Regional Rural Banks in India as asked in IBPS
Regional Rural Banks are special financial intermediaries that have been formed to cater to the needs of rural masses and weaker sections of the society. A large strata of India’s population is unbanked and devoid of even basic banking services. With a view to bring this sector under the ambit of Indian Banking, RRBs were formed in 1975.
- mobilize deposits from rural and semi-urban areas
- provide loans to small and marginal farmers, artisans, agricultural laborers, and other priority sector areas.
The power of managerial and operational supervision is vested with the Sponsor Bank. Whereas, Performance monitoring and regulatory supervision is done by NABARD (and RBI).
History of Regional Rural Banks
Mahatma Gandhi once said – “Real India lies in villages”. The leaders during that time quickly understood that for the development of India, development of rural areas is a must. As a result, Private Banks were brought under the ambit of ‘social control’ in 1967. Due to some reasons (beyond the scope of this tutorial), this social control seemed inadequate and 14 private commercial banks were later nationalized in 1969. However, it soon became clear that commercial banks were unable to cater to the needs of rural population even after being nationalized. Consequently, Narasimhan Committee was formed in 1975 that suggested formation of Regional Rural Banks in India.
- An ordinance was passed in September 1975 and 5 regional rural banks were set up in the first phase.
- The first regional rural bank was ‘Prathama Bank‘ that was established on 2nd October, 1975 in Moradabad, UP. It was sponsored by Syndicate Bank.
- The other 4 regional rural banks were opened in Gorakhpur (UP), Malda (WB), Bhiwani (Haryana), and Jaipur (Rajasthan)
- The 1975 ordinance was later replaced by Regional Rural Banks Act, 1976.
Ownership of Regional Rural Banks
The RRBs are owned by Central government, State government, and the Sponsor Banks. The ratio is as follows
- Central Governent – 50%
- Sponsor Bank – 35%
- State Government – 15%
Amalgamation of Regional Rural Banks
RRBs were originally visualized as low cost institutions that can better look after the credit needs of rural people. In 1990, there were as many as 196 Regional Rural Banks in India. However, it soon became evident that these banks can’t thrive just on rural economies. Most of these banks started making losses. As a result, a consolidation process was initiated in the year 2005 on the recommendation of Vyas Committee. First phase of amalgamation was initiated Sponsor Bank-wise within a State in 2005 and the second phase was across the Sponsor banks within a State in 2012. In 2006, there were only 133 RRBs.
As of March 2013, 64 RRBs are functioning in India. The amalgamated RRBs thus, benefit from larger area of operation and better credit exposure limits.
UPDATE: As of 1 Jan, 2015 about 47 RRBs are operating in India.