8/18/2019 Agriculture and Rural Sectors Play an Important Role in India

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 Agriculture and rural sectors play an important role in India?s overall development strategy in terms of

income and employment generation and poverty alleviation. Great significance has, therefore, been

accorded to developing appropriate institutions and mechanisms for catering to the credit requirements of

these sectors.

Government of India promoted Regional Rural Banks RRBs! through the RRBs Act of "#$% to bridge the

gap in the f lo& of credit to the rural poor. 'he RRBs have a special place in the multi(agency approach

adopted to provide agricultural and rural credit in India. 'hese banks are state(sponsored, regionally(

based and rural(oriented. Besides the RRBs, commercial and co(operative banks have been catering to

the credit requirements of the rural sector.

'he rene&ed emphasis on agricultural and rural development by the Government of India &ould lead to a

gro&ing demand for different types of financial services in the rural areas. 'he present structure of rural

credit may not be able to cater to the same. RRBs &ould be called upon to play a greater role in providing

such services due to their rural character and feel. RRBs have to take over a larger share of credit

disbursements calling for much larger resource mobili)ation, as also greater efforts for their institutional

strengthening.

It &as announced in the *nion Budget for +-(# that the entral Government and the /tate

Governments had reached an agreement on the content of the package for revival of the long(term

cooperative credit structure. 'he cost of the package &as estimated at Rs. 0,$1 crore, of &hich the

entral Government?s share &ould be Rs. +,%1+ crore.

Related Study on Rural Banking

 

  The Performance of Regional Rural Banks (RRBs) in India: Has Past Anything to Suggest for Future

 

Research Officer in the Department of Economic Analysis and Policy, Reserve Bank of India and

presently working from the Patna office of the Bank. he views e!pressed here are of the a"thor and notnecessarily of the instit"tion to which he #elongs.

Disc"ssions with $hri $.$.%ishra have #een enlightening for the a"thor.he a"thor wo"ld like to

thank an anonymo"s referee for val"a#le s"ggestions. he A"thor gratef"lly acknowledges the

enco"ragement and inspirations of Dr. &arendra 'adhav, Dr. R.(.Pattnaik and $hri $. )anesh. Biswa $war"p

%isra

$ince their inception, regional r"ral #anks *RRBs+ have taken deep roots and have #ecome a sort of

insepara#le part of the r"ral credit str"ct"re in India. he financial via#ility of the RRBs has, however, #een a

matter of concern since the -/s, 0"st five years after their e!istence. A n"m#er of committees have gone

into the iss"e of their financial via#ility and possi#le restr"ct"ring. his st"dy follows a ded"ctive approach.

1irst the e!tent of the pro#lem of the loss making RRBs has #een st"died to analy2e if the pro#lem

is confined to some partic"lar sponsor #anks or $tates. $"#se3"ently, an attempt is made to en3"ire as to

factors that infl"ence the performance of the RRBs and the role4played #y the sponsor #anks. he empirical

analysis has #een co"ched in terms of profit and loss making RRBs for a reasona#ly long */4year+ period to

draw ro#"st policy inferences.

Introduction

 

Regional R"ral Banks have #een in e!istence for aro"nd three decades in the Indian financial scene.

Inception of regional r"ral #anks *RRBs+ can #e seen as a "ni3"e e!periment as well as e!perience in

improving the efficacy of r"ral credit delivery mechanism in India. 5ith 0oint share holding #y 6entral

)overnment, the concerned $tate )overnment and the sponsoring #ank, an effort was made to integrate

commercial #anking within the #road policy thr"st towards social #anking keeping in view the local

pec"liarities. he genesis of the RRBs can #e traced to the need for a stronger instit"tional arrangement for

providing r"ral credit. he &arsimham committee concept"ali2ed the creation of RRBs in -78 as a new set

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of regionally oriented r"ral #anks, which wo"ld com#ine the local feel and familiarity of r"ral pro#lems

characteristic of cooperatives with the professionalism and large reso"rce #ase of commercial #anks.

$"#se3"ently, the RRBs were set "p thro"gh the prom"lgation of RRB Act of -79.

heir e3"ity is held #y the 6entral )overnment, concerned $tate )overnment and the $ponsor Bank in the

proportion of 8/:8:;8. RRBs were s"pposed to evolve as specialised r"ral financial instit"tions for

developing the r"ral economy #y providing credit to small and marginal farmers, agric"lt"ral la#orers,

artisans and small Entreprene"rs. Over the years, the RRBs, which are often viewed as the small man<s#ank, have taken deep roots and have #ecome a sort of insepara#le part of the r"ral credit str"ct"re=. hey

have played a key role in r"ral instit"tional financing in terms of geographical coverage, clientele o"treach

and #"siness vol"me as also contri#"tion to development of the r"ral economy;.

A remarka#le feat"re of their performance over the past three decades has #een the massive e!pansion of

their retail network in r"ral areas. 1rom a modest #eginning of 9 RRBs with 7 #ranches covering = districts

in Decem#er -78, the n"m#ers have grown into -9 RRBs with >,>>9 #ranches working in 8 districts

across the co"ntry in %arch =//>. RRBs have a large #ranch network in the r"ral area forming aro"nd >;

per cent of the total r"ral #ranches of commercial #anks. he r"ral orientation of RRBs is formida#le with

r"ral and semi "r#an #ranches constit"ting over -7 per cent of their #ranch network. he growth in the

#ranch network has ena#led the RRBs to e!pand #anking activities in the "n#anked areas and mo#ili2e r"ral

savings.

he mandate of promoting #anking with a r"ral foc"s, however, wo"ld #e an end"ring phenomenon only

when the financial health of the RRBs is so"nd. 5ith #"ilt4in restrictions> on their operations, it is common

to e!pect that the financial health of the RRBs itself wo"ld #e a matter of concern. As regards their financialstat"s, d"ring the year =//;4/>, 9; RRBs earned profits amo"nting to Rs.-8; crore while ;; RRBs inc"rred

losses to the t"ne of Rs.> crore. &inety RRBs had acc"m"lated losses as on %arch ;, =//>. Aggregate

acc"m"lated loss of RRBs amo"nted to Rs. =,7=8 crore d"ring the year =//;4/>. Of the -/ RRBs having

acc"m"lated loss, 8; RRBs had eroded their entire owned f"nds as also a part of their deposits.

1"rthermore, non4performing assets *&PAs+ of the RRBs in a#sol"te terms stood at Rs.;, =-- crore as on

%arch ;,=//>. he percentage of gross &PAs was =.9 d"ring the year ending %arch ;, =//>. 5hile /;

RRBs had gross &PAs less than the national average, -; had &PAs more than it. )iven the m"lti agency

share holding, this st"dy makesan attempt to en3"ire into s"ch factors that infl"ence the performance of the

RRBs and the role played #y sponsor #ank in a #roader scenario. he pro#lem has #een approached in a

ded"ctive pattern. 1irst, an attempt is made to identify the e!tent of the pro#lem of loss making RRBs and

see if they are confined to some partic"lar sponsor #anks or $tates. If the pro#lem #anks and $tates co"ld

#e identified that wo"ld help in foc"ssing the attention for an end"ring sol"tion.

$"#se3"ently, a model4#ased approach has #een p"rs"ed to identify the factors that are responsi#le for thepro#lems faced #y the RRBs. his st"dy contri#"tes to the literat"re on RRBs primarily in two ways. 1irst,

the iss"es concerning RRBs are an area that is less visited empirically *econometrically+ compared to the

vast literat"re on commercial #anks.

5hatever st"dies have emerged on the topic, they have primarily relied on e!ploratory analysis done for a

partic"lar year or on a gro"p of RRBs to draw inferences. his kind of an approach has a serio"s limitation in

that the findings are g"ided #y the choice of the year of analysis or the partic"lar RRB*s+ in 3"estion.

o overcome this pro#lem, one needs to consider, as attempted in this paper, a reasona#ly long period for

analysis where e!treme o#servations wo"ld #e evened o"t so that one gets res"lts that are more

dependa#le. his st"dy is an attempt rather than a few RRBs and a ten4year period for empirical analysis so

that res"lts are #road #ased and ro#"st.

$econd, given the attention at the policy level to restr"ct"re the RRBs, it is necessary that the #ehavior of

RRBs #e analy2ed separately for the profit and loss making ones, than all RRBs #"nched together so that it

helps in policy form"lation. $"ch an approach has #een followed in this st"dy.he rest of the paper isorganised in si! segments. $ection I provides a #rief review of the co"rse for restr"ct"ring and financial

via#ility of RRBs s"ggested #y different committees over the years.

$ection II reviews #riefly the different factors identified in the literat"re that affects the financial

performance of commercial #anks and also the e!tant literat"re on factors affecting performance of RRBs. A

#ird<s eye view of the spatial distri#"tion of the performance of RRBs across the $tates and sponsor #anks is

given in section III. he methodology of the empirical analysis is disc"ssed in $ection I?. $ection ? disc"sses

the empirical res"lts.