahu sir for aasinging this project to
me and providing the necessary guidance and encouragement
concerning the project and also helping me to prepare the project
report.

I am also grateful to respected Prof. Dipa Banerjee mam whose

timely guidance, suggestions and support helped me to go in the right
track for the preparation of the project.

I would also like to thank my family and friends for their kind co-
operation and encouragement which helped me a lot during this
project.

SHOVAN MAITI
 Table of Content

 INTRODUCTION

 ABSTRACT

 LITERATURE REVIEW

 SOME IMPORTANT INFORMATION ABOUT RRBS

 SOURCES OF RURAL CREDIT IN INDIA

 CURRENT STATE OF RRBS

 RESEARCH METHODOLOGY

 PROBLEMS OF RRBS

 FUTURE OF RRBS IN INDIA

 CONCLUSION

 BIBLIOGRAPHY
 INTRODUCTION

The villages are the backbone of our country. As far as India is

concerned, it is populated highly with rural mass that undertakes the
agriculture and its allied activities at larger level. The income from
these activities occupies more in the Gross Domestic Product of
India. It is well known that the banking system is the heart of any
countries’ economy, striving to achieve growth and that remain a
permanent and dominating factor in the global competitive business
environment. They are having a favourable growth, asset quality and
profitability. To improve the rural credit mechanism cooperative
banking sector were also introduced earlier and that was also not in
a position to satisfy the rural needs in terms of money. This
inadequate situation led the Government of India to form a
committee to find feasible solution to enable easy rural credit
satisfying mechanism.

The committee that headed by Shri. M. Narasimhan in the year 1975

came out with its recommendation to form Regional Rural Banks. In
particular, the regional rural bank of India mainly focuses on supply
of credit to the rural people. Regional Rural Banks of India satisfies
the needs of rural people for their agriculture and agro-based
business financial needs and in turn they earn profit for their
activities through their banking activity.

In this project, I have focused mainly on the future of rural banking in

India and also highlighted on several other information and issues.
 ABSTRACT

More than 70% of the Indian population are based on rural area. In
rural areas, banking services are not accessible for everyone. India
has adopted a multi-layered mechanism to make financial system
accessible for individual of rural India. The initiative of financial
inclusion is taken by Reserve Bank of India and Indian government as
a joint effort to streamline the weaker and poorer section of the
rural society. The policy makers of our country recognized the need
and importance of banking services throughout the country since the
time of independence. Some surveys are done like “All India Rural
Credit Survey” and “All India Rural Credit Review” that made a
hopeful way for commercial banks to enter into the rural areas and
provide their banking services at a large scale to the rural people.

It has been witnessed that the demand for rural credit is increased
for infrastructure development, production, agriculture and for
consumption also. Rural banking became very easy and
approachable by the help of commercial banks.

Commercial banks are facing some challenges in rural banking like:

high transaction cost, lack of infrastructure, resistance of employees,
big number of accounts having very low funds, lack of security in
carrying and transporting cash by mobile banking in remote areas
etc.
The co-operative banks made their presence in India under the
British rule in 1904. The Reserve Bank of India was also set up in
1935 when India was under the British rule. Although commercial
banking is older than the independence of our country, but the real
efforts in rural banking came into existence with “All India Rural
Credit survey (1954)”. In this sequence, the “All India Rural Credit
Review” done in 1969 introduced the concept of social banking for
commercial banking due to nationalisation of major banks.
Due to the rapid development and improvement in communication
and information technology, the banking became easier. The
improvements in banking are also made by considerable
improvement in land mortgage procedure and other borrowings
from banks. More emphasis given to a considerable amount of paper
work, it also require lots of repeated visits to the bank branches by
the customer makes them face the problem of bribe and other
issues. These all issues results in increased transaction costs for
obtaining loans from banks for the farmers and rural people.

This situation has all the earmarks of being incompletely a result of

absence of proper authorization of mandates to the booked business
banks and RRBs in rearranging techniques. In the setting where
banks are relied upon to assume the job of giving credit guiding to
the cultivating network, disentangling systems and straight
forwardness in giving credit need unique consideration.

A portion of issues rising up out of a few investigations have

additionally been introduced. As it shows up, interest for credit has
expanded in the provincial territories for creation and furthermore
for utilization purposes. Rural banking is graduating to be an
appealing recommendation for commercial banks.
 LITERATURE REVIEW

Haslem (1968) revealed that the internal determinants originate

from the balance sheets and the profit and loss accounts of the bank
concerned and are often termed as micro or bank specific
determinants of profitability. The external determinants are
systematic forces that reflect the economic environment. The
literature provides mixed evidence on the impact of liquidity on
profitability.

Revell (1979) studied the relationship between bank profitability and

inflation. He noted that the effect of inflation on bank profitability
depends on whether bank wages and other operating expenses
increased at a faster rate than inflation.

Chippa and Sagar (1981) discussed the variations in the level of

banking in Eighteen States in 1977 and studied it’s relationship with
other social, economic and infrastructural variables. The analysis
revealed that literacy rate followed by the infrastructural
development emerged as the most dominant variables influencing
the level of banking development.

Angadi (1983) measured the extent of concentration of priority

sector advances in general and agriculture advances in particular in
selected states in India. The analysis revealed that the degree of
concentration of both priority sector advances and agricultural
advances in the selected states had reduced in 1979 as compared to
1969-1970.

Bhattacharya (1986) analysed the impact of branch expansion on the

deposit mobilization in different Indian states. The broad conclusion
drawn by the researcher was that all the four types of deposits were
satisfactorily responsive to branch expansion in Maharashtra, Uttar
Pradesh, Karnataka, Tamil Nadu, Andhra Pradesh, Gujarat, Punjab,
Kerala, New Delhi. However in the states like Himachal Pradesh,
Jammu & Kashmir, Assam, Orissa, Bihar, the extent of branch
expansion was very small in relation to the above mentioned states.

Bal Krishna and Sooden (1991) made an attempt to ascertain the

extent of inter-state disparities with respect to commercial banking
services in rural India during 1975 to 1985. The analysis suggested
that the extent of disparities, with respect to all indicators of banking
development except rural deposits per rural branch had come down
in the year 1985 with respect to the year 1975.

Rao (2002) analyzed the impact of new technology on the banking

sector. Technology changes the way businesses are done and opened
new opportunities for doing the same work differently and more
efficiently.

Sinha (2003) in a field study of 5 RRB’s found that non-priority sector

advances increased sharply in the second half of the 1990’s for all
the sample banks, of which 4 banks have a significant 25 percent of
their portfolio invested in non-priority sector loans.
 SOME IMPORTANT INFORMATION ABOUT RRBS

Regional Rural Banks or RRBs are government banks operating at

regional level in different states of India. These are designed to cater
the needs of the rural area people. Regional Rural Banks helped in
bringing financial inclusion in the primary level of the
nation. Currently there are 43 RRBs in India and each RRB is
sponsored by Government of India along with State Government and
Sponsor bank. Regional Rural Banks (RRBs) were set up under the
provisions of 26 September 1975 ordinance and the RRB Act of
1976 to allocate banking and credit services for agriculture and other
rural sectors. They were established on the recommendation of
Narasimhan Working Group. That time, almost 70% of India’s
population was based on rural region. After passing the act, within a
year at least 25 RRBs were established across India. They were
established with a view to develop banking institutions which could
function as a commercial organization in rural areas.

After the legislation of the Regional Rural Banks Act, 1976, the first
Regional Rural Bank “Prathama Grameen Bank” at Moradabad (U.P)
was set up on October 2, 1975 which was sponsored by Syndicate
Bank with Rs 5 crore as initial capital. There were 4 more RRBs that
were established after this on the same day. One among them was
set up at Malda (West Bengal) under the name of Gour Grameen
Bank (sponsored by UCO Bank) which was the first Grameen Bank of
Eastern India. Others were Gorakhpur Kshetriya Gramin Bank
(sponsored by State Bank of India), Haryana Kshetriya Gramin Bank
(sponsored by Punjab National Bank), and Jaipur-Nagpur Anchalik
Gramin Bank (sponsored by UCO Bank). This act provide
incorporation, regulation and winding up regional rural banks with a
view to develop rural economy by providing the purpose of
development of agriculture, trade, commerce, industry and other
productive activities in the rural areas, credit and other facilities,
particularly to the small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs and other individuals.

Sponsorship of Regional Rural Banks:

Each Regional Rural Bank is sponsored by a Public Sector Bank. A

sponsor bank in relation to a Regional Rural Bank is a Bank by which
such a RRB is sponsored. It is duty of a sponsor bank to aid and assist
the RRB sponsored by it. A sponsor bank helps RRB by:

a) Subscribing to the share capital.

b) Training personnel of Regional Rural Bank.

c) Providing managerial and financial assistance to RRB. A sponsor

bank provides such managerial (staff) and financial assistance during
the first 5 years of its functioning. The central government may,
either on its own motion or on the recommendations of NABARD
extend such period of 5 years for such further period(not exceeding
5 years at a time) as may be deemed fit.

The authorized capital of Regional Rural Banks is Rs. 5 crores which is

contributed by Central Government, State Government and the
Sponsor Bank in ration of 50:15:35.

Functions of Regional Rural Banks:

a) Granting of loans and advances to small and marginal farmers and

agricultural labourers, whether individually or in groups, and to co-
operative societies, agricultural processing societies, co-operative
farming societies, primarily for agricultural purposes or for
agricultural operations and other related purposes.

b) Granting of loans and advances to artisans, small entrepreneurs

and persons of small means engaged in trade, commerce and
industry or other productive activities within its area of operation.

c) Accepting deposits.

Ownership of Regional Rural Banks:

Regional Rural Banks are owned by three entities:

a) Central Government with a share of 50%

b) State Government with a share of 15% and

c) Sponsor Bank with a share of 35% (Any commercial bank can

sponsor the regional rural banks)

Regulation:

Regional Rural Banks are regulated by RBI and supervised by National

Bank for Agriculture and Rural Development (NABARD). All the states
have RRBs in India now except Sikkim and Goa. RRBs are Indian
Scheduled Commercial Banks (Government Banks). NABARD is the
parent organization of these Regional Rural Banks.

Regional Rural Banks Objective:

RRBs were created with the following objective in mind:

 a) To provide banking services to rural and semi-urban areas.

b) Locker, debit and credit card facilities to the country side

people.
c) To enhance employment opportunities by promoting trade and
commence in rural areas.

d) To support entrepreneurship in rural areas.

e) Pension and MGNREGA wages distribution.

Structure of Regional Rural Banks:

The structure of RRBs differs from one RRB to the other RRB
depending on the size and nature of the RRB. The following is the
hierarchy of officials in a Regional Rural Bank.

 Board of Directors
 Chairman & Managing Director
 General Manager
 Assistant General Manager
 Regional Manager/Chief Manager
 Senior Manager
 Manager
 Officer
 Office Assistant
 Office Attendant
Number of Regional Rural Banks in India:

Currently, Regional Rural Bank are going through a process of

amalgamation and consolidation. We have a list of number of RRBs
throughout the years.

Number of RRBs from the initial date:

Dec 1975:- 6 RRBs Dec 1980:- 85 RRBs Dec 1985:- 188 RRBs

Mar 1990:- 196 RRBs Mar 2006:- 133 RRBs Mar 2011:- 82 RRBs

Mar 2013:- 64 RRBs Mar 2014:- 57 RRBs Mar 2016:- 56 RRBs

Jan 2019:- 45 RRBs April 2020:- 43 RRBs

Role of Regional Rural Banks for Rural Development:
Regional Rural Banks were established with the following responsibilities in
mind:

 Taking the banking services to the doorstep of rural masses, particularly

in hitherto unbanked rural areas.
 Identify the financial need especially in rural areas.
 Making available institutional credit to the weaker section 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 enhance banking & financing facilities in backward or unbanked
areas.
 Mobilize rural savings and channelize them for supporting productive
activities in rural areas.
 To provide finance to the weaker sections of society like small farmers,
rural artisans, small producers, rural labourers etc.
 To create a supplementary channel for the flow the central money
market to the rural areas through refinances.
 To provide finance to co-operative societies, Primary Credit societies,
Agricultural marketing societies.
 Generating employment opportunities in rural areas and bringing down
the cost of providing credit to rural areas.
 Enhance & improve banking facilities to semi urban, rural & other
untapped market. With these objectives in mind, knowledge of the local
language by the staff is an important qualification.

Regional Rural Banks VS Commercial Banks:

 RRBs provide banking facility to rural citizen and development to rural

economy .That’s why RRBs exist. Commercial banks exist to make profits
out of their operations
 Scope of RRB is limited to agriculture finance, small sector loans,
handicrafts and other small sector loans scope of commercial banks is
wide and it not only provides agriculture finance but also housing loan,
car finance, letter of credit, credit to big companies and for many
activities.
 RRB is present in rural and semi urban areas only commercial banks do
operations in all over the country that is rural, semi urban and urban
areas.
  While the focus of RRB is more on accepting deposits and granting of
loans to the people the focus of commercial banks apart from lending
and borrowing is on many other services like stock broking, asset
management, insurance, merchant banking, venture capital financing,
foreign exchange related business etc…
 RRB include government of India, state government and commercial
banks stakeholders of commercial banks are public, central government
etc

State Wise All RRBs:

Regional Rural Banks in Andhra Pradesh :

Local Language- Telugu

Sl. No List of RRBs Head Offices

1. Andhra Pragathi Grameena Bank Kadapa

2. Chaitanya Godavari Grameena Bank Guntur

3. Saptagiri Grameena Bank Chittor

Regional Rural Banks in Arunachal Pradesh :

Local Language – English, Hindi

4. Arunachal Pradesh Rural Bank Naharilagun

Regional Rural Banks in Assam

Local Language - Assamese, Bengali, Bodo

S.No. List of RRBs Head Offices

5. Assam Gramin Vikash Bank Guwahati

Regional Rural Banks in Bihar

Local Language – Bhojpuri

S.No. List of RRBs Head Offices

6. Uttar Bihar Gramin Bank Muzaffarpur

7. Dakshin Bihar Gramin Bank Patna

Regional Rural Banks in Chhattisgarh

Local Language – Chhattisgarhi

S.No. List of RRBs Head Offices

8. Chhattisgarh Rajya Gramin Bank Raipur

Regional Rural Banks in Gujarat

Local Language – Gujarati

S.No. List of RRBs Head Offices

9. Baroda Gujarat Gramin Bank Bharuch

10. Saurashtra Gramin Bank Rajkot

Regional Rural Banks in Haryana

Local Language - Haryanvi

S.No. List of RRBs Head Offices

11. Sarva Haryana Gramin Bank Rohtak

Regional Rural Banks in Himachal Pradesh

Local Language - Pahari

S.No. List of RRBs Head Offices

12. Himachal Pradesh Gramin Bank Mandi

Regional Rural Banks in Jammu and Kashmir

Local Languages - Dogri, Kashmiri, Punjabi, Urdu, Gojri, Pahari, Ladakhi, Balti (Palli),
Dardi, Hindi
S.No. List of RRBs Head Offices

13. Ellaquai Dehati Bank Srinagar

14. J&K Grameen Bank Jammu

Regional Rural Banks in Jharkhand

Local Language – Hindi

S.No. List of RRBs Head Offices

15. Jharkhand Rajya Gramin Bank Ranchi

Regional Rural Banks in Karnataka

Local Language – Kannada

S.No. List of RRBs Head Offices

16. Karnataka Gramin Bank Bellary

17. Karnataka Vikas Grameena Bank Dharwad

Regional Rural Banks in Kerala

Local Language – Malayalam

S.No. List of RRBs Head Offices

18. Kerala Gramin Bank Mallapuram

Regional Rural Banks in Madhya Pradesh

Local Language – Hindi

S.No. List of RRBs Head Offices

19. Madhya Pradesh Gramin Bank Indore

20. Madhyachal Gramin Bank Sagar

Regional Rural Banks in Maharashtra

Local Language – Marathi

S.No. List of RRBs Head Offices

21. Vidarbha Konkan Gramin Bank Nagpur

22. Maharashtra Gramin Bank Aurangabad

Regional Rural Banks in Manipur

Local Language – Manipuri

S.No. List of RRB Head Office

23. Manipur Rural Bank Imphal

Regional Rural Banks in Meghalaya

Local Language – Khasi

S.No. List of RRB Head Office

24. Meghalaya Rural Bank Shillong

Regional Rural Banks in Mizoram

Local Language – Mizo

S.No. List of RRB Head Office

25. Mizoram Rural Bank Aizawl

Regional Rural Banks in Nagaland

Local Language – Nagamese

S.No. List of RRBs Head Offices

26. Nagaland Rural Bank Kohima

Regional Rural Banks in Odisha

Local Language – Odia

S.No. List of RRBs Head Offices

27. Odisha Gramya Bank Bhubaneshwar

28. Utkal Grameen Bank Bolangir

Regional Rural Banks in Puducherry

Local Language – Tamil, Malyalam, Telugu

S.No. List of RRB Head Office

29. Puduvai Bharathiar Grama Bank Puducherry

Regional Rural Banks in Punjab

Local Language – Punjabi

S.No. List of RRBs Head Offices

30. Punjab Gramin Bank Kapurthala

Regional Rural Banks in Rajasthan

Local Language – Marwari, Hindi

S.No. List of RRBs Head Offices

31. Baroda Rajasthan Kshetriya Gramin Bank Ajmer

32. Rajasthan Marudhara Gramin Bank Jodhpur

Regional Rural Banks in Tamil Nadu

Local Language – Tamil

S.No. List of RRBs Head Offices

33. Tamil Nadu Grama Bank Salem

Regional Rural Banks in Telangana

Local Language – Telugu, Urdu

S.No. List of RRB Head Office

34. Telangana Grameena Bank Hyderabad

35. Andhra Pradesh Grameena Vikas Bank Warangal

Regional Rural Banks in Tripura

Local Language – Bengali

S.No. List of RRB Head Office

36. Tripura Gramin Bank Agartala

Regional Rural Banks Uttar Pradesh

Local Language – Hindi

S.No. List of RRBs Head Offices

37. Aryavart Bank Lucknow

38. Baroda Uttar Pradesh Gramin Bank Raibareilly

39. Prathama UP Gramin Bank Moradabad

Regional Rural Banks in Uttarakhand

Local Language – Hindi, Sanskrit

S.No. List of RRB Head Office

40. Uttarakhand Gramin Bank Dehradun

Regional Rural Banks in West Bengal

Local Language – Bengali & English

S.No. List of RRBs Head Offices

41. Bangiya Gramin Vikash Bank Murshidabad

42. Paschim Banga Gramin Bank Howrah

43. Uttarbanga Kshetriya Gramin Bank Cooch behar

 SOURCES OF RURAL CREDIT IN INDIA

1. CREDIT CO-OPERATIVE SOCIETIES:

The co-operative societies are known about the very cheap and
essential part of the agricultural credit. When it was first set up,
it fulfilled all credit needs and wants of small and medium
farmers. In the era of 1950-51, co-operative societies played a
significant role in the area of rural credit. They achieved success
according to their plans and started helping farmers belong to
self-help groups. They provided facilities of taking short term
loans whose limit was 305 crores in 1965-66 and later it became
5200 crores in 1999-2000. Government also encouraged NABARD
for their work towards farmer and rural credit. NABARD is
famous for giving credit facilities to their customers like farmers
or people working in rural industries like cottage dairy etc. It
plays a very important role in states like Tamil Nadu, Andhra
Pradesh, Karnataka, Punjab, Haryana, Himachal Pradesh,
Rajasthan etc. Credit facility provided by co-operative societies
has increased with time. Though it is yet to develop more in
eastern states like Bihar, Orissa etc. where various corrupt
moneylenders and land-proprietors have neutralized the
development.

2. LAND DEVELOPMENT BANKS:

Land development banks (earlier known as Land Contract Banks)
essentially gives long haul advances to ranchers against the
home loan of their properties at low paces of enthusiasm over a
time of 15 to 20 years. Ranchers discovered obtaining from such
 banks is appealing through expensive land improvement
programs or if extra land is gained.

The measure of term credit appropriated by LDBs was a lot

higher, contrasted with the credit dispensed by business banks in
the underlying years, yet in the later years the image got
blended.

3. COMMERCIAL BANKS:
Before nationalisation in June,1969,top banks had an urban
inclination. Different variables discouraging progression of bank
credit to farming were:

 Failure of ranchers to give security

 Challenges of recouping advances
 Absence of book-keeping
 The limited quantity of credit
 High exchange cost

Commercial banks presently give both immediate and

roundabout account to horticulture. Direct account is
accommodated short and medium terms to empower ranchers
do farming task easily. They help in farming activities as well as
they stretch out credits to support units which give
infrastructural offices, for example putting away and
warehousing of horticulture product. Farmers additionally get
business bank help under different plans as Small Farmers
Development Agencies(SFDA) and Marginal Farmers and
Agricultural Labourers(MFAL). Business banks have supported
rural banks to protect poor people from the abuse of
moneylenders.
4. REGIONAL RURAL BANKS:
In 1975, the government set up a system of provincial country
banks to investigate the unique needs of little and peripheral
ranchers, landless labourers and the rustic poor. The one of a
kind component of the 196 RRBs working since September 1990
is that they work solely to the more fragile segments of the
provincial network through almost 14800 branches across the
country.

5. THE GOVERNMENT:
The Government has additionally given various credits to
ranchers in the time of natural calamities like floods or
droughts. Such credits are known as Taccavi advances.
However, these advances have not seen expected hugeness
throughout the years.

Different elements have represented this unacceptable

condition of advances like postpones associated with getting
advances authorized and dispensed, time squandered in making
regular outings to government offices, tingling palms of
government officials who endorse the advances etc. These are
different reasons why such advances have not gotten a lot of
well known throughout the years.
 CURRENT STATE OF RRBS
India is one of the largest economy in the world in terms of Gross
Domestic Product (GDP) and Purchasing Power Parity (PPP). But in
terms of GDP per capita, India holds a very low position. Within the
country, there is a stark divide in the incomes of people living in
urban areas and rural areas. Average monthly per capita
consumption expenditure (MPCE) in urban area is almost double of
rural India.

In addition, there are significant disparities in urban and rural

consumption expenditure between different states. Jharkhand and
Orissa, for example, have an MPCE of approximately of Rs. 900 and
Rs. 410, respectively in urban and rural areas. In other states like
Punjab and Haryana, the urban-rural disparity is significantly lower. A
fifth of the Indian population is below the poverty line(BPL) today
with a MPCE below Rs. 340. In some states like Jharkhand and Orissa,
the proportion of BPL is greater than 40%. Many people believe that
the segments which are not considered BPL, should be considered as
potentially bankable with genuine financial needs that could be met
by developing financial and banking systems.

In comparison with other developing economies, India has a

significant opportunity for increasing penetration of both deposit
and credit accounts. Not only there is a large disparity between India
and other developed countries, but there is also a large variation in
banking penetration between urban and rural India. While urban
India seems to be over-banked with more than 100% penetration
(many urban Indians have more than one bank account),rural India
lags far behind with 25% penetration. The variance in rural and urban
deposit and credit account penetration is not restricted only to few
states, but in common across all states.

Access is the availability of financial services and usage is the actual

use of those services. Access is influenced by basic economic state of
rural India, lack of good infrastructure facilities, regulatory
constraints and the economies of rural banking. Usage is constrained
by social issues such as illiteracy, incomplete service offerings by
banks and high transaction costs in the formal banking system.
Access and usage are not synonymous, as people may have access to
financial services, but decide not to use them, either for socio-
cultural reasons or because opportunity costs are too high. RRBs
started their function or operation a long time ago and penetrated
every corner of the country and extended a helping hand in the
growth process of the country. But RRBs are facing several issues and
challenges and their numbers have decreased significantly because
of not being technologically advanced and for some other reasons
also.
 RESEARCH METHODOLOGY

NEED FOR THE STUDY:

RRBs were formed to serve the rural inhabitants of India, the
majority who were not having access to banking. There are many
institutions set up by the state government and central
government and some in collaboration. The main objective of this
institution is to serve the rural population. But the question is how
effectively these banks have performed?
To accomplish the objectives of the paper, we collected various
data from secondary sources. We used several data published in
annual statistics of RRBs, several news articles, books, newspapers
and internet.

OBJECTIVES OF THE STUDY:

 Reviewing capital structure of RRBs
 Study the state wise and region wise RRBs
 Examine deposits and outstanding loans of RRBs
 To understand overall performance of RRBs

TOOLS OF ANALYSIS:

To analyze the collected data, average, standard deviation, co-

efficiency of variation, t-cal, percentages and growth rate were
used.

LIMITATIONS:
The study was restricted to only some particular areas because
of the ongoing pandemic and other reasons.
 DATA ANALYSIS:

AMOUNT IN LAKHS
YEAR OWNED BORROWED TOTAL OWNEDFUNDS BORROWED
TOTALFUNDS TOTALFUNDS
FUNDS FUNDS FUNDS
2011 6647 7303 13950 47.65 52.35
2012 7286 9776 17062 42.70 57.30
2013 8733 11494 20227 43.17 56.83
2014 10910 12736 23646 46.14 53.86
2015 3959 18770 22729 17.42 82.58
2016 4076 27217 31293 13.03 86.97
2017 5002 30289 35921 14.17 85.83
2018 5977 38268 44265 13.51 86.49
2019 6170 51208 57378 10.75 89.25
2020 6173 58824 64997 9.50 90.50
TOTAL 64933 265885 330818
MEAN 6493.30 26588.50 33081.80
t-cal - 3.36

So this data analysis shows that share of owned funds is declining

year by year. Whereas it was 47.65 in the year 2011, it became only
9.50 in the year 2020. But the borrowed funds are aggressively
increased from 52.35 per cent to 90.50 per cent. It indicates that the
banks financial strength has been increasing. This means that the
capital risk has been reducing day by day. The calculated t-cal value
indicates -3.36 significant at 5 percent level of significance between
owned fund and borrowed fund in RRBs.

In Northern region, the total number of RRBs was registered 13,

among which, 2 are communal from Haryana and Himachal Pradesh
and 3 RRBs are shared by Jammu & Kashmir, Punjab, and Rajasthan
respectively; Similarly the total number of RRBs was increased to 18
in 2006-07, 2008-09, 2009-10 respectively; the total number of
RRBs were declined to 15 in 2010-11; again the total number of
RRBs remains declining to 14 during 2011-12; 11 in 2012-13 and
10 in 2013-14 respectively; and declined to 9 in 2014-15 respectively;
In North Eastern Region there are 7 states, which are listed namely:
Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland
and Tripura.

In Arunachal Pradesh total RRB were registered 16 during 2005-06

and rest of the study period registered only one RRB from 2006-07 to
2014-15. In Assam; during the financial year 2005-06 only 1 RBB was
registered and increases to 2 RRBs later after central government
realizes the need of it. In Manipur it was shown 2 RRBs in 2005-06
and rest of the years only one RRBs respectively. Hence, total RRBs in
North-Eastern Region recorded 23 RRBs in 2005-06 and fallen down
to 8 RRBs from 2006-07 to 2014-15 respectively. In Eastern Region
the total number of RRBs was 16 registered in 2005-06; then it was
increased to highly 28 RRBs in 2006-07 and gradually decreasing to
16 RRBs in 2007-08, 15 RRBs in 2008-09, 14RRBs during 2009-10 to
2011-12 and lastly 10 RRBs recorded during 2012-13 to 2014-15
respectively. In Central Region also registered same trend but the
total number of RRBs showed 31 in 2005-06, then it was increased to
highly 48 RRBs in 2006-07 and gradually declined to 31 RRBs in 2007-
08, 27 RRBs in 2008-09, 25 RRBs in 2009-10, 23 RRBs during 2010-11
to 2011-12, 16 RRBs in 2012-13 and lastly 12 RRBs recorded during
2013-14 to 2014-15 respectively.

Likely in Western Region also followed same situation and recorded

the total number of RRBs 10 in beginning year, it was increased to 11
RRBs in 2006-07 highly, then it was gradually decreased year by year
to 10 RRBs in 2007-08, 9 RRBs in 2008-09, 7 RRBs in 2009-10, 6 RRBs
during 2010-11 to 2011-12 and 5 RRBs during the last 3 years of
2012-13 to 2014-15 respectively. In Southern Region the total
number of RRBs were recorded 15 in the year 2005-06 followed by
20 RRBs in 2006-07, and decreased and shown 15 RRBs in 2007-08
and 2008-09, and increased to 16 RRBs during 2009-10 to 2011-12,
again declined to 14 RRBs in 2012-13 and lastly 12 RRBs registered
during the ending years of 2013-14 and2014-15 respectively. In all
India level the total number of RRBs were recorded 108 in the year
2005-06 followed by 133 RRBs in 2006-07, and gradually decreased
and registered 96 RRBs during 2007-08, 90 RRBs in 2008-09, 86 RRBs
during 2009-10, 82 RRBs in 2010-2011, 81 RRBs in 2011-12, 64 RRBs
in 2012-13, 58 RRBs in 2013-14 and lastly 56 RRBs registered during
2014-15 respectively. It is found that the region wise and state wise
RRBs in India during the study period have been decaling trend in
fluctuation manner. It is a good sign for the development of banking
sector in India but when compared to the state wise RRBs registered
constantly during a very long time specially in north Eastern region
and Western region respectively. An examination reveals that the
deposits and loans and advances disbursed by RRBs in India during
the decade period from 2005-06 to 2014-15.The total deposits were
indexed over the study period Rs. 15911036 lakhs with an average of
Rs. 159103.60 lakhs and the total loans and advances were recorded
Rs.898738 lakhs with an average of 89873.80 lakhs over the study
period. Year-wise deposits of RRBs in India furnished that the
amount of deposits were highly increased continuously during the
study period from Rs. 71329 lakhs from Rs.271329 lakhs. A deep
assessment of loans and advances at branches of RRBs in India
were also highly pulled year by year aggressively from Rs. 39713
lakhs in 205-06 to Rs. 184843 lakhs during the ending of the study
period respectively. The table reveals that the share of loans and
advances on deposits during the study period and it was found that
the share of loans and advances were increased in fluctuation
manner. It recognized that the loans and advances were registered
55.68 per cent on deposits in initial study period and followed by
58.32 per cent in 2006-07, 59.52 per cent in 2007-08, 56.41 per cent
in 208-09, 58.15 per cent in 2009-10, 43.15 per cent in 2010-11,
44.30 per cent in 2011-12, 48.31 per cent in 2012-13, 66.66 per cent
in 2013-14 and 68.13 per cent during 2014-15 respectively. The
calculated S.D., C.V. and t-cal were registered Rs. 67872.80 lakhs in
deposits, Rs. 89873.80 lakhs in loans and advances; 42.66 per cent of
C.V. registered on deposits, 52.64 per cent on loans and advances
and the calculated t-calculation value 7.49 is not significant. It reveals
that the no significant relationship between deposits and loans and
advances during the study period. Table 4 provides agency-wise
Self-Help Group (SHG) financial assistance in Regional Rural Banks
(RRBs) in India in form of SHG bank linkage and amount disbursed
during the study period of last decade period from 2005-06 to 2014-
15. The total amount of bank linkage to SHG was registered
Rs.408984 lakhs with an average of Rs. 4089.84 lakhs and disbursed
Rs. 2075.34 lakhs with an average of Rs. 207.53 lakhs. The agency
wise SHG bank credit link have been abnormally fluctuated during
the study period and declined from Rs. 74002 lakhs in 2005-06 to Rs.
40590 lakhs in 2014-15. Year-wise bank credit linkage was registered
an highest amount worth of Rs. 74002 lakhs in 2005-06 followed by
Rs. 38119 lakhs in 2006-07, Rs.24059 lakhs in 2007-08 in decreasing
way. It was increased to Rs. 33850 lakhs in 2008-09, Rs. 37568 lakhs
in 2009-10 and fallen down to Rs. 36610 lakhs during the year 2010-
2011. Again it was increased to Rs. 36852 lakhs in 2011-12, followed
by Rs. 37534 lakhs in 2012-13, Rs. 49800 lakhs in 2013-14 and slightly
declined to Rs. 40590 lakhs respectively. It is find out that the
amount disbursed to SHGs in RRBs was registered a declining trend
by having enormous fluctuations over the study period in India. It
was recorded yearly over the study period were Rs. 332.15 lakhs in
2005-06, it was declined to Rs. 205.73 lakhs in 2006-07 and Rs.
159.51 lakhs during 2007-08. From the financial year 2008-09 on
wards it was in increasing trend and registered Rs. 173.73 lakhs,
followed by Rs. 185.96 lakhs in 2009-10, Rs. 193.05 lakhs in 2010-11,
Rs. 197.10 lakhs in 2011-12, Rs. 209.13 lakhs in 2012-13 and Rs.
223.17 lakhs in 2014-15 except during the financial year 2013-14, it
was recorded Rs. 195.81 lakhs respectively. Overall performance is
not significant with respect to the credit linkage and disbursements.

NABARD (2020) in one of its report, named “An Overview of

Financial Performance of RRBs", shows the finding of their study
which reveals that total Business of the RRBs as of 31 March 2020
stood at 7.77lakh Crore. Regional rural banks, at an aggregated level,
achieved a growth of 8.6% which is quite satisfactory. On the other
hand, Advances, Deposits & Net Loans of the institutions increased
by 10.2% and 9.5%, respectively. 17 out of the 45 RRBs had CRAR less
than 9%, and six RRBs had negative CRAR (%). System-wide CRAR
percentage (%) of the banks deteriorated from 11.5% as of March 31,
2019, to 10.2% on 31 March 2020.

So some RRBs are performing well, some are not as per the study,
but there are chances of improvement. They are not so developed
like commercial banks, but still there are some rays of hope as some
of them are showing good performance and satisfactory
improvement. Indian government should take decisions about RRBs
wisely so that the overall economic condition of country improves.
RRBs are existing and serving us since a very long time. Government
should think about developing their services like commercial banks
which may give the rural economy the boost it needs.
 PROBLEMS OF RRBS

The Regional Rural Banks, in most cases, apparently have a mixed

record of ‘successes’ and ‘failures’, specially in achieving business
goals. Their failure in achieving their targets may be the result of
some unsolved problems and challenges they come across during
their regular operations. It is known that, many big businesses face
several challenges. Regional Rural Banks are no exception. So here
are some challenges or difficulties faced by RRB’s :

 Lack of Co-ordination in Branch Expansion

The branch expansion programme of the RRBs, in many cases has

shown irregularities due to lack of coordination. It could not be
ensured that the branches of the RRBs are opened at regions where
there are no provisions of commercial or co-operative banking
facilities. Lack of coordination is another important cause for the
slow progress of the regional Rural Banks.

 Difficulties in Deposit Mobilization

The RRBs faced a number of practical problems in deposit

mobilisation. As a result of the restrictive lending policy of the RRBs,
which excludes the richer sections of the village society; these
potential and prospective depositors show minimum interest in
depositing their money with the RRBs. The RRBs are aiming at
catering to the needs of the poor class of the rural areas and are not
serving the needs of the rich, this is another reason, the RRBs are not
able to draw the attention of the potential customers, and deposit
from that potential sectors.
  Constraints in Deposit Mobilization

The RRBs forbid the richer sections of the village society in providing
direct financial services and assistance. These sections of the society
are the eligible mass, which have potential savings to deposit. But,
because of the stringent and restrictive credit policy of the RRBs they
are least interested in depositing their savings with the RRBs.
Moreover the state and local government agencies also have not co-
operated much in maintaining their deposits with the RRBs. The RRBs
have not succeeded in mobilising the accounts within themselves.

 Slow Development in Lending Activity

The RRBs’ rate of growth in loan business is slow, in comparison with

other types of banks because of the restrictive policies of the RRBs,
as known till 1996 the RRBs were only permitted to lend money only
to the priority sectors. The following reasons may be cited for this:

 There was limited scope for the RRBs to lend money directly
 It is always complicated to understand and identify the
potential small borrowers and it was a requirement for the
bankers to make sincere efforts in this aspect;
 Most of the small borrowers do not understand the bank
formalities and procedures and prefer to borrow finance from
the moneylenders;
 The variations in the Differential Interest Rate (DIR) Scheme
also posed an unusual dilemma to the Regional Rural Banks,
while the interest charged by the RRBs is 14 per cent , the
other commercial banks charge only 4 percent interest under
the DIR Scheme in rural areas. Therefore, every borrower
would always prefer going to a commercial bank, rather than
RRBs or co-operative societies.
 There is no useful link between the RRBs and the farmers’
service societies.
  There is lack of co-ordination and cooperation between
officials of the district credit planning committees and the
Regional Rural Banks.

 Urban-Orientation of Staff and Lack of Training and

Development Facilities

A critical problem which is experienced while banking with the RRBs

is the urban orientation of the staff that is rarely inclined to serve the
rural and backward areas, as the staffs don’t have any true local
involvement in the village where they serve. Generally they are from
the urban areas, and may not aware of the problems faced by the
rural people; moreover lack of training facilities also creates
problems resulting in the low growth prospects of the RRBs.

 Procedural Rigidities

The measures and procedures followed by the RRBs are very

complicated and time consuming in case of deposits and advancing
loans from the villagers’ point of view, as they don’t understand. The
rural borrowers always prefer informal ways and simple procedures
as have been followed by the money-lenders and the local bankers.

 Running into losses

During 1997-98, out of 196 RRBs, 70 RRBs incurred losses amounting

to Rs. 230.76 crore in total. The total loss of all the RRBs up to the
end of March 1998 amounted to Rs. 3116.00 crore. The reason may
be heavy overhead costs, decrease in lending rates, low profit
margins, and increase in salaries and allowances of the bank staff,
etc. During 2001-02, out of 196 RRBs, 167 made a net profit of Rs.
699.93 crore while 29 suffered losses amounting to Rs. 92.05 crore.
The total loss of all the RRBs declined to Rs. 2792.59 crore as on
March,2001. But ultimately RRBs have become loss making concerns.
  Scope of investment is limited

The scope of investment of the surplus fund for the RRBs are very
limited as the basic objective of RRBs is to provide cash and credit
facilities to poor and weaker sections of society, especially to small
and marginal farmers, artisans, and other weaker sections.

 Delay in decision making

The RRBs are controlled directly and indirectly by the sponsoring

bank, NABARD, RBI, and Central Government, therefore these
organisations also holds the decision making power of the RRBS,
resulting in delayed decision on important issues. Therefore it
hinders the progress of RRBs. Since the end of 1997, the operational
responsibility of RRBs has been approved, and taken by the sponsor
bank.

 Poor recovery rate

The recovery performance of the RRBs is not up to the mark, the rate
of recovery is only around 55 percent.

 Capital inadequacy

As most of the RRBs are suffering from huge losses, there is no

financial soundness for the RRBs, capital inadequacy is such a
problem faced by the RRBs. The huge loss incurred by the RRBs is
eating away the capital.

Also, poor marketing strategies, poor knowledge of customers, low

production, low awareness about savings have created many hurdles
for RRB’s. 6. Lack of proper co-ordination between RRB’s and other
financial institution like commercial banks, NABARD and other co-
operative bank has badly affected the performance of these banks.
Though there are so many challenges the RRBs are facing in their day
to day operations, they are trying hard to achieve their social
objectives and responsibilities. Till date, they have succeeded in
many fronts, and they have successfully projected their image, and
are known as ‘small man’s bank’. They are, in fact, development
banks of the rural poor. They have been trying to fill up the regional
and functional disparity and gaps in rural finance area in our country.
To overcome these problems, efficient financial decisions are
necessary as rural banks are a crucial part of Indian Economy.
Developing the rural banking sector will develop our country
financially in an impressive way. Serving the poor people of our
country is really important for the bright future of our country.
 FUTURE OF RRBS IN INDIA

So now let us focus on the probable future of rural banking of our

country and how they can upgrade themselves to survive.

Many people (financial experts as well as common people) have

several thoughts about the future of RRBs. Though we all know that
future is unpredictable, but we should consider their views as well as
government policies and decisions about Regional Rural Banks.

Many people think that RRBs will be non-existent sooner or later,

Payment Banks, DBTs are a big threat for them and given the state of
corruption and their work style, they will end up loss making unit and
will be forced to shut, however government's effort to keep it
functional will keep it going for long but not ultimately.
One notable thing is can RRBs adapt tech? For if the answer is in
affirmative that is yes, then they may survive and will grow like PSBs
have grown after the computerization.

The RRBs were opened to serve the customers of rural areas and
ensuring development of rural areas .These were established under
RRB Act .The central govt, state govt and sponsor banks are share
holders .To reduce cost operations, lower pay scales were fixed for
staff and not pensionable .But these have been revised and RRB staff
gets all facilities of PSB staff. Many RRBs were found not viable and
loss making .Some of them were merged. As performance RRBs were
not satisfactory, a Committee on RRBs was established.The
Committee on Rural Banks suggested merger of RRBs with concerned
Sponsor Banks .The suggestion on RRBs was accepted by RBI and
suggested the same to Govt of India .The GOI is yet to take a decision
in the matter .Mostly in coming years RRBs are likely to be merged
with sponsored Public Sector Bank .With regard to concessions Govt
of India and sponsored banks are supporting RRBs in respect of
mobilisation of deposits and providing additional capital. We need
RRBs as these banks are functioning for rural development by
providing agricultural credit to farmers to the full extent.

Before we thought about brighter future of RRBs but after

introduction of mini banks now its quite complicated to say because
although these mini banks lacks in infrastructure but they are more
cost effective with good reach in services in rural areas which
facilitates them to stand far away from RRBs for making digital and
general banking simple by combining both of them.

Now, government are taking several decisions to develop rural

banking.

 TECHNOLOGY AND RURAL BANKING

We should recognise that the role of banks, which is central to

formal credit in rural areas, is fast changing. Many non-banks are
providing avenues for savers and funds for investment purposes.
Banks themselves are undertaking non-traditional activities. Banks
are also becoming what are called universal banks and are already
providing a range of financial services such as investments, merchant
banking and even insurance products. Similarly, non banks are also
undertaking bank like activities. At present in India, these are mostly
confined to urban areas, but they will sooner than later get spread to
rural areas.
Another development relates to the gradual undermining of the
importance of branches of banks. The emergence of new technology
allows access to banking and banking services without physical direct
recourse to the bank premise by the customer. The concept of
Automated Teller Machines (ATMs) is the best example. At present,
ATMs are city oriented in our country. It is inevitable that ATMs will
be widely used, in semi-urban and rural areas.
The technology-led process is leading us to what has been described
as virtual banking. The benefits of such virtual banking services are
manifold:

 Firstly, it confers the advantage of lower cost of handling a

transaction.
 Secondly, the increased speed of response to customer
requirements under virtual banking vis-à-vis branch banking
can enhance customer satisfaction.
 Thirdly, the lower cost of operating branch network along with
reduced staff costs leads to cost efficiency
 Fourthly, it allows the possibility of improved quality and an
enlarged range of services being available to the customer
more rapidly and accurately at his convenience.

It may not be possible to deny these facilities to rural areas in our

country since, if banks do not provide them, some non-banks will do
it. Another development relates to the increasing popularity of credit
cards, which are bound to reach rural areas. Many Public Sector
Banks are already in credit card business. In fact, multipurpose cards
could be a facility that IT could usher in for rural population. The
potential can be illustrated with SMART cards. SMART cards – which
are basically cards using computer circuits in them thereby making
them ‘intelligent' – would serve as multipurpose cards. SMART cards
are essentially a technologically improved version of credit and debit
cards and could be used also as ATM cards. They could be used for
credit facilities at different locations by the holders. SMART cards
could also be used for personal identification and incidentally for
monitoring credit usage. For the spread of virtual-banking and
SMART cards to rural areas, it is essential that electric power and
telecom connectivity are continuous and supplies do not drop
especially during the hours when a bank's transactional activity is at
relatively high levels. The banks could, under such assured supply
conditions acquire the required banking software and also put in
place the necessary networking for providing anywhere banking
facilities in rural and semi-urban areas also. Like banks in other parts
of the world, Indian banks will have to get interested in providing
diversified range of financial products and services along with those
that they are already providing, by using technological advances. As
the level of education in rural areas rises and affluence spreads,
customers will start seeking efficient, quicker and low cost services.
As the financial system diversifies and other types of financial
intermediaries become active, in rural areas, savers would turn
towards mutual funds or the savers themselves decide to deploy part
oftheir financial surpluses into equities and debentures as also other
fixed income securities. The bulk of bank deposits in the rural areas
are currently longer term deposits and as these come down, there
would be a distinct shortening of the average maturity structure of
bank deposits with an increase in asset liability mismatches. The
spreads that the banks now enjoy will progressively shrink making it
more difficult for them to survive. As more and more intermediaries
enter rural areas with greater level of technology, traditional banking
business will come under pressure. In order to face the competitive
pressures being exerted by the recently set up market savvy banks,
banks which have extensive branch network in most of the existing
and potential rich rural and semi-urban areas may have to provide
such services.

 MERGING OF RRBS

The merger of Regional Rural Banks (RRB) with their sponsor banks
would avoid business cannibalization and reduction in
administrative overheads, the All India Bank Employees' Association
(AIBEA) said.
In a letter to Union Finance Minister Nirmala Sitharaman, AIBEA
General Secretary C.H. Venkatachalam said instead of further
reforms in the RRB sector, it would be better to merge them with
their sponsor banks as this will add to the rural network of the latter
and at the same time, eliminate the weaknesses that they suffer
presently.
"Monitoring would be much more effective since they would
become part of the bank and come under the direct control of the
management of the sponsor banks. This would also obviate a lot of
administrative overheads and expenses," he said.
While the objectives of RRB are laudable, their very nature of the
business makes them fragile and vulnerable, he noted.
"More often than not, these RRBs even face competition from their
own sponsor banks too. In this background, there have been many
efforts to restructure the RRBs to make them strong and vibrant but
the results have not been that encouraging because of the intrinsic
reasons and they are bound to be so," Venkatachalam said.

Merger of Regional Rural Banks: Seven RRBs into three – Reserve Bank of
India Notification

Merger of Regional Rural Banks :

 Punjab Gramin Bank, Malwa Gramin Bank and Sutlej Gramin

Bank into a single RRB as Punjab Gramin Bank
 Assam Gramin Vikash Bank and Langpi Dehangi Rural Bank
into a single RRB as Assam Gramin Vikash Bank

Baroda Gujarat Gramin Bank and Dena Gujarat Gramin Bank into a
single RRB as Baroda Gujarat Gramin Bank
Govt mulls merger of India Post, RRBs into large PSB to cut down
losses, improve efficiency

The government may merge loss-making entities India Post, along

with the regional rural banks (RRBs), into a full-fledged public sector
bank to beat down the mounting losses. As per the proposal, which is
in early stages, the Centre may control these entities via a holding
company. Both RRBs and Post Payments Banks (PPBs) will be
subsidiaries of the new entity and both PSBs and states would have
the option to monetise or divest their stakes in RRBs.
The reasons the government wants to make India Post, along with
regional banks, a unified bank is because it not only goes well with it
plan to unify loss-making government entities but also infuse a new
lease of life in them, the Financial Express reported.
The Centre could in future only keep two big entities - State Bank of
India and India Post -- as large public banks. The inclusion of RRBs
will provide readymade cash and vast lending portfolio to the new
entity. Their merger into one entity could also boost the overall
efficiency.
While India Post recorded highest net loss worth Rs 18,255 crore in
FY20, RRBs' loss in FY19 stood at Rs 2.8 lakh crore. RRBs extend over
90 per cent loans to priority sectors like agriculture, MSMEs, housing
and education. Their advances as of FY19 stood at Rs 2.8 lakh crore.
Around 90 per cent of the India Post branches cater to the rural
sector, while 80 per cent of RRBs also function in the rural areas.
India Post has a total workforce of 4.2 lakh employees and 1.56 lakh
branches across the country but its finances are crippled by higher
pay and allowance costs, which its higher than its total revenue.
 Impact of RRB Merging

 MERGER PROCESS AND PERFORMS

The strengthen RRBs and improve their performance many initiative

have been taken by government of India and the RBI. The
comprehensive restricting programme, recapitalization of RRB’ s was
initiated in the year 1994-95. The process continued till 1999-2000
and covered 187 RRBs with aggregate financial support of Rs.
2188.44 crore from the shareholders, viz. Government and sponsor
bank in the ratio of 50:15:35. In the wake of introduction of financial
sector reforms in 1991-92, the commercial viability of RRBs emerged
as the most critical factor in deciding about the desired role due to
their limited business flexibility with scope of expansion/
diversification smaller size of loans with higher risk and professional
efficiency in financial deployment. The regional offices of RBI clear
RRB application to open new branches under the new norms
empowered committees. The branches of RRBs may undertake
government business including conducting foreign exchange
business with the prior approval of the concerned government
authority and RBI. These banks have also been permitted to open
extension counters at the premises of the institutions of which they
are principal bankers after obtain license from the concerned
regional office of the RBI. RRBs have been permitted to merge/close
down their unviable branches and the branch licensing policy for
RRBs is almost at par with that for commercial banks. Now RRBs
compete with that for commercial banks. Now RRBs compete with
the commercial banks in rural credit market of India. RRBs give loans
for agriculture and rural development while commercial banks also
serve needs of commerce and industry in rural areas. In 2005-06, the
Government of India initiated the process of structural consolidation
of RRBs by amalgamating RRBs sponsored by the same bank within a
state (2004). The amalgamated RRBs were expected to provide
better customer service due to better infrastructure,
computerization of branches, pooling of experienced work force,
common publicity, marketing efforts etc, and also derive the benefits
of a large area of operation, enhanced credit exposure limits and
more diverse banking activities. As a result of the amalgamation, the
number of RRBs was reduced considerably during the year 2009.
Thus, under the amalgamation process, 145 RRBs have been
amalgamated to form 45 new RRBs. PNB has plans to merge three
RRBs the Vidur Gramin Bank, the Muzzaffanagar Kshtriya Gramin
Bank and the Hindon Gramin Bank into a single RRB to be name as
Vidur Hindon Gramin Bank with its headquarters at Ghaziabad (Uttar
Pradesh). The first phase of consolidation was in 2004-05 when RRBs
of same sponsor banks, within a state, were merged. As a result, the
number of RRBs came down from 196 to 82. The second phase was
in 2011-12, when RRBs with geographical contiguous areas of
operation within a state were merged, across sponsor banks. As a
result, the number of RRBs further declined to 56.

 PERFORMANCE OF THE RRBS OF UTTAR PRADESH BEFORE AND AFTER

MERGER

The deposit mobilized by the bank has increased from 44539 crores
in the year 2001-02 to 120189 crores in 2014-15. It has been
observed that the amount of Investment of the bank has increased
from 30532 crore in the year 2002-03 to ` 65910 crore in 2014-15.
Net profit position of RRBs raised from Rs 600.62 crore in 2001-02 to
Rs 2435 crore in 2014-15 indicating that more that 91.07% RRBs are
operating on profit line. Number of loss making RRBs have reduced
from 26 in 2001-02 to 5 in 2014-15 and the amount of less declined
from Rs 75.86 crore in 2001-02 to 0 in 2013-14 but in last two years
the 5 RRBs have suffered a loss of Rs 176 crore in 2014-15 and Rs 121
crore in 2015-16. The accumulated loss making RRBs have reduced to
8 and amount of accumulated loss also reduced to Rs 1030 crore in
2014-15. RRB is showing considerable improvement in their credit
and deposits performance. The deposits mobilized by the bank has
been increased from 62.143 crore in the year 2008-09 to 1,20,189
crore in 2013-14The increase over the period was 93.40% Amount of
investment of the bank has been increased from Rs 36,762 crore in
the year 2008-09 to Rs 65.910 crore in 2014-15. Accumulated loss of
RRBs have reduced from 66% in 2001-02 to 44% in 2014- 15. But
after amalgamation the losses have further reduced from 44% to
21%. This shows that amalgamation has been beneficial for RRBs to
reduce their accumulated losses. At the same time, Net worth of
RRBs has increased from 34% in 2001-02 to 56% in 2014-15. But after
amalgamation, the Net worth has further increased from 56% to
79%. This shows that amalgamation has been beneficial for RRBs in
increasing the Net worth of RRBs. The recovery of agricultural
investment loans also increased from 31.75% in 1993 to 59.89% in
2002. The recovery of allied activities also increased from 30.50% in
1993 to 46.72 in June 2002. The total agriculture loan recovery was
43.71 in 2010 also increased to 89.10 in 2015.

 CAUSES OF MERGER AND ACQUISITION OF REGIONAL RURAL BANK

There is no single reason for the merger and acquisition trend and no
single underlying cause. Rather, the trend might best be viewed as
the result of a combination of macro and microeconomic factors,
external forces that fundamentally and irrevocably changed the
environment in which banks operate Environmental Factors: Merger
and acquisition has been driven by exogenous changes in the
banking industry economic environment. Among them have been
globalizations of the market place, technological change,
deregulation, and Major macroeconomic events.
1) Globalization and Technology:
Globalization began slowly in the aftermath of World War II. After
war, the major economies of the world gradually become more
connected and interdependent. The trend towards globalization
accelerated in the 1970 and 1980s – with the beginnings of world
became a revolution in information and telecommunication
technologies. Dramatically lowered costs and the ability to
transmit information almost instantaneously around the globe
effectively freed the financial services industry from the
 constraints of time and place. In the global financial economy,
banks, securities - firms, corporation and even individual investors
became able to transfer huge amount of capital around the globe
with the click of a mouse. They also resulted in more competitive
marketplace for banking and financial services. To survive and
prosperity, banking organization needed to respond to this new
environment. Consolidation was one response

2) Macro-Economic factors:
In the 1970 – even before deregulation and before the full effects
of the revolution in ITC technologies had been felt –a series of
macro-economic shocks combined with the forces of globalization
and technology to dramatically alter the economic environment
within which bank operated. Indeed, the decade of the 1970 saw
the introduction of floating exchange rates increased volatility in
interest rates, oil price shocks, stagflation, and unexpected
changes in other economic and financial variables. In the early
1980’s, these stresses were intensified by double- digit inflation
and then by the anti inflationary monetary policies designed to
combat it. The number of failures soared, soon reaching levels
that had not been seen in the great depression. All these factors
led to consolidation of weak and failing banks.

3) Micro- Economic factors:

The micro–economic factors are largely responsible for the
consolidation trend. These factors are individual decisions by
banking firms to pursue a merger or acquisition strategy. For
example, a merger strategy can be based on value maximizing
motives, such as achieving economies of scales or reducing risks
or increasing profits through geographic and product
diversification. A firm decision to merge may also be influenced by
motives that do not necessary maximize the firm’s values.
Adverse change in the bank’s competitive environment may
compel a banking form to undertake an acquisition as part of
purely defensive strategy or merger decision wholly or partly on
 the self-serving motives of managers. Consistent with a change in
merger motive, many of the merger participants in 1980 focused
on expanding their geographic bases to gain strategic long –run
advantage by getting footholds in new location, rather than on
reducing cost or raising profits in the short run.

4) Synergy:
The idea that by combining business activities, performance will
increase and costs will decrease. Essentially, a Bank will attempt
to merge with another Bank that has complementary strengths
and weaknesses.

5) Growth:
Mergers can give the acquiring Bank an opportunity to grow
market share without having to really earn it by doing the work
themselves - instead, they buy a competitor's Balance Sheet for a
price.

6) Eliminate Competition:
Many mergers allow the acquirer to eliminate future competition
and gain a larger market share. The downside of this is that a
large premium is usually required to convince the shareholders of
the target company to accept the offer.There will be better
management of human resources. The human capital in the banks
will be better trained, better integration of the workforce,
centralized transfer system, uniformity in pay-scales, and
uniformity in terms of employment policy etc.
 ADVANTAGES OF MERGER AND ACQUISITION OF RRBs:

(A) The merger would bring down the working expenditure and
make the new entity more viable.
(B) Change in sponsorship may help in improving the performance
of Regional Rural bank.
(C) Change in sponsorship may improve the competitiveness,
work culture, management, and efficiency of regional rural bank
(D) Merger and acquisition of regional rural bank help in
improving the operational viability of regional rural bank and take
advantage of economies of scale.
(E) A bank merger helps your institution scale up quickly and gain
a large number of new customers instantly. Not only does an
acquisition give your bank more capital to work with when it
comes to lending and investments, but it also provides a broader
geographic footprint in which to operate. That way, you achieve
your growth goals quicker. Acquisitions also scale your bank more
efficiently, not just in terms of your efficiency ratio, but also in
terms of your banking operations.
(F) Bank mergers and acquisitions empower your business to fill
product or technology gaps. Acquiring a smaller bank that offers a
unique revenue model or financial product is sometimes easier
than building that business unit from scratch. And, from a
technology perspective, being acquired by a larger bank might
allow your institution to upgrade its technology platform
significantly. Also increase in experienced staff and management
of bank by veteran bankers makes overall performance better.
(G) While not a factor on the balance sheet, every bank benefits
from a merger or acquisition because of the increase in talent at
leadership’ s disposal. An acquisition presents the possibility of
bolstering your sales team or strengthening your team of top
managers, and this human element should not be ignored or
downplayed.
(H) Advantage of setting off losses of inferior bank with superior
bank. Increase in customer base of depositors. Increase in number
of breaches and more widespread reach.
 DISADVANTAGES OF MERGER AND ACQUISITION OF RRBs:

(A) Consolidation reduces the number of independent and locally

owned bank.
(B) Independent and locally owned bank are important source of
funds for local businessmen and farmers. Consolidation reduces
such number of independent and locally owned bank. So local
businessmen and farmers will now find it difficult to obtain credit.
(C) Some large bank become junior partner’ s in new organization
because some banks have been acquired by some banking
companies.
(D) Bank acquired by large or distant organization will lend less to
local borrowers because parent company cannot make credit
decision as efficiently nor has other preferred uses for the bank
funds.
(E) Smaller banks likely to lose local characteristics leading to poor
culture fit (people/culture of the area).
(F) HR issues can be difficult to handle. Career growth of senior
management and other work force could become problematic.
(G) Large inter linked banks expose the broader economy to a
greater financial risks.
(H) Likely to have lesser commitment on the part of staff
impacting customers in terms of their perception.
(I) The bigger the bank, the better is the diversification of its
assets portfolio and lesser chances that the bank will fail in the
system.
(J) The merged entity will be able to tap into cheaper funds more
easily and it will also be able to rationalize the branches all over
the country, to cut down the operation costs.
(K) Mergers will result in immediate job losses on account of large
number of people taking VRS on one side and slow down or
stoppage of further recruitment on the other. This will worsen the
unemployment situation further and may create law and order
problems and social disturbances.
(L) Financial inclusion plans may be affected and their deadline for
their implementation may be delayed. ‘Direct Benefit Transfer’
(DBT) of government aid, subsidies and grants also will be
affected.
(M) The Head Office of the banks after merger will be situated at
a far off place, may be more than thousand kilometer away from
different branches situated at different corners of the country.
 CONCLUSION

So through this detailed study and project report about RRBs, we

learnt about their history, past performances, present situations as
well as probable future scenario. They have contributed huge to
develop rural economy as well as overall Indian economy.

So if amalgamation happens, After the Amalgamation, with the help

of computerization, newer and upgraded technologies, efficiency
increases, moreover the rural people who have not availed the
banking service are the prospective customers, all these will give
positive results, the incurred loss will be recovered and the objective
for which the Regional Rural Banks are operating will prove to be a
successful one. The Regional Rural Banks are trying hard to achieve
the social objectives which are providing services to the rural mass
that are under privileged.

So let’s hope that whatever the Indian government will decide about
Regional Rural Banks, will be fruitful for all, specially for the rural
people of our country.
 BIBLIOGRAPHY

 The Performance of Regional Rural Banks (RRBs) in India: Has

Past Anything to Suggest for Future?
(By Biswa Swarup Misra)
 National Sample Survey Organization (NSSO), Household
Consumer, Expenditure in India
 Access to and Usage of Financial Services, World Bank
 Reserve Bank of India, www.rbi.org.in

 NABARD, www.nabard.com

 Future of Rural Banking (By Y.V.Reddy)