Rural Banks Still Have a Role To Play, The Trick Is To Find How To Make Them More Relevant

The financial performance of these 43 banks has been improving in the last few years but with intense competition, rising compliance, and technology upgrades, challenges for these lenders are multiplying. However, the view emerging in the North Bloc which oversees the plethora of banks which have state funding, is that RRBs are still relevant as they fill a gap that scheduled commercial banks are unable or unwilling to fill in rural India.

However, to help them bridge the challenges facing them, Finance Minister Nirmala Sitharaman would look to carve out a holistic strategy for the RRBs involving consolidation as opposed to their merger with state-run banking giants like State Bank of India or Punjab National Bank. 

Last year the government made the consolidation exercise for RRBs easier. It announced that the RRB mergers would not need the approval of the Competition Commission of India. However, no consolidation has taken place since then.

Financial Performance Of RRBs

A closer look at their financial parameters reveals that the RRBs, owned by the centre, state and sponsor banks, are not yet out of the woods even though they have improved their performance considerably.

The cumulative net profit of the RRBs surged to Rs 4,974 crore at the end of March 2023 compared to Rs 3,219 crore in March 2022, as per a NABARD report. But their accumulated loss too inched upward from Rs 9,062 crore in 2021-22 to Rs 9,840 crore in 2022-23.

Their gross non-performing asset (NPA) level at 7.3 per cent as on March 2023 was also higher than 6.1 per cent in March 2014. The gross NPA rose steadily from 2011 when it was 3.8 per cent, touching 10.8 per cent in March 2019.

These banks have improved their performance in relation to the government-run schemes including Pradhan Mantri Jan Dhan Yojana enrolment and disbursement of MUDRA loans but again compared to the state-owned lenders, their share remains insignificant.

Uneven Performance Across The Country

According to the report, these banks have bettered their performance in the southern states including Andhra Pradesh, Telengana, Kerala and Tamil Nadu barring Karnataka. The RRBs have registered a strong performance in other states such as Rajasthan, Uttar Pradesh and Maharashtra as well. Their output in Bihar and Assam has been the worst.

RRBs were set up in 1975 to power the rural economy by catering to the small and marginal farmers, labourers, artisans and small entrepreneurs.

“Back then the economic and banking dynamics were very different from what we have now. Today we have a well-oiled, efficient, and modern banking system, with networks in urban and rural areas. In this context, the functioning of the RRBs needs to be reviewed. There is very little need to have an RRB today. Instead, the other lenders including the public, private, and small finance banks need to further expand their presence in the unbanked and rural areas,” a senior  public sector bank official said.

The sponsor banks are mostly focused on their own functions and businesses and have little interest in boosting the RRBs. Multiple RRBs lead to more problems, the top official said, arguing against demands by bank unions for a merger of RRBs with state-run banks.  

The government too seems to favour leaving RRBs as separate entities possibly after a bout of consolidation. Since rural and agricultural development is one of the flagship programmes that the NDA 3.0 government wants to take up, officials feel the need to improve the functioning of RRBs is acute and does not warrant snuffing them out through mergers.  

The argument in favour of RRBs as separate entities stems from the fact that they have an intimate rural connect and are able to not only identify customers better but also mobilise deposits better in a rural milieu. "In simple words they know the market and have better penetration. that wealth of knowledge will go waste in a senseless merger with sponsoring banks," said officials in the banking division of Finance Ministry.

Government Push

Last year, in a meeting with the RRBs, the finance minister asked the banks to focus on digital upgradation and increase penetration of the government-run schemes. In one of her meetings, she even brought up the issue of duplication of PMJDY accounts and asked the RRBs to look into the issue and remain watchful.

In 2021-22, Sitharaman announced a whopping capital infusion of Rs.10,890 crore into the RRBs compared to the total of Rs 8,393 crore injected into them between 1975 and 2021, in order to help them meet the regulatory requirement of 9 per cent CRAR (Capital to Risk Weighted Assets Ratio).

The first phase of consolidation among the RRBs was carried out by the UPA government in 2005. The number of RRBs was brought down to 82 from 196. Subsequently, this number was further reduced.

While the RRBs have improved their financial performance in the last few years, their role in the overall banking space has remained rather limited. Is it, therefore, time for the NDA 3.0 government to take a fresh look at the RRBs?