The Centre Wants One RRB Per State. Will It Improve Economies Of Scale?  

An analyst, on condition of anonymity, said the proposed merger exercise reflects that the government is betting on creating bigger banks even as it had earlier pointed out the need for setting up small finance banks.

At present there are 43 RRBs or Gramin banks across states with around 22,000 branches. The Reserve Bank of India (RBI) had issued the first set of draft guidelines for small banks in 2014, facilitating the setting up of niche lenders with specific areas of focus.

Problems have arisen with small finance banks as well. Several of them are looking to merge with other lenders to achieve scale that is expected to provide them with operational comfort. A few of these have also been looking to graduate to “universal banks.”

RRBs A Problem Area Since UPA 1

Challenges for the RRBs, set up in 1975 to cater to the semi-urban and rural areas of the country focusing on agriculture and micro, small, and medium enterprises (MSME) sector, have multiplied over the years. Severe competition, high attrition level and limited reach apart from inadequate digital infrastructure have been plaguing these lenders.

More than 90 per cent of the RRB branches are located in rural and semi-urban areas.

Although the RRBs are meant to focus on agriculture and MSME sector loans while also helping in expanding several government-run schemes, including the Pradhan Mantri Jan Dhan Yojana, their sponsors, the state-owned banks, are also expected to perform the same functions.

“As a result, RRBs have to compete with their own sponsor banks, as the latter too are now focusing on the same areas as these lenders. The state-owned banks are also expected to meet stiff targets on lending and also carry out various government schemes. It defeats the purpose of the small rural banks and makes it difficult for them to survive,” C H Venkatachalam, All India Bank Employees Association (AIBEA) general secretary told The Secretariat.    

In a note to Finance Minister Nirmala Sitharaman, the AIBEA and the All India Bank Officers' Confederation (AIBOC) had earlier underlined the need to merge the RRBs with their sponsor banks. “This kind of merger will not resolve the issue, as the RRBs will continue to lack the scale at which the public sector banks operate,” Venkatachalam said.

Last year, Sitharaman urged the RRBs to address the high attrition level in these banks. Several of these lenders still lack updated tech support, even as their sponsor banks have been asked to take necessary steps for digital upgradation.

Sources said that the winding up of RRBs could turn into a political issue, something the government would like to avoid. In the early days of the UPA 1 government, former Finance Minister P Chidambaram was keen to merge the RRBs, but had eventually baulked at the prospect.

Government Support For RRBs

In 2023, the Finance Ministry announced that the RRB mergers would not come under the ambit of the Competition Commission of India, a move that was expected to make the consolidation exercise seamless.

Even earlier, in 2021-22, Finance Minister Nirmala Sitharaman had announced a capital infusion of Rs 10,890 crore into the RRBs, far exceeding the total capital infusion of Rs 8,393 crore into RRBs between 1975 and 2021. RRBs have been regularly infused with capital to help them meet the regulatory requirement of 9 per cent CRAR (Capital to Risk-Weighted Assets Ratio).