Regional Rural Banks

For ManagementParadise.com By ex-TYBMS students.
Index
Introduction..........................................................................................................................2 Purposes of Rural Credit......................................................................................................2 Structure of Rural Credit......................................................................................................3 Formation and Development of Regional Rural Banks.......................................................6 Objectives of Regional Rural Banks....................................................................................7 Capital Structure..................................................................................................................7 Business of a Rural Bank.....................................................................................................8 Management of Regional Rural Banks ...............................................................................8 Banking Environment..........................................................................................................9 Progress of Regional Rural Banks.....................................................................................10 Characteristics of Indian Rural Economy and Rural Borrower and the Related Problems in the working of Regional Rural Banks............................................................................12 Suggested Remedies..........................................................................................................14 Future of Rural Banking....................................................................................................16 Bibliography......................................................................................................................18
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Introduction India lives in its villages and in rural India a substantial portion of the population is engaged in agriculture or allied activities. The farming community consists mainly of small farmers and agricultural labourers. Poverty is generally wide spread in the rural areas, with hardly any pockets of prosperity. As rural economy is running short of capital, it must be assisted with adequate capital, appropriate technology and required training in modern technology of production. Hence provision of adequate financial assistance to agricultural, rural industries and rural artisans is necessary. The welfare and prosperity of the nation rests on the development of agriculture and allied activities. Purposes of Rural Credit For purchase of farm implements viz. indigenous wooden implements, improved iron implements, agricultural implements, hand tools etc. For purchase of tractors with accessories, threshers, power tillers, combine harvesters, power sprayers. For purchase of oil engines, electrical engines, pump sets, construction of wells, leveling of ground for irrigational purposes etc. For the purpose of construction and repairs to farm buildings/structure of the type viz bullocks shed, farm store, godowns, animal farm etc. For the purposes of bunding, terracing, leveling, drainage, reclamation of ravine lands, moisture conservation practices For purchase of seeds including high yielding/hybrid fertilizers, manure, pesticides, fungicides etc. For meeting capital expenditure and working capital on units and dairy, poultry, piggery etc. for construction of buildings, purchase of animal equipment, feeds, medicines, vehicles etc
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Structure of Rural Credit The credit facilities are available to rural agriculturists and artisans through financial and non financial institutions which are: Non Institutional Professional money lenders Agricultural money lenders Relatives and friends Traders and commission agents Land lords and Others Institutional Government Cooperative Banks and Commercial banks The non institutional credit sources are considered as exploitative and high cost system. However, they are very much accessible and easily negotiable with the lenders. It is observed that non institutional source of credit is continued to be an important source in rural areas. Institutional lending or credit or loans refers to loans provided by financial institutions.
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Institutional Arrangement for Rural Credit
Commercial Banks
Cooperative Societies
Regional Rural Banks
Rural Branches
Branches
Long term Credit (investment credit)
Short term credit (production credit)
State Cooperative Banks Federal Structure Unitary structure District Central Cooperative Banks State level Agricultural and Rural Development Bank State level Agricultural and Rural Development Bank
Primary Agricultural Credit Society
Primary Development banks
Branches
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Formation and Development of Regional Rural Banks Cooperatives have been encouraged since 1904 and the commercial banks were made to accept the responsibility of financing rural economic activities from 1968 under social control to relieve the poor peasants from the clutches of money lenders. Previously banks felt that financing agriculture was not their job and that his responsibility would be withdrawn soon. So the results of control and the working of cooperatives had not been significant. Hence, the government of India had nationalized the 14 major commercial banks with the objective to channelise the resources the resources of commercial banks to rural areas. The impact of bank nationalization on the growth of scheduled commercial banks in rural areas is clear: the share of rural bank offices in total bank offices jumped from 17.6 per cent in 1969 to 36 per cent in 1972. The share rose steadily thereafter, and attained a peak of 58.2 per cent in March 1990. Consequent to the adoption of intensive agricultural programmes under IADP and DPAP, Green Revolution etc. the demand for financial inputs has increased enormously in the rural areas. Therefore it was felt that cooperative and commercial banks alone would not be in a position to meet all the credit needs of the expanding rural economic sector. Between 1966 and 68 various committees suggested that the rural credit structure was weak, therefore some system of rural banks should be created to fill up the credit gap in rural areas. These banks should extension in the rural areas for rural people as such they must be located in rural areas and understand the rural economic environment. Thus Regional Rural Banks were a new type of institution, which combined a. Local feel and familiarity with rural possess problems which co-operative banks have. b. Degree of business organization ability to mobilise deposit, access to money market and modernised outlook which commercial banks have. The Government of India promulgated the Regional Rural Banks Ordinance on 26th September 1975, which was later replaced by the Regional Rural Bank Act 1976. At to the end of June 1985, 183 Regional Rural Banks with a network of 10,245 branches have been opened in the states of the Indian Union. The total number of Regional Rural banks functioning in the country as at the end of June 1999 was 196 covering 451 districts spread over 23 states with the network of 14,467 branches These banks have been established by the Government of India in terms of the provisions of Regional Rural Banks Act, 1976. The distinctive feature of a rural bank is that though it is a separate body corporate with

perpetual succession and common seal, it is closely linked with the commercial bank which has sponsored the proposal to establish it. The central Government, while establishing a rural bank at the request of a commercial bank, specifies the local limits within which it shall operate. The rural Bank may establish its branches or agencies at any place within the notified area. Objectives of Regional Rural Banks Regional Rural Banks were established with the following objectives in mind: i.) ii.) iii.) iv.) v.) Taking the banking services to the doorstep of rural masses, particularly in hitherto unbanked rural areas. Making available institutional credit to the weaker sections of the society who had by far little or no access to cheaper loans and had perforce been depending on the private money lenders. Mobilise rural savings and channelise them for supporting productive activities in rural areas. To create a supplementary channel for the flow the central money market to the rural areas through refinance Generating employment opportunities in rural areas and bringing down the cost of providing credit to rural areas.
With these objectives in mind, knowledge of the local language by the staff is an important qualification to make the bank accessible to the people Capital Structure The authorized capital of each Regional Rural Bank is Rs.1crore, divided into 1 lakh fully paid up shares of Rs.100 each. The Central Government may, after consultation with the Reserve Bank and the sponsoring bank, increase or reduce such authorized capital, but it shall not be reduced below 25 lakhs. The issued capital of each Rural Bank is Rs.25lakh. Fifty percent of the capital issued by a Rural Bank is subscribed by the Central Government and thirty five percent by the sponsoring Bank. The Board of Directors of a Rural Bank may, after the consultation with the Reserve Bank and the sponsoring Bank and with the prior approval of the Central Government, increase the issued share capital from time to time. The additional capital shall be subscribed in the same proportion as is specified above. The shares if the Rural Bank shall be deemed to be included in

the securities enumerated in Section 20 of the Indian Trusts Act, 1882 and shall be deemed to be approved securities for the purposes of the Banking Regulation Act, 1949. Business of a Rural Bank A Rural Bank carries on the normal banking business i.e. the business as defined in Section 5 (b) of the Banking Regulation Act, 1949 and engages in one or more forms of business specified in Section 6(1) of that Act. A rural bank may, in particular, undertake the following types of business, namely: The granting of loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individual or in groups and to co-operatives societies (including agricultural marketing societies, agricultural processing societies, Co-operative farming societies, primary agricultural credit societies or farmers service societies) for agricultural purposes or agricultural operations or for other connected purposes. The granting of loans and advances, particularly to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry or other productive activities within the notified area of a Rural Bank.
Management of Regional Rural Banks The Management of Regional Rural Banks is largely governed by the RBIs Act, 1976, Banking Regulation Act 1949 and the guidelines of RBI and NABARD and sponsor banks. The general superintendence, direction and management of affairs and business of RRBs are vested in Board of Directors. They exercise the powers and discharge all the functions of the RRBs. In discharging its functions, the Board of Directors act on business principles and shall have due regard to public interest. The Board will consist of a chairman and not more than 8 directors. The Central Government will appoint a Chairman and three Directors, the concerned State Government nominates not more than two Directors and the sponsor bank will nominate not more than three Directors. The Chairman is responsible for the

overall management of the management of the bank and hold office for a period of 5 years. The Chairman is required to devote the whole time to the affairs of the RRBs and subject the superintendence, control and jurisdiction of the board of directors. The tenure of office of a director will be 2 years and he shall hold office until his successor is nominated and will also be eligible for renomination. The RRBs Act has also facilitated the creation of business committees by the Board of Directors. These committees may consist wholly of directors or wholly of other persons or partly of directors and partly of other persons for such purpose as it may decide. Most RRBs constitute Business Committees for examining the feasibility of advances, mobilization of deposits, deployment of funds in other institutions and to find ways and means of recovery performance. Banking Environment Banking Organisation is an open adaptive system. It has its own internal and external environments. Internal environments of RRBs consist of Banking, Personnel, Public Relations etc. The external environment consists of uncontrollable economic, social, political and legal factor governing the success or otherwise of RRBs The RRBs external Environment consists of: Banking Regulation Act RRBs Act Religion Education
General Laws
Legal Environment
Social Environment
Culture
National Politics
RRBs Economic Political Environment Environment
Competition from other banks 9
Economic Administration and relations with other More Notes and Projects and Resources for BMS and MBA students available at Regional Politics institutes http://www.ManagementParadise.com : The TRUE Voice of Management Students Financial Markets
RRBs external Environment comprises of: 1. Legal Environment dealing with rules, regulations and legislative measures such as General Laws, RRBs Act, Banking Regulation Act etc. 2. Economic environment consisting of change in economic activity such as competition, changes from other banks, financial markets and the prescriptions of the lead banks also effect the working of RRBs. Change in the economic environment will affect refinance from NABARD. 3. Political environment dealing with Regional and national Politics. RRBs activities are affected by monetary and fiscal policies of government. 4. Social Environment describing the religious activities, social attitudes, behavior, education and deep-rooted connections. This plays a major role in rural villages where due to illiteracy and poverty, social and cultural forces influence business patterns. Progress of Regional Rural Banks The RRBs were inaugurated on 2nd October 1975. Since the inception of these banks till June 1985, 185 banks have been operating through 8250 branches. Their deposits and advances totaled Rs.1009 crores and Rs.1159 crores respectively, at the end of June, 1985. There are 196 RRBs now in the states covering 495 districts with 14,311 branches. The number of profit-making RRBs rose to 172 during 2000-01 from 44 during 1996-1997 and their profit also rose to Rs 681 from Rs 69.68 crore during this period The credit-deposit ratio was 111 % which is much beyond the capacity of commercial banks to achieve. More than 90% of the outstanding advances have gone to the weaker sections like small and marginal farmers and landless laborers. According to Mr. K.S.V. Krishnamachari, Dy. General Manager of the RRBs Dept. of the State Bank of India, the future of the RRBs in their present form is at stake and recent press reports indicate that the Government of India is seriously considering a proposal to set up a `National Rural Bank' amalgamating the existing 196 RRBs in the country. 10

Indicators Number of Commercial Banks (a) Scheduled Commercial Banks of which: Regional Rural Banks (b) Non-Scheduled Commercial Banks Number of Bank Offices in India (a) Rural (b) Semi-Urban (c) Urban (d) Metropolitan Deposits of Scheduled Commercial Banks in India (Rs. crore) Credit of Scheduled Commercial Banks per office (Rs. lakh) 1994 276 272 196 4 63755 33126 13374 9533 7722 3236.3 166844 1995 284 281 196 3 64234 33021 13581 9717 7915 3868.6 211560 1996 288 287 196 1 64937 32982 13832 9964 8159 4338.2 1997 296 295 196 1 65562 32929 13979 10263 8391 5056 1998 300 299 196 1 66306 32890 14208 10555 8653 6054.1 1999 301 301 196 67041 32894 14390 10816 8941 7222 368837
254015 278401 324079
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Characteristics of Indian Rural Economy and Rural Borrower and the Related Problems in the working of Regional Rural Banks There are certain characteristic features of the Indian rural economy and the rural borrower. Each of these features creates some hindrance in the effective development of rural banking. The Indian rural socio-economic scene is still feudal in nature largely still in the midst of illiteracy. Besides this, the Indian rural psyche is deeply entwined with the cultural ethos. Problem for banking system: There exists a traditional anti-loan psychosis and people prefer to avoid credit as far as possible. Even when they do borrow, moneylenders have a traditional stronghold on the minds of the rural borrowers. The availability of credit from banks is dependent on a number of formalities. Even literate rural customers prefer to avoid such complexities of documentation, restricted working hours, loan amount, proximity factors, purpose of loan .
Rural borrowing may be seasonal in nature due to the heavy dependence in these areas on agriculture and allied activities. Timely availability of funds is crucial. Problem for banking system: The procedures involved in availing bank finance sometimes delay the actual receipt of funds. The money if received late may be of no use to the borrower. The next time finance is required he will approach a source that guarantees timely delivery of money usually local moneylenders. In such situations the cost of borrowing may be immaterial. This can be seen from the fact that rural customers borrow heavily from moneylenders despite their astronomical rates of interest.
The economic profile of most rural borrowers is very weak. The average amount of credit required is relatively low and savings deposited may be as low as Rs. 10 or 20 per month.
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Problem for banking system: Banks may not find operations economical, as sometimes the transaction and follow up costs are more than the amount of credit. Rural banks and rural branches that are compelled to operate in this milieu do so unprofitably Repayment period of loans fixed by banks are shorter than required for the type of activity financed. Gestation period is not considered while fixing the due dates. Due dates of repayment of loan installments were not fixed according to income generation. Working capital was not given on a need based approach or not released at the right time for want of compliance of various conditions of sanction. Besides there is also some amount of subsidized credit available to rural borrowers from the Government. This further reduces the efficiency and independence of the system, as it cannot generate enough to support operations let alone lower interest rates. Compounding to this is the problem of non-repayment of loans. Another problem is that banks generally do not give loans for consumption. In cases where day-to-day living itself is at question, banks, their strict conditions on the use of money borrowed and the numerous delays are avoided.
Other factors leading to non-viability of Regional Rural Banks: Non availability of adequate infrastructure facilities, like pucca houses to locate branches, access roads to villages, police protection on the one hand and availability of staff to keep pace with needs, on the other hand, constitute the major handicaps of RRBs in making progress in branch expansion. Natural calamities in successive years leading to loss of assets. Price fluctuations for farm produces as well as in the cost of inputs. Inadequate support and interest of the government to the RRBs. With 50% shareholding in each RRB, Government has the right to nominate 3 Directors on the Board of RRBs. How best the GOI could get over the difficulty of finding enough number of the right type of people to be nominated as directors and what steps are needed to make the Boards
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function effectively are aspects receiving the attention of GOI and NABARD. Thus, the problem of effectively reaching the masses still remains unsolved. In other words, rural banks as they are cannot be expected to become genuinely rural in the outlook and operations. For any meaningful participation in the overall national rural scene there need be set up at least 20,000 branches of RRBs. Compared to the present number of branches (about 8000) this only shows the magnitude of the task before RRBs and the others who have a stake in its success. Suggested Remedies Some of the steps to make RRBs participation more effective in rural areas are: 1. Efforts for poverty eradication must comprise a package of appropriate technologies, development of skill, services and asset creation. The responsibilities of banks will be to provide financial support to the beneficiaries for creation of productive assets by involving themselves whole heartedly in borrowers, or organization of a system for supply of inputs or marketing of produce. 2. All the existing minor irrigation schemes should be passed on to the RRBs for implementation in proportion to their branch network. 3. With the shift in the lending policy from the credit worthiness of the borrower to the credit worthiness of the purpose, RBI directives that collateral security/third party guarantee need not be insisted upon in respect of small loans, should be effectively implemented to facilitate flow of credit to the poor. 4. The follow up of credit must be done and necessary arrangements should b made in case of entrepreneur faces problems of supply of raw materials and/or in the sale of his product. 5. For proper understanding of the concept of Rural Development and poverty eradication plan, workshops/seminars should be conducted at block level every year. 6. The credit deposit ratio is generally above 10% and in most cases it is more than 15%. Thus, to augment their resources, state Governments must direct all the rural based agencies, e.g. Gram Panchayats, Krishi Upaj Mandies, Marketing Societies etc. to keep their funds with RRBs. 14

7. In the programme like the IRDP, which would virtually involve preparing viable projects/schemes for each family to be assisted, it is also the more imperative that banks, more particularly RRBs, and the State Governments machinery work in total unison. 8. The machinery set up by the State Government for recovery purpose is quite inadequate to cope up with the cases referred. Stringent measures must be taken to ensure repayment of loans in case of willful defaulters.
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Future of Rural Banking As per the estimate of Agricultural Credit Review Committee (Khusro Committee) the demand for agricultural credit in 2001-2002 would be of the order of Rs. 1,10.873 Crores (Rs. 53,534 Crores for short terms & Rs. 57,339 Crores for term loans) & the supply of institutional credit would be Rs. 89,447 Crores implying a shortfall of Rs.21,426 crores. The demand for finance will also go up on account of intensive use of modern technology, increase in consumption of fertilizers, insecticides & pesticides, creation of irrigation facilities, growing use of high yielding variety crops & diversification of agriculture to various allied activities. Despite the multi agency approach adopted for providing rural credit, certain inbuilt formalities viz. documentation, restricted working hours, loan amount, purpose of loan & proximity factors have been causing inconvenience to the deserving rural poor. Yet, exploitation of the rural poor continues by the local money-lenders. Of this, the formal sector accounts for about 20 %. The nature of this segment demands a level of customization that the formal banking network has failed to provide. The uniform treatment meted out and the centralized structure of the system are the basic causes for the failure to cultivate a healthy banking habit in the rural areas. All these causes and effects, create a situation where an innovative means of credit delivery is called for. The process of customization that is the need of the day has been titled micro banking Micro finance has been defined by the task force set up by the NABARD as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards. Micro finance institutions can include NGOs (Non-Government Organisations), co-operatives, banks (commercial, RRBs, other nationalised and public sector banks) and NBFCs (Non-Banking Financial Companies). The NABARD felt that banks would be unable to efficiently organize such grass-root level groups and thus NGOs and Voluntary Agencies were introduced into the picture. New micro credit companies such as Basix and the SEWA-aided bank represent a primarily NGOdriven effort to charge market linked, risk adjusted rates of interest on small loans to small borrowers. At the same time they ensure hurdle free access to borrowers and high repayment rates for themselves.
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In addition to financial intermediation, many micro finance institutions provide social intermediation such as group formation, training in financial literacy and management capabilities. Micro finance is therefore not just a banking tool but also a development tool. Along with benefits to the rural population, the financial institutions advancing the credit also enjoy better recovery rates. The most prevalent method of providing micro finance in India is through SelfHelp Groups (SHGs A SHG is a group of individuals ranging from 5 to 20 members, who come together for a mutually beneficial purpose. They are homogenous in some respect and have certain pre-defined social binding factors. Members of a SHG contribute to a common fund from which collateral-free loans are given to needy members as per the group decisions. After at least 6 months if a bank is convinced, the SHG can become eligible for linkage to the bank for availing credit and can open a savings account in its name and can receive up to 4 times its savings balance as credit. The members of the SHG in turn receive credit as per their needs. This linkage was introduced by the NABARD in 1991-92 through pilot project. . The SHG decides the rate to be charged to its members. Similarly, the bank negotiates about appropriate repayment period with the SHG and the SHG decides on the repayment schedule for its members, generally in weekly installments. If members require larger amounts of loans they can approach the bank for individual loans, with the SHG accepting responsibility for proper credit utilization, repayment by the member and monitoring of the same Micro finance is thus a potent method of rural credit delivery with tremendous potential for serving the rural masses.
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Bibliography Economics of Rural Banking : K. Someshwar Rural Credit Market : Anita Gill Rural Banks for Rural Development : H. Mohapatra Banking in India : Baidyanath Misra Rural banking, A feasible alternative : Atulya Venkataraman
Webliography www.bankersindia.com www.basixindia.com www.sewa.org www.aidindia.org www.economywatch.com www.projectshub.com www.indiaagronet.com
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For ManagementParadise.com By ex-TYBMS students.

For ManagementParadise.com By ex-TYBMS students.

For ManagementParadise.com By ex-TYBMS students.

For ManagementParadise.com By ex-TYBMS students.