RRBs

Regional Rural Banks (RRBs) - Detailed Explanation

1. Background and Formation

• Context and Need:
  • Post-Nationalization Era (1969): Despite the nationalization of banks, rural areas still faced significant issues in accessing credit due to cultural and structural barriers within commercial banks. This issue was recognized in the early 1970s.
  • Narasimham Working Group (1975): Established to address these barriers, this group recommended the creation of specialized institutions to cater specifically to the credit needs of rural areas.
• Legislation:
  • Regional Rural Banks Ordinance (1975): Issued as an interim measure.
  • Regional Rural Banks Act (1976): Replaced the ordinance and formally established RRBs to cater to rural credit needs.

2. Objectives of RRBs

• Bridging Credit Gaps:
  • Purpose: Address the lack of access to credit in rural areas by providing financial services to underserved segments like small and marginal farmers and rural artisans.
• Retaining Rural Deposits:
  • Purpose: Encourage rural residents to keep their savings within rural areas, rather than transferring them to urban banks, which helps in maintaining liquidity in rural financial systems.
• Reducing Regional Imbalances:
  • Purpose: Promote economic development in less developed regions to reduce disparities between urban and rural areas and to generate employment opportunities.

3. Sponsorship and Structure

• Sponsoring Banks:
  • Role of Sponsor Banks: Public sector banks sponsor RRBs and support them by:
    • Share Capital Subscription: Contributing to the initial share capital of the RRB.
    • Training Personnel: Providing training for RRB staff to ensure effective management and operations.
    • Managerial and Financial Assistance: Offering managerial and financial support, especially during the initial five years of operation, which can be extended if needed.
• Capital Structure:
  • Authorized Capital: Set at Rs. 5 crores.
  • Contribution Ratio:
    • Central Government: 50%
    • State Government: 15%
    • Sponsor Bank: 35%

4. Functions of RRBs

• Banking Services:
  • Deposit Acceptance: RRBs accept deposits from the public, including savings and fixed deposits.
  • Credit Provision: Grant loans to:
    • Farmers: Small and marginal farmers for agricultural activities.
    • Agricultural Laborers: Individuals involved in agriculture.
    • Co-operatives: Agricultural and other rural co-operatives.
    • Artisans and Entrepreneurs: Small-scale industries and rural artisans.
  • Remittance Services: Facilitate the transfer of money within and outside the rural areas.
  • Investments: Invest in government securities and deposit schemes to manage funds.
• Refinance Facilities:
  • Support from NABARD: RRBs can seek refinancing from NABARD for loans they have disbursed, helping them manage liquidity and continue providing credit.
• Regulatory Compliance:
  • DICGC Coverage: Deposits in RRBs are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme.
  • RBI Regulations: RRBs must comply with RBI regulations, including maintaining Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
• Priority Sector Lending:
  • Requirement: Since April 1997, RRBs must allocate 40% of their Net Bank Credit (NBC) to Priority Sector Lending, including:
    • Weaker Sections: 25% of Priority Sector advances or 10% of NBC must be allocated to weaker sections of society.

Key Facts and Additional Information

• Role in Rural Development: RRBs play a crucial role in improving financial inclusion and supporting economic activities in rural areas. They address the unique financial needs of rural populations and contribute to overall rural development.
• Evolution: Initially focused on providing credit, RRBs have expanded their role to include various developmental activities, infrastructure support, and financial inclusion efforts.

This detailed explanation covers the origins, objectives, structure, and functions of Regional Rural Banks, providing a comprehensive understanding of their role and operations.