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Regional rural banks


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Meaning, Features of RRBs, Objectives of Regional Rural Banks, Formation and Development of Regional Rural Banks, Reform process of RRBs, For Development/ Promotion/ & Effectiveness of RRBs., Working of RRBs, Functions of RRBs, Structure of Rural Credit

Published in: Economy & Finance, Business

Regional rural banks

  1. 1. Regional Rural Banks Meaning RRBs are oriented towards meeting the needs of the weaker sections of the rural population consisting of small & marginal farmers, agricultural labourers, artisans & small entrepreneurs. Features of RRBs As these banks were more suitable for rural development work, preference should be given to them to open branches in rural banks. The eligible business of commercial banks rural branches may be transferred to RRBs The losses in initial years of RRBs may be met by shareholders & equity capital should also be raised. The various facilities provided by sponsor banks should continue for 10 years in each case. Concessionary refinance by RBI should be continued. The control, regulatory and promotional responsibilities relating to RRBs should be transferred from the Government of India to RBI or NABARD. 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 1968under social control to relieve the poor peasants from the clutches of moneylenders. Previously banks felt that financing agriculture was not their job and that his responsibility would be withdrawn soon.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 tochannelise 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
  2. 2. to the adoption of intensive agricultural programmers 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 anew 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 mobilize deposit, access to money market and modernized outlook which commercial banks have. The Government of India promulgated the Regional Rural Banks Ordinance on26th September 1975, which was later replaced by the Regional Rural Bank Act1976. At to the end of June 1985, 183 Regional Rural Banks with a network of10, 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 June1999 was 196 covering 451 districts spread over 23 states with the network of14,467 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. Reform process of RRBs In order to provide access to low-cost banking facilities to the poor, the Narasimham Working Group (1975) proposed the establishment of a new set of banks, as institutions which "combine the local feel
  3. 3. and the familiarity with rural problems which the cooperatives possess and the degree of business organization, ability to mobilize deposits, access to central money markets and modernized outlook which the commercial banks have”. RRBs started their development process on 2nd October 1975 with the formation of a single bank (Prathama Grameen Bank). As on 31 March 2008, there were 91 RRBs (post-merger) catering to the credit requirements of 586 districts in 25 states with a network of 14,790 branches. For Development/ Promotion/ & Effectiveness of RRBs. RRBs are allowed up to December 31, 2000 to maintain cash reserves at 3 per cent of their demand and time liabilities. A no. of measures taken since 1995 not only to make RRBs viable but also to enable them to function effectively. Apart from Re-Capitalization & infusion of equity, the measures include deregulation of interest rates on advances and deposits of above-one-year maturity, rationalization of branches and relaxation of norms relating to investments by RRBs. In 1998-99, NABARD introduced several policy measures for improving its overall performance. These are: Quarterly/ Half-Yearly review of RRBs, especially weak one by the sponsor banks. Merger of RRBs coming under a sponsor bank & operating in contiguous area. Off-site Surveillance. Framing of Appointment & Promotion Rules (1998) for the staff of RRBs Introduction of kisan credit cards for provision of credit of Farmers. Encouraging RRBs to adopt self-help groups (SHG) for challenging credit to the poor on a sustainable basis.
  4. 4. Working of RRBs RRBs have done mainly two works: Grant of Credit at cheap or concessional rates Lending to individuals belonging to weaker sections without checking the viability of the activity proposed to be undertaken. Objectives of Regional Rural Banks Regional Rural Banks were established with the following objectives in mind: i.)Taking the banking services to the doorstep of rural masses, particularly in hitherto unbanked rural areas. ii.)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. iii.)Mobilize rural savings and channelise them for supporting productive activities in rural areas. iv.)To create a supplementary channel for the flow the central money market to the rural areas through refinances v.)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. Functions of RRBs Every RRB is authorized to carry on to transact the business of banking as defined in the Banking Regulation Act and may also engage in other business specified in Section 6 (1) of the said Act. In particular‚ a RRB is required to undertake the business of
  5. 5. (a) granting loans and advances to small and marginal farmers and agricultural laborers‚ whether individually or in groups, and to cooperative societies‚ including agricultural marketing societies‚ agricultural processing societies‚ cooperative farming societies‚ primary agricultural credit societies or farmers’ service societies‚ primary agricultural purposes or agricultural operations or other related purposes, and (b) Granting loans and advances to artisans‚ small entrepreneurs and persons of small means engaged in trade‚ commerce‚ industry or other productive activities‚ within its area of operation. The Reserve Bank of India has brought RRB’s under the ambit of priority sector lending on par with the commercial banks. They have to ensure that forty percent of their advances are accounted for the priority sector. Within the 40% priority target, 25% should go to weaker section or 10% of their total advances to go to weaker section. 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
  6. 6. 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. Institutional Arrangement for Rural Credit Rural Branches Branches Commercial Banks Co-operative Societies RRBs Long Term Credit (Invt. Credit) ( Short Term Credit (Production Credit) ( State Co-operative Banks District Central Co- operative Banks Primary Agricultural Credit Society Unitary StructureFederal Structure State Level Agricultural & Rural Development Bank State Level Agricultural & Rural Development Bank Primary Development Bank Branches