27

REVIEW OF LITERATURE

In this chapter, an attempt has been made to review the empirical studies related

to RRBs and commercial banks. This chapter has been divided into two sections viz;

section 2.1 and section 2.2. Section 2.1 reviews the empirical studies on the working of

RRBs in India highlighting the problems and prospects of RRBs; section 2.1 provides

the review of studies on technical efficiency and total factor productivity growth of

RRBs as well as a brief outline of empirical studies of commercial banks conducted at

national and international level.

SECTION 2.1

Dutta (1976) discussed the need for rural bank branches through the establishment of

RRBs. He commented that the present structure of banking had been successful in

attending the desirable kind of branch expansion and in advancing adequate credit to

agriculture and other high-priority sector. There was a need for a new structure.

Moreover, wasteful competition should be eliminated with the introduction of a system

which offered banking service in depth in the areas allocated to different units. There

was a need for regionally grouped compact zones, each served by a single public sector

zonal bank with full stake in the development of the zone and with a quick

communication link with its constituent branch offices. Although recent experience had

not shown much economies of scale, yet it did not take into account the fact that there

had been large dis-economies from the search for far flung fields of operation. The

economies of scale would appear with the expansion of scale within a compact area.

System should be such in which monetary policy could be made quickly effective

through a relatively small number of decision making authorities, which in their turn,

could effectively supervise and control the banking operations in their respective areas.

Mukherjee (1976) recommended the establishment of RRBs. He opined that to write

off the debt of small and marginal farmers, and agricultural labourers from the money-

lenders, the institutional sector like RRBs would have to fulfill that gap 100 percent and

that, too, in a very short period. The intention was to have rural touch and local feel i.e.

28

a familiarity with rural problems. RRBs should supplement and not replace the other

institutional agencies. RRBs had a two way relationship both with commercial banks on

the one hand and farmer and service society on the other hand.

Dantwala (1977) committee appointed by the Reserve Bank of India (RBI) to review

the working of RRBs submitted its report to RBI in February, 1978. The review

committee observed that there was a need to establish a new institution of RRBs to

fulfill the credit gap. The committee’s view was that credit gap should be measured

with reference to geographical, functional and sectional consideration and also by the

criteria of the degree of substitution of informal credit by formal credit. The

geographical gap would indicate the regional dispersal of institutional credit in the rural

areas. The committee recommended that RRBs would be very useful credit institutions

to the weaker sections of the society like, small farmers, landless laborers, village

artisans, etc. The committee felt that the RRBs can make a substantial contribution

towards improving the quality and quantity of credit flows to the rural areas by

becoming an integral part of the rural credit structure.

Kant (1977) undertook a definitive and comparable appraisal of the performance and

problems by selecting two of first five RRBs started on October 2, 1975, namely, the

Haryana Kshetriya Gramin Bank, Bhiwani (Haryana) and the Jaipur Nagaur Aanchalik

Gramin Bank, Jaipur (Rajasthan) till period. The study found that working of the RRBs

was influenced by specific local conditions which vary from place to place. These

RRBs suffered from many problems. Therefore, the study suggested the need to bring

out some of the key issues so that their performance could be improved to make it

imperative to conduct case studies of their performance and problems. This paper

presented the findings of two such case studies. It was suggested that the working of

these banks should be reorganized and revitalized for improving their performance. The

study explored that Dantwala committee is already at work for examining the working

of these banks and tried to suggest their future set up. The findings of these studies

would also be helpful for reviewing the working of such banks and for thinking of their

reorganization in the future.

29

Wadhva (1977) presented the findings of the workings of two selected RRBs, namely,

Haryana Kshetriya Gramin Bank in Bhiwani District, Haryana and Jaipur Nagaur

Aanchalik Gramin Bank in Jaipur District, Rajasthan. The case study on the workings

of the above two banks had been made for the first three years i.e., 1975-77. The study

explained that the RRBs established for fulfilling certain targets had been recognized as

the development banks for rural poor in India, yet these banks were under-nourished.

Further, their working was under several restrictions which were completely beyond

their control. Therefore, based on the findings of this study, a set of recommendations

was made to the policy-makers for achieving effectively the objectives for which the

RRBs were set up.

Kamat (1978) made some important observations on the functioning of the RRBs. He

observed that in India there was multi-agency approach to finance agriculture. These

were co-operative banks, commercial banks and the RRBs sponsored by commercial

banks. The role of RRBs was to supplement the institutional agencies and not to replace

the other institutional agencies in the field of agriculture finance. The working group

recommended that the RRBs should not enter direct lending and compete with co-

operative banks.

Singh, P. (1978) studied the performance of Farrukhabad Grameen Bank from 1975 to

1977. The study revealed that the bank concentrated mostly on crop loans and even the

recovery performance was unsatisfactory. A small amount of loan was provided for the

purchase of milk animals and to small businessmen and rural artisans. No advance was

provided for the purchase of tractors or installation of tube wells. The study concluded

that both RRBs and commercial banks are the new entrants in the field of rural finance

and therefore, there was shortage of trained and experienced personnel. Moreover, they

lacked rural background which had affected the recovery situation adversely.

Agriculture Finance Corporation (1986) conducted a study on two RRBs, namely,

the Mala Prosha Gramin Dharwar in Karnataka and The Royal Seems Gramin Bank in

Andhra Pradesh over the period ranging 1975 to 1985 on behalf of NABARD. The

study examined the viability of these two RRBs. The study revealed that viability of

RRBs was essentially dependent upon the fund management strategy, margin between

30

resources mobility and their deployment, and on the control exercised on current and

future costs with advances. RRBs incurred losses due to defects in their systems. Also,

the proportion of the establishment costs to total cost and expansion of branches were

the critical factors which affected their viability. The study recommended that there

should be improvement in infrastructure facilities and opening up of branches by

commercial banks in such areas where RRBs were already in operation. There was also

need to redress the problems faced by banks so that their viability could be maintained.

However, the main limitation of the study was that its generalizations were based on the

study of only two RRBs, while each bank in different places had different problems.

Chauhan et al. (1991) studied the availability and adequacy of credit and its impact on

rural income and savings with specific reference to the operations of the Etawah

Kshetriya Gramin Bank in Uttar Pradesh for the period 1984 to 1985. Borrowers were

divided into four categories viz; small and marginal farmers, landless labors, rural

artisans and small traders. The findings revealed that during the period 1984 to1985 the

availability of credit per borrower was the highest for landless labor. However, it was

found that the demand for loans exceeded the supply by about eight per cent for the

other three categories of borrowers. Further, it was found that 35 per cent of total loan

was put to unproductive use to the urgent consumption needs particularly in case of

landless labor and a very little surplus income existed within the sample ranging from 7

to 16 per cent for the average household. It was credit activities and schemes that

encouraged the mobilization of savings among the rural poor.

Balishter and Singh (1992) studied the performance of the Etawah Kshetriya Gramin

Bank, in Uttar Pradesh for the period 1984-1988. The study assessed the performance

on the basis of coverage, growth in deposits and deposit accounts, composition of

deposits, total loan advanced, loan advanced to the weaker sections of the rural

community, purpose-wise loan advanced, recovery position and profit and loss account.

The findings highlighted that the Etawah Kshetriya Gramin Bank achieved progress

with respect to deposit mobilization criteria as compared to other criteria. This success

was achieved mainly from the side of weaker sections of rural society through small

savings accounts. As per the guidelines provided by RBI, the bank should maintain 2:1

ratio while financing to agricultural and non-agricultural activities. The study suggested

31

that advances must be provided to rural cottage industry as it provided employment to

rural people. It suggested the need for big efforts to make the bank into a financially

viable and self-sustaining initiative.

Kumar (1993) studied the progress and performance of the RRBs in India from 1979-

80 to 1989-90. The study selected various performance indicators such as number of

RRBs, number of districts covered, number of branches, amount of deposits and

advances provided to different categories. The findings of the study suggested that the

RRBs should mobilize deposits in order to increase the amount of advances. Further,

the quantum of loan per account for allied activities and short-term loans would

decrease with the increase in area coverage. The comparative analysis highlights that

some states like Orissa, Kerala, West Bengal, Tamil Nadu, Tripura, Bihar, Karnataka

and Assam had shown poor performance throughout the study period, whereas the other

states had shown better performance. They suggested that the poor performer banks

should increase their advances for agriculture purposes and also provide adequate short-

term loans to the farmers as per their requirement.

Deagirikar (1997) examined the non-performing assets of Aurangabad-Jalna Garmin

banks in Maharashtra for the year 1998. The findings of the study revealed that NPAs

was a serious problem faced by the banks. The indicators i.e., a number of suit filed

accounts, mounting overdue, number of sick units in integrated rural development

programme ( IRDP) showed that assets management of the bank on sound lines had not

been ensured. The availability of data on NPAs was based on accounting procedure and

management policy, and hence did not reflect the true position. The analysis indicated

that IRDP may be held responsible for large NPAs. It was verified by calculating the

ratio of NPAs of IRDP to total NPAs of each branch. This ratio was 45:55 percent

which indicated the close relation between them. The study suggested the need of

proper monitoring and follow- up in collaboration with government and voluntary

agencies. Moreover, the head office should have had undertaken diversified lending

operations and mobilized larger business for attending viability in branches.

Deshpande et al. (1999) analyzed the impact of deregulation of interest rates on 15

RRBs for the period 1996-97. This study was prepared just for shifting the loss making

32

RRBs into profit making RRBs. The study found that RRBs though operate with a rural

focus, were primarily scheduled commercial banks with a commercial orientation.

Further, impact of deregulation of interest rates on profitability was felt more strongly

through increased interest cost compared to increased interest income. Combined

impact of advances and deposits on profitability was found to be restricted. They agreed

with Haslem for his seminal contribution by recognizing two broad sets of factors; i.e.,

internal factors and external factors that influenced the performance of banks. The

internal determinants originated from the balance sheets and profit and loss accounts of

the bank concerned and were termed as micro or bank-specific determinants of

profitability, whereas the external determinants condition the operation and

performance of financial institutions and reflected forces that affect the economic

environment of banks.

Hosmani (1999) analyzed the performance of Malaprabha Grameena Bank in

Karnataka from 1980 to1998. He used multistage stratified random sampling procedure

for selecting the samples. Kendall’s coefficient of concordance was used for analyzing

the credit flow and Gini’s coefficient for knowing the extent of concentration. A

comparative assessment had also been made for the period of establishment and period

of development. The study found that liquidity solvency position of the bank was

sound. The pattern of credit flow to the beneficiaries remained unchanged as indicated

by significant Kendall’s Coefficient of Concordance (0.90) and a lower inequality in

credit distribution among beneficiaries was indicated by Gini’s Coefficient (0.12). The

study recommended for operating NRI account, export financing, procedure

simplification, credit enhancement, long run planning and periodical evaluation for

enhancing the performance of bank.

Kalra and Singh (2000) studied the ability of RRBs to succeed as an institutional

reform in the field of rural credit and the important factors that affected their

profitability by examining the functioning and performance of two branches-Thulliwal

and Ghanaur of Malwa Gramin Bank in Punjab. The data consisted of 817 borrower

households of these branches during the agricultural year 1996-97. The study found that

the bank's earnings from the large farmers, who were economically more viable, were

better. The improvements in productivity per employee, especially with more increases

33

in advances per account, helped the Malwa Gramin Bank to improve their recovery

percentage and to overcome the losses and earn profits over time. The break-even levels

of the volume of business, deposits, advances, and income per branch were estimated at

Rs. 215 lakh, Rs. 137 lakh, Rs. 78 lakh and Rs.16 lakh respectively. Almost all the

branches of MGB were earning profit, as they were all viable. The findings suggested

that deposits, expenditure, advances and income would help to improve the profitability

parameter.

Kumar (2001) conducted a case study of the performance of Vashali Kshatriya Garmin

Bank from 1985 to 1998. The study was bifurcated into two reforms period i.e., pre-

reforms period from 1985 to 1990 and post-reforms period from 1991 to 1998. The

study found that during pre-reforms period, the bank provided financial facilities to the

poor for agriculture and non-agriculture purposes and to the priority sector. It had been

observed that performance of the bank was unsatisfactory in terms of deposits, advances

and credit-deposit ratio. It showed that higher income group had received the largest

benefits; the bank had been working with a bias in favour of elites among beneficiaries.

After the financial sector reforms, there had been continuous increase in performance of

the bank. Reforms measure had been taken to make the banks viable. From the perusal

of performance of Vashali Kshatriya Garmin Bank, it emerged that majority of

beneficiaries did not know the procedure of advancing, the purpose and need of the

loan. The bank’s branches had inadequate staff. The study also revealed that bank had

progressed in quantitative terms but not in qualitative terms. The study suggested that

mobilization of adequate deposits was essential, the beneficiaries should be given the

opportunities regarding the need and procedure of repayment, the bank should educate

the people about the scheme and the provision of guarantor should be discontinued for

providing loans to the weaker section.

Tulsyan (2001) undertook an analytical sample study on banking sector reforms in

Alauli block, a reserved constituency of north Bihar with coverage of five Munger

Kshetriya Gramin Bank in the area. Information had been collected concerning 500

beneficiaries from farmers’ families. All of them had been assisted with income

generating assets during the period 1993-94. The study revealed that RBI had been

entrusted with the responsibility of supervision of all rural banks and RBI discharged its

34

responsibility very successfully. Apart from these, there had been continuous decline in

the profitability of these banks. Further in the list of poverty alleviation programmes, no

mention was made of human resources in rural banks. There was always high level of

overdue due to poor quality of lending. Efficient administration was not provided to the

bank branches. There was no comprehensive blue-print present for the reforms in RRBs

which had been un-coordinated. What was needed was much experimentation and

modification to cope with unforeseen problems. The findings suggested RRBs should

use the locally obtained funds for effective disbursement of rural finance. Post-

monitoring over the end use of credit should be strictly undertaken by the bank with

utmost sincerity. Efficient administration should be provided to the bank branches.

Malhotra (2002) discussed the issue of location with reference to 22 different

parameters that had an impact on the functioning of RRBs in India for the year 2000.

The study stated that geographical location of RRBs did not have any effect upon the

performance of RRBs. Rather, sponsored banks affected their performance. Umbilical

cord had its effect on the performance of RRBs but financial health of the sponsor bank

was not considered directly to infer about the umbilical cord hypothesis. This was the

main limitation.

Prasad (2003) examined the performance of all RRBs in the context of pre and post -

financial sector reforms period during the period 1975 to 2002. In the first two and a

half decades of RRBs inception i.e., from 1975 to 1990, there was increase in number of

banks, district coverage and deposit mobilization of the banks. But after this period,

these banks faced various problems like increased over dues, controlled of multi-agency

system, untrained staff, increased establishment costs, losses etc. Further, the balance

sheets of 156 RRBs out of 196 RRBs had shown losses. The study further explained

that on the basis of the recommendations made by various committees, a number of

policy change or measures for development of RRB’s had been introduced. The

important amongst them were the diversification of business activities, application of

prudential norms, restructuring of RRBs, development action plans, memorandum of

understanding, deregulation of interest rates etc. During 2001, out of 196 RRBs, 187

were covered under the restructuring programme. Moreover, the loss making RRBs

were decreased to 152 in 1991, and further to 26 in 2002 and at the same time, these

35

started making profits. Similarly, various measures that were initiated for revamping the

RRBs had resulted in overall growth in the financial health of RRBs to sustain their

growth.

Yadappanvar and Nath (2003) conducted a case study of Aurangabad-Jaina Gramin

Bank which had been operating since 1983.This study showed that the bank had

achieved significant progress on several fronts such as at branch level, per employee

business, loans advances and deposits. Above parameters had strong positive

association which was committed under memorandum of understanding. Analysis of

data relating to the branches of the Bank earmarked that each of the branches had

certain location specific functional advantages as well as problems. Hence, they differed

a great deal in terms of operational efficiency parameters. The significant factors

contributing to the viability of these branches seemed to be the interest spread of loans

especially on high yielding advances, growth in target advances and productivity per

employee and establishment costs. The basic problem of non-viability of these bank

branches resulted from low rates of return on advances to weaker sections and it was

suggested that the problem could be solved by giving large volume of advances on

higher rates of interest to priority sector and non-target groups. This study concluded

that right motivational climate, teamwork and supportive work culture had helped to

bring out the best in the employees. There was a deliberate strategy to bring down the

ratio of investment credit to working capital loans. This resulted in great profitability

from its loan portfolio.

Bhatt and Thorat (2004) analyzed the efforts of institutions and incentives in shaping

the performance of RRBs. The lackluster performance of the RRBs during the last two

decades could be largely attributed to their lack of commercial orientation. Instead of

adopting international best practices in microfinance, especially in terms of reducing

transaction costs for clients and lending to individuals based on an appraisal of their

ability and willingness to repay , these internally inefficient banks made loans based on

political and social considerations that defied the very fundamentals of prudent

underwriting. The unsustainability of the RRBs, has led some observers to advocate a

greater role for non-government organizations and self-help groups in rural financial

intermediation. The progress in liberalizing the policy framework was indeed

36

commendable and the RRBs had a powerful incentive to minimize lending, under the

current environment of reforms, especially to disadvantaged groups. The study

suggested aligning the institutional objectives of increasing outreach and sustainability

with the private incentives of bank clients and staff. A number of policy-level changes

were recommended. Moreover, the next leg of reforms focused on aligning the

incentives of these stakeholders by giving greater importance to the RRBs’ internal

organizational contexts and larger policy environments.

Chavan (2004) analyzed the growth and regional distribution of rural banking of

underprivileged region of east, northeast and central part of India over the period 1975

to 2002. The study revealed that these regions got profit only before 1990. But these

gains reversed in the 1990s and cutbacks in rural branches in rural credit deposit ratios

were the steepest in the eastern and north-eastern states of India as introduction of the

policies of financial liberalization had unmistakably worsened regional inequalities in

rural banking in India.

Agarwal (2005) evaluated the growth process of all RRBs from 1975 to 2003. The

study found that all RRBs had to face various types of problems such as poor loan

recovery, increasing NPAs and poor C-D ratio etc. The study suggested that it was right

time to consider operational amalgamation of all RRBs of the same sponsor bank in a

state. That would improve business opportunities and also enable them to overcome

deficiencies, i.e. prudent deployment of their funds, career progression of staff, dilution

of local feeling etc. In other words, the RRBs should be true to their name; i.e., RRBs

should be operative in a region comprising 10 to 15 districts and not merely restricted to

1 or 2 districts as present. To start with, 3 or 4 adjoining RRBs of the same sponsor

bank could be merged. The amalgamation process might start with small states and

states having high recovery performance. This study recommended that if tangible

reforms were not introduced in the RRBs to make them work in a competitive

environment, these institutions might fail to achieve the success which they were

destined for.

Bose (2005) briefly reviewed the three phases of Regional Rural Banking in India – the

inception and expansion phase from 1976 to1990 and the reforms phase from 1991 to

37

2003. The study concluded that the first phase was more focused on outreach and was

not devoid of a blueprint for viability, though the notion of viability for the RRBs was

much more pronounced than what it denoted under the neo-liberal reform era. It was

true that the commercial principles of banking were put under stress, especially in the

later part of the 1980s, which needed corrective steps, and indeed many of the policy

recommendations of that time were geared to improve recovery and reduce losses

incurred by these banks. However, it was generally held that these improvements could

be done within the parameters set for the RRBs, which in turn were determined by the

overall vision of rural banking. The reform phase focused on commercial profitability

for the RRBs. The reforms of the RRBs were similar to reforms of the commercial

banks. The same set of policies was implemented, and the same set of standards was

also set to calibrate their performance. RRBs relocated to more promising areas;

investments in government securities and PSU bonds and debentures increased, while

banks were hesitant to increase their loan portfolios; credit was extended mainly under

non-priority sector heads so that the proportion of priority sector loans declined; interest

rates on lending were deregulated which resulted in high interest rates charged by the

RRBs; credit to deposit ratio became less than half of the pre-reform levels indicating

increased net transfer of resources from the rural poor to the urban rich; regional

imbalances aggravated; and the small borrowers, the principal clients of the RRBs were

overwhelmingly sidelined. By the beginning of the present decade, the carefully built

structure of rural development banking in India had all but collapsed. The third phase of

Regional Rural Banking i.e., the reforms phase implemented the recommendations of

the government’s own Estimates Committee (2002-03) fully so that both the volume of

credit and the terms of credit to the rural areas, and to the targeted population, could

begin to improve. More generally, the incentive environment currently in place, which

forces banks to respect commercial viability ‘only’ without any obligation towards

RRBs primary banking activities, had to be urgently replaced. The formation of zonal

and state RRBs by merging the various RRBs would be a welcome move. Several

sponsor banks had announced their plans to merge the different RRBs sponsored by

them in a state while the more profitable RRBs are being merged with the parent bank.

38

Many more RRBs are amalgamated so that further branch rationalization would be

possible and dislocation of the RRB staff be made easy.

Ahmad (2006) made an attempt to analyze the business performance of all RRBs

covering deposits, outstanding advances and loans, investment, credit- deposit ratio and

recovery of loans. The study covered the period from 1975 to 2000. The findings

revealed that these banks incurred huge losses due to poor business performance from

1975 to 1994. But after 1995, the position had improved a lot after the implementation

of the Bhandari committee recommendations. RRBs were being completely restructured

by infusing fresh capital, cleansing of balance sheets, allowing non-target group lending

and investment of surplus funds in securities, where attractive returns are available.

Moreover, the viability of RRBs depended on several factors such as level and quality

of business, recoveries, leadership, and shareholders’ support and in addition to the size.

Merger depended upon the stronger partner’s ability to absorb the weaker RRBs and

compatibility of area and sponsor banks, subject to acceptance by all stakes-holders

including RRBs employees. This study suggested the need of liquidation for non-viable

RRBs.

Misra (2006) examined the problems associated with all RRBs from 1994 to 2003

which were specific to certain sponsor banks or states in which they operated. This

study is based from the asset side of the RRBs balance sheet. Various estimation

techniques such as Net income as a percentage to total assets (NITA), umbilical cord

hypothesis, fixed effect and panel GMM were employed so as to interpret the factors

that contribute to their financial health. All the RRBs were categorized into profit

making and loss making ones. RRB earning profits consecutively for the past three

years from the terminal year of the study had been classified as profit making and the

rest as loss making. Such a classification led to 150 RRBs falling in the profit making

category and rest 46 as loss making. The exploratory analysis revealed that the problem

of the loss making RRBs was neither confined to some specific states nor to a group of

sponsor banks. In the absence of any strong systematic pattern so as to suggest that the

performance of RRBs was driven by the peculiarities of any particular sponsor bank or

a specific state in which they operate GMM estimation results indicated that the loan

portfolio management for the profit making RRBs was an area of concern. Investments

39

contributed positively to the financial performance of the profit making RRBs.

Advances while had a positive impact, investments however, turned out to be

inconsequential for the performance of loss making RRBs. The results further indicated

that the umbilical cord hypothesis was operational. The sponsor bank contributed

positively to the financial health of the profit making RRBs. For the loss making RRBs,

the sponsor bank acted as a drag on their performance. The loss making RRBs on the

other hand, could have done better, had the sponsor banks played a proactive role,

especially in their investment portfolio management.

Pal and Sura (2006) assessed the growth pattern of all RRBs in terms of the credit

distribution as well as geographical distribution. Ratios and time series data from

inception 1975 to 2005 were utilized. The study found that the RRBs had achieved

tremendous growth in term of number of bank and its branches. It had extended its

service to every nook and corner of the country covering 487 districts in 26 states. Out

of the 26 states, Uttar Pradesh had the highest number of 36 RRBs followed by Madhya

Pradesh with 19, and Bihar with 16 RRBs, and these three states constitute 36 percent

of the total RRBs in India However, the distribution of banks was not same in different

states. The highest bank numbers were in Uttar Pradesh with 36 banks and the RRBs

were yet to start activities in Delhi, Goa, Sikkim and all Union Territories. Moreover,

the overall position of RRBs in India was not quite encouraging. The poor credit-

deposit ratio was still making big dent on the desired functioning of RRBs. Since the

RRBs were banks for poor people, their presence in all the states of country especially

in underdeveloped states and Union Territories was strongly realized. The study

suggested that the government should spread the branches of RRBs to grass root level to

provide banking and credit service to the needy people in rural India. Moreover, it was

also the responsibility of the bank management and the sponsored bank to take the

charge for corrective measures to raise the credit-deposit ratio of the bank. The gap

between C-D ratio of commercial banks and RRBs need to be minimized so that the

rural India should gain benefit of credit policy.

Kumar (2008) studied the case for the de-amalgamation of RRBs for the year 2005 and

concluded that GOI’s decision to amalgamate 196 RRBs was not supported by

NABARD/RBI. Since the RRBs were established under a special act passed by the

40

parliament, the decision to amalgamate all 196 RRBs at the national level needs to be

ratified by the parliament. The ratification must be preceded by the de-amalgamation

notification to be issued the GOI for all RRBs and a full-scale debate in the parliament

was required on such amalgamations. If the finance minister/GOI did not stand on its

prestige, the best option available was the de-amalgamation of RRBs. Further, it would

be ironic if RRBs, which were conceived by the Indira Gandhi regime were allowed to

die when her daughter-in-law who is wielding the real power under the United

Progressive Alliance government. Perhaps, the United Progressive Alliance government

would look into the situation and restore RRBs to their original mandate in the interests

of rural poor. The irony was further confounded by the Congress claims, ‘Congress ka

hath garib ke sath’, which had pulled back the RRBs from the rural poor by their

amalgamation. Hence, the GOI should issue a notification in the official gazette for de-

amalgamation of RRBs immediately.

Satyasai (2008) examined a few structural constraints that hamper the credit delivery

system and also discussed some of the measures taken to improve the situation. The

study found that the public policy on rural credit in India focused on institutionalization

as a means of providing cheaper credit to the farmers. As a result, the share of private

moneylenders had decreased substantially from 93 per cent in early-1950s to 31 per

cent by 1991. Disturbingly enough, they emerged as an important source, more so for

the resource-poor with a share of 39 per cent by 2002. Further, the multi-agency system

onset for giving a wide choice to farmers turned out to be ineffective due to deficiencies

of design and architecture. Also ailing cooperatives, backtracked RRBs and commercial

banks with waning interest in rural credit contributed to the ineffectiveness of the

multiagency system, hampering the credit delivery. In the study several measures were

taken to revitalize the system from time to time. Co-operatives were being given

package assistance for revival following the Vaidyanathan committee report. RRBs had

been amalgamated and were being given capital to cleanse up their balance sheets.

Commercial banks had been successfully involved in farm credit package for doubling

the credit and other initiatives of government of India. The self-help group bank linkage

had been promoted on a large scale to supplement rural credit delivery. But, its high

transaction costs make it a costly alternative, especially when the business is handled

41

solely by non-government organizations and Mutual Fund Institutions. There should be

thorough overhauling of the rural credit system and its restructuring is the need of the

hour. However, it wouldn’t be effective if done alone in isolation without revitalizing

the Indian agriculture itself.

Dhananjaya (2009) conducted a case study to analyze the efforts of saving

mobilization of Pragati Gramin Bank in Deodurga Taluk, Raichur district in Northern

Karnataka during the year 2007. The study found that bank had evolved many saving

products keeping in view the preferences of the customers. It used campaigns, special

deposit mobilization fortnight, targeting farmers clubs etc. as saving mobilization

strategies. Bank officials were mainly involved in such mobilization campaigns. In spite

of all these efforts, the penetration to the rural segment was not adequate. More

importantly, all these strategies did not succeed in changing the mindset of the people

towards savings. The people opened accounts mainly for availing loans and government

subsidies. Analysis of the various savings products of Pragati Gramin Bank and

perception of customers on these products has brought out three important elements.

First people preferred easy liquidity option. This was common in both rural and less

developed region. Second important element was the accessibility. Though most of the

bank branches of RRB were located in rural areas, they were still inaccessible to many

villages. People preferred door step services, but banks were not in a position to provide

such facilities. In this connection, operation of the banking corresponding model

seemed to be appropriate. Finally, the customer’s preferred safety rather than high

returns on their deposits. This made many rural customers to open the account in the

RRBs. Keeping in view the backwardness of the region and less favorable attitude of

people for savings, Pragathi Gramin Bank tried to provide additional feature of

insurance for the saving bank account. This additional feature had made the product

more meaningful and at the same time it helped bank to mobilize more deposits from

large number of accounts.

Nand et al. (2009) analyzed credit delivery and performance of Haryana Gramin Bank

in financing agriculture in Hisar and Ambala Districts during the year 2007-08 fitted

chi-square test and simple linear regression technique. The study was based on multi-

stage random sampling technique One branch from each district i.e., Neoli Kalan

42

Branch in Hisar (22 branches) and Patvi branch in Ambala (9 branches) were selected

randomly. Two villages from operational area of each selected branch were selected

randomly and finally 60 farmers from feeding villages of each selected branch were

selected at random. The results concluded that deposits and loan advances of Haryana

Garmin bank had been continuously increasing over the period in the study area. The

bank had highest deposits and loan advanced in Hisar as compared to Ambala. The

CGR of deposits and loan advanced in both districts exhibited positive sign. The

recovery of loan advance showed increasing trend as result of enhanced income of

farmer-borrowers, use of credit for income generating enterprises better assessment of

borrowers at the time of credit advancement. The recovery of loan outstandingly

reached up to 91 percent in the year 2007-08 in the study area. The higher percentage of

loan recovery indicated better performance of bank. The value of chi-square test

indicates significant association between land holding categories and educational status

of farmer-borrowers. In case of crop loans, the bank advanced loan 91.79 percent and

89.06 percent of total credit demanded in Hisar and Ambala districts. While these

figures were 83.3 percent and 87.50 percent of total demanded in case of livestock. It

was also observed that the certain amount of loan advanced for purchase of inputs used

in crop production, animals and farm implements and tractors was diverted towards,

celebration of social ceremonies, repayment of loans, purchase of grains and edible

products, construction of houses and its repair on all categories of farms. The study

suggested that the banks should advance the adequate amount of loan for productive

purposes and repayment of loan should be linked with income of borrower. The

consumption loan should be advanced to the farmers to avoid the diversion of loan

advanced for agriculture and allied activities.

Ibrahim (2010) used ANOVA and ‘t’ test to investigate the impact of merger/

amalgamation on the performance of regional rural banks in India, undertaken in 2005-

06. The study was confined to number of branches, district coverage, deposits

mobilized, credits and investments made by the Indian RRBs during 2002 to 2009.

RRBs covered 511 districts as on 31st March, 2002 increased to 616 as on 31st March,

2009. The increase over the period was 1.20 times. The study revealed that number of

RRBs decreased from 196 in the year 2001-02 to 86 in 2008-09. This was due to the

43

amalgamation that took place in the year 2005-2006, covering 525 districts with a net

work of 14,494 branches. However, the number of branches had been significantly

increased from 14,390 in 2001-02 to 15,181 in 2008-09. The increase over the period

was 1.05 times. C-D ratio increased from 41.8 in the year 2001-02 to 56.4 in 2008-09.

Amount of investment of the bank had been increased from Rs 30,532 crore in the year

2001-02 to Rs 65,910 crore in 2008-09. The mean level of loans (i.e., 39345.38) was

less than that mean level of investments (i.e., 42226.25). The study suggested that RRBs

should extend their services in to un-banked areas and increase their credit-deposit ratio.

The process of merger should not proceed beyond the level of sponsor bank in each

state.

Sharma and Sharma (2010) analyzed the comparative performance of the Himachal

Gramin Bank and Parvatiya Gramin Bank on the basis of investment, loan and

advances, resource mobilization and non-performing assets for the year 2000-09 applied

standard deviation, coefficient of variation, compound growth rate, t-test . The study

found that the investment position of the Himachal Gramin Bank was much better than

the Parvatiya Gramin Bank; both the banks had made a commendable progress in the

credit expansion during the period under study. The compound growth rate was noted to

the tune of 15.94 and 20.19 percent of the Himachal Gramin Bank and the Parvatiya

Gramin Bank respectively. The compound growth rate of the Himachal Gramin Bank

and the Parvatiya Gramin Bank in terms of dispensation of the credit was noted to the

tune of 16.13 percent and 19.02 percent respectively. The t-value depicted that there

existed a significant difference in the credit dispensation of both the banks. It was

observed that both the RRBs had made remarkable progress in attaining its objective of

the rural credit. The total resources of both the banks had followed an upward trend of

growth and maintained it throughout the period under study. The compound growth rate

of the Himachal Gramin Bank and the Parvatiya Gramin Bank had been revealed as

11.82 percent and 8.56 percent respectively. The deposit mobilization was found to be

the major contributor in the total resources of these RRBs. The borrowings which

include borrowings from the NABARD, sponsor bank and IDBI/SIDBI had also played

a considerable role in the resource mobilization of both the banks. The Parvatiya

Gramin Bank had been found to be more conservative in comparison to the Himachal

44

Gramin Bank with regard to NPAs management, because the NPAs to the total assets

ratio for the Parvatiya Gramin Bank had decreased during the last few years of the

study. This might be due to better management of the NPAs by the bank and the use of

better methods of loan recovery.

Swami et al. (2010) analyzed the trends in deposits and credit deployments of regional

rural banks in the state of Karnataka during the post- reform period from 1992 to 2008.

Kendall’s coefficient of concordance (W) was computed to study changes in the pattern

of the flow of sect oral credit lending by the RRBs over the study period that in the area

of deposit mobilization, the RRBs had made a notable progress .This achievement was

possible probably due to RRBs tried their best to reach a large number of households in

their service areas. Further, it observed that the expansion of branches to cover the

unbanked area and population might have contributed towards significant growth in

deposits. The total advances increased continuously over the years, except in 2006

wherein the advances declined compared to preceding year possibly because of the

amalgamation process. Credit-deposit ratio of the banks indicated the measure of

creation of credit out of deposit mobilized. This ratio of RRBs was fluctuating

throughout the study period. It was around 100 percent during the first two years (i.e.,

during year 1992, 1993) and then started declining and reached to 78.9 percent in 2000.

But after year 2000, C-D ratio was increasing and reached to 91 percent in 2008. The

share of credit towards agriculture to total bank credit of RRBs remained more than 55

percent during the study period. In addition average credit distributed towards

agriculture to total bank credit of RRBs stands to 59.5 percent in the same period. This

clearly showed the efforts of regional rural banks in favor of agriculture development in

Karnataka. The advances to personal loans seemed to be more preferred sector after

agriculture sector by the RRBs. In our study, it had been observed that credit towards

rural artisan industries and other small scale industries had showed the declining trend.

The study also pointed out that the share of credit to other small scale industries has

declined from 14.0 percent in 1996-97 to 7.8 percent in 2004-05. It seemed that due to

liberalization in the lending policy as the consequence of banking reforms, RRBs are

also shifting their focus on personal advances from village industries credit.

45

Aparna (2011) evaluated the impact of amalgamation on various aspects of the Deccan

Grameena Bank in Andhra Pradesh in achieving the objectives of amalgamation from

2005-06 to 2008-09. The outstanding advances to non-priority sector recorded an

increase of 36.04 percent in the year 2007-08 over the previous year 2006-07.

Moreover, the bank had recorded an increase of 22.8 percent in the number of self help

groups financed in 2007-08 over the previous year. The volume of business of the bank

showed a significant improvement after amalgamation. A business growth of 23.60

percent was registered during 2006-07 over previous year 2005-06. In the year 2008-09

the growth rate over 2007-08 was 26.21 percent. The proportion of gross NPAs to total

advances declined from 4.75 percent in 2005-06 to 1.77 percent in 2008-09. The asset

quality of the bank has tremendously improved after amalgamation due to its improved

recovery performance. The rate of recovery improved sharply from 79 percent during

2006 to 80.64 percent in 2009. The operating cost which was at 2.06 percent in the year

2006 is marginally reduced to 1.26 percent as on 31st March, 2009. The wage bill in

proportion to total assets reduced from 1.47 percent in 2006 to 1.06 percent in 2009.

The risk and other costs followed the same trend and reduced by 0.44 percent during the

same period. The findings concluded that the recent policy, related to amalgamation had

resulted in significant growth in the financial aspects of the bank. The study suggested

that amalgamation policy had provided the way for cross subsidization which had

increased the business volume as well as outreach of the bank to a great extent.

Rangaswamy and Gopalappa (2011) tried to focus on the performance of the credit

delivery by various institutions like co-operative credit banks (CCBs), RRBs and CBs

to the agriculture sector over a period of time i.e., from 1990-91 to 2008-09. Data

analysis was carried out by using simple statistical methods like percentages and

averages. During this period financial sector reforms had taken place. This reforms

period could be classified into two parts. The first part was from 1990-91 and again

from 1999-2000 and the second part was from 2000-01 and again from 2008-09. The

study concluded that overall growth rate of the institutional credit was very high as it

had become a more popular source of finance to the farmers in rural areas. This was

mainly because funds were available in abundance for the RRBs and CBs, whereas for

the CCBs it was much less. In 1991-92 the share of CCBs in agricultural credit was

46

more than 50 per cent which declined to 17 per cent by 2008-09. Whereas, the share of

CBs increased and their share stood at 74 per cent in 2008-09. This was mainly because

of the advent of financial sector reforms under economic liberalization. The share of

RRBs had been hovering around nine per cent in recent years. In addition to this, the

government of India had been trying to take up many policy initiatives to strengthen the

agricultural credit in the rural areas through various financial innovations viz., micro-

finance and kisan credit cards. In this connection the share of non-institutional sources

in credit supply to agriculture had declined from 92.70 per cent in 1951 to 29.70 per

cent in 2010. Further, the study suggested that the organized credit should increase

further so that cent per coverage was achieved and farmers’ exploitation by the private

money lenders was reduced.

Reddy and Prasad (2011) used CAMEL model for evaluating the performance of two

RRBs, Andhra Pragathi Grameena Bank and Sapthagiri Grameena Bank during the post

reorganization period i.e., 2006-2010. Further, in case of gross non-performing assets

(GNPAs) to Net advances and total Investments to Total Assets Sapthagiri Grameena

Bank performed better than that Andhra Pragathi Grameena Bank. The average NPAs

to net advances of Sapthagiri Grameena Bank and Andhra Pragathi Grameena Bank are

0.4280 and 1.6640 with mean difference 1.236‘t’ value for between the banks is 3.066

with ‘p’ value 0.015 i.e. Sapthagiri Grameena Bank out performed Andhra Pragathi

Grameena Bank. With respect to net NPAs to total Assets the average of Sapthagiri

Grameena Bank was 0.3120 where as it was 1.344 for Andhra Pragathi Grameena Bank

with mean difference 1.032. ‘t’ value between banks was 3.049 wit ‘p’ value 0.016

therefore null hypothesis was rejected i.e. Sapthagiri Grameena Bank performed better

than Andhra Pragathi Grameena Bank. The study further found that the average total

assets to total deposits of Sapthagiri Grameena Bank and Andhra Pragathi Grameena

Bank were 107.524, 100.6240 respectively. The mean difference was 6.90 with‘t’ value

2.895 and ‘p’ value 0.020 therefore null hypothesis was rejected i.e. the performance of

Sapthagiri Grameena Bank was better than Andhra Pragathi Grameena Bank. In terms

of business per employee the performance of two sample banks did not differ

significantly, where as the Andhra Pragathi Grameena Bank had proved to be good at

profit per employee. Therefore the performance of sample banks did not differ

47

significantly. In terms of spread to total assets, the performance of Andhra Pragathi

Grameena Bank had excelled over the Sapthagiri Grameena Bank. Similarly in terms of

net profit to assets the Andhra Pragathi Grameena Bank outperformed the Sapthagiri

Grameena Bank. The average interest income to total income of Andhra Pragathi

Grameena Bank and Sapthagiri Grameena Bank were 91.6680 and 88.0040

respectively. Under non-interest income to total income, the mean difference between

Andhra Pragathi Grameena Bank and Sapthagiri Grameena Bank was 4. Null

hypothesis was rejected i.e. Andhra Pragathi Grameena Bank performed better than

Sapthagiri Grameena Bank. The average liquidity assets to total assets of Andhra

Pragathi Grameena Bank and Sapthagiri Grameena Bank were 20.6820 and 17.5120

respectively. The mean difference between two sample banks was 3.170 with ‘t’ value

0.497 and ‘p’ value 0.633. Hence the performance of two sample banks did not differ

significantly. Similarly the performance of two sample banks with respect to

government securities to total assets did not differ significantly.

Gandhimathi et al. (2012) employed compound growth rate to analyze the impact of

the pre and post- economic reforms period on the distribution of agricultural credit in

India. The pre-reforms period was considered from 1971 to1991 and the post-reforms

period was taken from 1991 to 2008. The findings of the study revealed that in the pre-

reforms period, the commercial banks achieved 16.0905 percent of compound growth

of direct agricultural credit disbursement. It was followed by the regional rural banks

(10.3294 percent). In the post-reforms period, the regional rural banks were dominant in

the growth of direct agricultural credit disbursement (21.7494 percent). In both pre and

post-reforms periods, the co-operatives had attained less growth of direct agricultural

advances. The highest growth of direct agricultural advances disbursement was

achieved in the post-reforms period (18.9461 percent). The highest compound growth

rate of direct agricultural advances outstanding was attained for the regional rural banks

in both pre and post-reforms period. In the pre-reforms period, it was 22.1281 percent.

In the post reform period, it was 21.1913 percent. The co-operatives had less percentage

growth of direct agricultural advances outstanding in both pre and post-reforms period.

In the post-reforms period, 15.4884 percentage of compound growth rate of direct

agricultural credit was attained, whereas only 12.6483 percent of compound growth of

48

direct agriculture advances was achieved in the pre-reforms period. The study

concluded that the co-operative banks dominated in the total agricultural credit

disbursement in the pre-reforms period, whereas the dominance of the commercial

banks was higher than the co-operative banks in the post-reforms period.

Ibrahim (2012) analyzed the role of RRBs in rural credit from 2002-03 to 2008-09.The

study concluded that there had been tremendous achievement in disbursing loans to

both the sectors. The priority sector loans constituted higher in percentage throughout

the study. RRBs had lent money to the agricultural sector through the short-term and

term-loans for the development of the agriculture sectors in the economy. The

disbursement of short-term loans and the term-loans of the RRBs had very strong

positive correlation. The linear correlation co-efficient is 0.98576 which was close to

+1. This means that the demand for short-term loan increased the demand for the term-

loan. Also the loans provide by the RRBs to various groups in the priority sector

showed an increasing trend. The years 2007-08 and 2008-09 registered higher growth.

When compared to the loans to non-agricultural activities, the highest share was

recorded in the agriculture. RRBs had been quite successful in its agricultural loans.

The banks had been able to mark a rising trend in its loans outstanding with 46 percent

in the year 2002-03 to 64 percent in 2008-09 in agriculture sector. Further analysis

revealed that the loan outstanding to non-agriculture had been decreasing from 54

percent in 2002-03 to 36 percent in 2008-09. Even though the standard deviations of the

percentages of the agricultural and non-agricultural loans outstanding by the RRBs

remained of the same value i.e. 6.626067, the coefficient of variation differed. Hence,

the agricultural loans outstanding were more consistent than that of non-agricultural

loans outstanding. However, it was the responsibility of the banks and the management

to look into the matter of providing sufficient amount of loans to non-priority sector as

well. The gap between short-term loans for crop and the term-loans for agricultural and

allied activities needed to be minimized. The banks needed to encourage the agricultural

sector by providing larger amount of term loans. Generally, non-agricultural sector

indirectly helped the rural economy in many ways.

Ishwara and Cirappa (2012) analyzed the impact of pre and post-amalgamation on the

financial performance of the RRBs during the period 1980 to 2009. The study found

49

that RRBs alone had 45 per cent of the total self-help groups in the country. RRBs had

also issued over 40 lakh kisan credit cards to the farmers. C-D ratio of 50 RRBs was

more than 60 percent that for 87 banks was less than 40 per cent in March 2004.

Further, the study explained due to amalgamation in 2005, 28 RRBs turned into nine

new RRBs sponsored by nine banks in six States. After amalgamation, RRBs

transformation had resulted in a 200 per cent increase in net profits, a 100 percent

increase in business, a gradual reduction in the number of loss-making banks and an

addition of 1000 outlets. All this had been because of consolidation among RRBs. The

study revealed that RRBs seemed to have better non-performing assets (NPAs)

management with net NPAs coming down every year after the amalgamation. In 2005-

06, the net NPAs stood at 3.96 percent. It declined to 1.98 per in 2008-09. RRBs are

extending loans to non-agricultural sector in rural areas also. They were broad-basing

their credit pattern. Financing of vehicles for rural transportation helped villagers, as

they sold their produce in urban areas. Moreover, the reduction in number of RRBs had

not resulted in any sudden reduction in staff strength since there was no termination of

services of employees after amalgamation.

Kaye (2012) studied the various credit facilities provided by RRBs and its impact in

augmenting income, generation of employment, alleviation of poverty and improving

the living standard of the rural tribal people in Arunachal Pradesh to different sectors of

rural economy. And impact of the information was collected from the field survey

through structured questionnaires administered over a sample of 200 tribal beneficiaries

who received loan and advances during the period from 2005 to 2009, 20 beneficiaries

from different categories of people had been selected, located in different areas, i.e.,

five branches from plain area and five from hill area. It was found that before availing

bank credit, an average beneficiary in the study area was employed for about 102

standard days in a year However, during the post-loan period; such employment was

estimated at 184 standard days in a year with an additional employment of 82 days. The

overall average incremental income per beneficiary from pre to post-loan period was

estimated at Rs. 1500, indicating a net growth in the income to the tune of around

21percent after availing loan banks. Out of 200 beneficiaries only 29 percent reportedly

invested in farm assets during the post-loan period with an average investment of

50

Rs.4719. On the other hand, majority of beneficiaries reported that their investments

were generally towards the accumulation of non-agricultural capital. It was therefore,

observed that average amount of investment was higher in non-agricultural assets than

the other assets, which accounted for 29 percent in agricultural sector and 45 percent in

non-agricultural sector during the post-loan period as compared to pre-loan period.

Further, there was significant trend in improving standard of living of the rural people

in the study area. About 57 percent of borrowers (113 beneficiaries) reported that their

economic conditions and social status had improved. Out of 113 beneficiaries, 52 has

attained better standard of living with high income, better housing conditions and

acquiring of good number of assets after availing loan from the APRB branch. Primary

reasons for the improvement was mainly found in increase of annual net income and

incremental income, accumulation of assets, housing condition etc. The study suggested

that RRBs should concentrate more on financing SHG, co-operative and small business

entrepreneurs, etc. for better returns and profits.

Sharma (2012) used ratio analysis and t test to analyze the impact of amalgamation on

the average financial performance of RRBs on the basis of five parameters viz.,

traditional lending-borrowing functions, social commitment, profitability,

diversification and operational cost. These parameters studied through variables viz;

credit-deposit ratio, investment-deposit ratio, return on assets ratio, operating profit

ratio, interest income ratio to total assets average , non-interest ratio and intermediation-

cost ratio. The study analyzed the significance of difference in these variables occurred

during 1999 to 2011. As the amalgamation of regional rural bank was started in 2005,

therefore the period of six years from 1999 to 2000 and 2004 to 2005 was considered as

pre-amalgamation period and the data of six years from 2005 to 2006 and from 2010 to

2011 had been considered as post-amalgamation period. The findings highlighted that

the mean value of average performance of RRBs during post-amalgamation period was

comparatively better than the pre-period. However, the individual studies of different

years revealed some variations in the trend. The growth rate of aggregate income of

RRBs decelerated to 19.5 percent in 2009 from 20.0 percent during last year. The non-

performing assets had shown a significant decline after the amalgamation in terms of

gross as well as net non- performing assets. Similarly, return on equity had also shown

51

advancement in post- period. The study concluded that the amalgamation of RRBs had

equipped them in a better way to attain the targets of rural development and financial

inclusion.

Shukla et al. (2012) examined the changing share investment credit advanced to

agriculture by different institutional credit agencies. Those were, co-operatives banks,

scheduled commercial banks and regional rural banks and disparities across states in

term of credit flow. Agency-wise flow of total agricultural credit as well as agency wise

proportion of short-term and term-credits in the total agricultural credit was worked out

for the post-liberalization period from 1992-93 and again from 2005-06. Term-credits

flow was estimated on per hectare basis to examine disparities across states at two

points of time, pre-liberalization period of 1985-86 and post-liberalization period of

1995-96. The findings concluded that co-operative banks dominated the scene in

agricultural credit flow till 1995-96 despite its share in credit supply declining from

61.8 per cent in 1992-93 to 47.6 per cent in 1995-96. Commercial bank credit over-took

co-operative banks in 1996-97 with its share in total agricultural credit consistently

increasing from 48.4 per cent in 1996-97 to 69.5 per cent in 2005-06. Share of RRBs in

total agricultural credit also increased consistently from 5.48 per cent in 1992-93 to 8.43

per cent in 2005-06. The total agricultural credit flow from all institutional agencies

shot up to Rs. 180486 crores in the 2005-06 from Rs 15169 crores in 1992-93 after

economic liberalization policy launched in 1991- 92. Further, co-operative banks credit

the share of term loan declined from 23.54 per cent in 1992-93 to 11.36 per cent in

2005-06. Within commercial bank credit, the share of term loan also declined in most of

the years barring over the 14 years period of 1992-93 to 2005-06. Within regional rural

bank credit also the share of term loan consistently declined from 41.16 per cent in

1992-93 and stood at 18.54 percent in 2005-06. In the post-liberalization period (1995-

96), inter-state disparities in the flow of term-credit to agriculture from commercial

banks declined in comparison to the inter-state disparities in the pre-liberalization

period (1985-86) as indicated by decline in coefficient of variation. Besides, there had

been an impressive increase in per hectare flow of term credit over the decade. The

study suggested for devising a conscious, implementable strategy for increasing

investment in the agriculture sector and also reducing interstate disparities therein.

52

Soni and Kapre (2012) analyzed the performance of Durg Rajnandgaon Gramin Bank

in Chhattisgarh during the period from 2009-11. He undertook income, expenditure,

assets, liabilities, recovery position and staff strength to full fill the objectives. The

growth in business mix over the previous year constituted 20.60 percent and deposits

have registered growth 18.00. The bank is extending effective customer services to the

utmost satisfaction of the customer and as such complaints were attended to

immediately. The recovery percentage of the bank stood at 81 percent. The bank did not

default at any occasion in making repayment from NABARD and sponsor bank. The

credit-deposit ratio of the bank were registering an increase of 3 percent over previous

level had gone up to 29 percent. Working results of the bank were registering 108.58

percent achievement. Overall, the study found that performance of bank had

significantly improved. The study also found a few problems faced by bank as not

mobilizing deposits because of severe competition from other banks and financial

institutions, lack of coordination in branch expansion, delay in the sanction of loans and

recovery procedure of bank were very poor.

SECTION 2.1

Reddy (2006) put into use the Data Envelopment Analysis (DEA) technique to examine

total factor productivity and scale efficiency changes in RRBs by using data of 192

banks and 27 parent public sector banks for the period 1996 to 2002. He divided his

study into two parts viz., first part analyzed the technical and scale efficiency of RRBs

whereas in second part he compared the total factor productivity growth of RRBs with

parent public sector banks. The inputs considered were interest expenses and operating

expenses, measures of the outputs considered were liquid assets, total advances, total

deposits and total income. The study concluded that technical efficiency of rural banks

was higher in service provision than in the parent public sector banks. The efficiency of

rural banks was higher in economically and socially developed regions as well as in low

banking density regions. Rural banks showed significant economies of scale in terms of

assets and number of branches under each bank. Banks located in economically

developed and low banking density regions exhibited significantly higher productivity

growth. Overall, there was a convergence of efficiency of rural banks during the study

53

period. There was no influence of parent public sector banks on the efficiency and

productivity growth of RRBs. The decomposition of productivity into technical

progress and technical efficiency growth indicated that technical efficiency change

contributed more to productivity growth than technical progress in both rural banks and

parent PSBs; however comparative contribution of technical progress was higher for

rural banks than parent PSBs. The findings also revealed that development of the

region, geographical location, banking density of the region, bank size indicators such

as total assets under operation and number of branches played a greater role in

determining the efficiency and TFP growth of RRBs than did the efficiency of the

parent PSBs. The study suggested for the opening of new banks in low banking density

regions as efficiency and productivity growth of rural banks in these areas were high.

Khankhoje and Sathye (2008) put into use non-parametric technique of DEA to look

into the improvement in productive efficiency of RRBs due to the restructuring strategy

undertaken in 1993-1994 for the period 1990 to 2002. He divided his study into two

restructuring period i.e., pre-restructuring period ranging from 1990 to 1993 and post-

restructuring period ranging from1994 to 2004. Interest income and non-interest income

were used as outputs and interest expenses and non-interest expenses were used as

inputs. As a major restructuring of these banks occurred in the year 1993-94, the mean

efficiency scores of pre-restructuring and post- restructuring years were compared using

ANOVA test. The mean efficiency score of the RRBs showed an increase in post-

restructuring years to 0.632 as compared to 0.455 during the pre- restructuring period.

The study found that efficiency of rural banks had significantly improved after

restructuring. The study compared the efficiency of RRBs and the commercial banks for

the year 1997-98. The mean efficiency of 196 RRBs in the year 1997-98 was 0.60. The

RRBs were on an average less efficient than commercial banks in the year 1997-98.It

may be as the latter are located nationwide and also in metropolitan and urban areas and

not necessarily in rural areas. The redeeming feature was that these institutions had

shown improved performance in recent years and restructuring measures seemed to

have a positive impact on the working in these institutions. The government of India

may have liked to consider the merger of these banks to bring about scale efficiency

improvements. Bigger size banks would have been able to afford new technologies and

54

that would have also been able to improve technical efficiency. This study

recommended the existing policy of bringing down non-performing assets as well as

curtailing the establishment expenditure through voluntary retirement scheme for bank

staff and rationalization of rural branches are steps in the right direction that could help

these banks improve efficiency further over a period of time studies on efficiency and

productivity of RRBs are considered scarce.

Mohindra and Kaur (2011) applied DEA to evaluate the effect of reforms on the

efficiency of 50 RRBs during the period 1991-92 to 2006-07 divided into two sub-

periods i.e., first-generation reforms period (1991-92 to 1997-98) and second-

generation reforms period (1998-99 to 2006-07). They employed loan able funds, fixed

assets and wages as input and advances and total income as output variables. The

findings reported that an average technical efficiency (TE) had turned out to be 78.5 per

cent, therefore technical inefficiency of banks came out to be almost 21.5 per cent.

Thus, the banks were required to curtail their input expenditures by 21.5 percent. The

comparative analysis of average TE scores between distinct periods revealed that the

degree of input waste was 24 per cent in first-generation reforms period which declined

to 19.5 per cent in second-generation reforms period. Therefore, the results concluded

that technical inefficiency had slowed down during second-generation reforms period.

In addition, average pure technical efficiency score estimated to be 91.5 percent and the

average scale efficiency score measured 84.6 percent. The comparative analysis of

average pure technical efficiency (PTE) and scale efficiency (SE) scores between

different periods indicated that PTE inefficiency was 10.2 percent in first-generation

reforms period, declined to 7.2 percent in second-generation reforms period. Therefore,

the degree of managerial incapability’s had declined by 3 percent during these periods.

Whereas, scale inefficiency measure of 17.5 percent in first -generation reforms period

declined to 13.7 percent in second- generation reforms period. The study also analyzed

the relationship between bank size (in terms of total assets) and scale economies of

RRBs and concluded that the large-sized RRBs experienced the highest level of 88

percent scale economies, followed by 84 percent of small-sized banks and 79 percent of

medium-sized banks. Accordingly these sizes of banks groups would have to change

their scale of operation by 12 percent, 16 percent and 21 percent respectively in order to

55

get in the front line. Finally, the empirical findings concluded that large-sized banks had

performed better than that their counterpart groups in terms of exhausting scale

economies.

Mohindra and Kaur (2011) studied the impact of deregulation on the efficiency of 38

RRBs banks during the second-generation reforms period spanning from 1998-1999 to

2008-09 using non-parametric technique of data envelopment analysis. They

incorporated interest expanded and operating expenses as input variable and interest

income and non-interest income as output variables. The findings reported that RRBs

had experienced technical efficiency to the tune of about 75 percent. Thus the banks had

to decrease their input by 25 percent and still they could produce the same level of

outputs. Further, pure technical efficiency and scale efficiency reported that 18 percent

points of technical inefficiency was due to managerial incapabilities in utilizing critical

inputs, while remaining part of the technical inefficiency attributed to the choice of sub

optimal scale of operation. The study also examined the efficiency of inter-bank

analysis of sample banks and concluded that out of 38 RRBs, not even a single bank

was found to be operating at optimal level having efficiency score equal to one which

meant that the banks were inefficient. Besides this, the empirical findings showed that

large- sized banks had performed better than small-sized and medium-sized banks in

terms of using scale economies.

Mohindra and Kaur (2012) analyzed the efficiency of 14 sample RRBs during the

period 1992-93 to 2008-09 dividing it into two sub-periods i.e. first-generation reforms

period (1992-93 to 1998-99) and second-generation reforms period (1999-2000 to 2008-

09) in order to examine the impact of reforms. They used DEA technique taking interest

expenses and operating expenses as input variables and deposits, investment and

advances as output variables. The study concluded that the sample banks had

experienced technical efficiency measure of 92 percent. Thus the banks could on an

average decrease their inputs by 8 percent in order to produce the same level of output.

The comparative analysis of average technical efficiency scores of banks between

distinct periods reflected that the degree of input waste was 7 percent in first-generation

reforms period increased to 8 percent in second-generation reforms period. This

increase in technical inefficiency was due to managerial incapabilities in utilizing

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critical inputs, while remaining part of the technical inefficiency may be attributed to

the choice of sub optimal scale of operation. Therefore the results concluded that

technical inefficiency has increased during second-generation reforms period. Further,

the decomposition of technical efficiency into pure technical efficiency and scale

efficiency showed that the pure technical inefficiency was nearer to 6 percent in first–

generation reforms period which declined to 5 percent in second generation reforms

period. This concluded that the degree of managerial incapabilities had declined by 1

percent during this period. On the other hand, scale inefficiency measure of 3 percent in

first-generation reforms period increased to 4 percent in second-generation reforms

period. Thus the level of the scale operations of the banks has increased during this

period. In addition to this, the studies also analyzed efficiency on the basis of the inter-

bank and concluded that the majority of banks observed had shown minimum efficiency

scores on most occasions and were not progressive in nature. Therefore the study

suggested that these banks would have to incorporate substantial changes in their

policies to keep in line with international standards.

Mohindra and Kaur (2012) analyzed the impact of deregulation on the productivity

changes of 50 sample RRBs during the period 1991-92 to 2006-07, further divided into

two sub-periods i.e. first-generation reforms period (1991-92 to 1997-98) and second-

generation reforms period (1998-99 to 1999-2007). DEA based Malmquist Productivity

Index has been applied on loanable funds, fixed assets and wages as inputs and

advances and total income as outputs. The empirical findings reported that sample

RRBs had practiced total factor productivity (TFP) growth at the rate of 1.45 percent

per annum during the period 1993-2007. This growth had been realized on account of

technological progress (i.e., 0.99 percent) and technical efficiency (i.e., 1.62 percent).

Thus the sample banks experienced more technical efficiency change due to the lesser

use of new technology. The findings further reported that banks had experienced

productivity gain in seven out of the fifteen sample years. The positive growth rates of

0.9 to 13.8 percent had been observed during the period 1992-93, 1997-2001 and 2006-

07. However, the productivity losses had been noticed in the remaining eight sample

years. The RRBs reported growth in terms of SEFFCH and PEFFCH index at the rate of

0.09 and 0.54 percent per annum during the period 1993-2007 respectively. The banks

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had witnessed scale efficiency progress in six study years and scale efficiency regress in

the remaining nine study years. Similarly, the sample banks had witnessed pure

technical efficiency growth in eight study years and pure technical efficiency loss in the

remaining seven study years. The study also examined the productivity of the inter-bank

analysis of sample banks and concluded that all the sample banks had experienced

positive as well as negative TFP growth pattern during the period.

There are notable studies of various research scholars related to the efficiency

and productivity of commercial banks in India.

Noulas and Katkar (1996) and Das (2000) analyzed the efficiency of public

sector banks for the year 1993 and 1998 respectively estimated efficiency measures of

public sector banks for the year 1998 and found that scale inefficiency was main

cause of overall technical inefficiency. Noulas and Katkar (1996) further analyzed

that public sector banks experienced increasing returns to scale during the study period

whereas; Bhattacharya, Lovell and Sahay (1997) carried out a study to assess the

productive efficiency of commercial banks from 1986-1991 which showed that public

sector banks experienced decreasing returns to scale. Efficiency is different in different

ownership structure of banks as were observed by various studies such as: Das (1997)

estimated the efficiency of scheduled commercial banks for various years: 1970, 1978,

1984, 1990 and 1996; Singh and Kumar (2005) measured efficiency of commercial

banks for the year 2002-03; and Rezvanian, Rao and Mehdian (2008) studied the

efficiency of Indian banking industry from 1998-2003 that showed higher efficiency in

foreign banks as compared to other ownership structure banks. Some other studies:

Kumar and Verma (2000-03) measured the efficiency the PSBs for the year 2001; and

Das, Nag and Ray (2005) analyzed the efficiency of the commercial banks for the

period 1997-2003 and found that large sized banks outperformed other sized banks.

Some studies were related to the performance of the public sector banks as the study of

Rammohan and Ray (2004) that compared performances of commercial banks for the

period 1992-2000; Sabha and Ravishankar (2000) estimated productivity of the

commercial banks for the period 1991 to 1994; and Sathye (2003) measured the

productive efficiency of commercial banks for the year 1998. Das, Nag and Ray (2005)

found that liberalization had not brought any significant change in the commercial

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banks for the time period 1997 to 2003; whereas the study of Ray (2012) found positive

impact of liberalization among Indian banks during the period 2000 to 2008. Gunjan,

M. (2006) assessed the efficiency of commercial banks for the period 1997-2000; Nath,

Pal and Mukherjee (2005) studied efficiency of commercial banks for the period

1996-1999; Sinha (2006) estimated efficiency of commercial banks for the years 1996

to 2003 and Sudesh and Pal (2007) measured the efficiency of commercial banks for

the period 2005-06. All these studies concluded that foreign sector banks and private

sector banks were better in performance than public sector banks.

The following studies examined the productivity of commercial banks as:

Satyanarayana (1996) measured the productivity of banks from 1969 to 1994 and

concluded that efficiency measurement should base on the market share concept.

Athma and Srinivas (1997) conducted a study to analyze the productivity of public

sector banks, private sector and foreign banks for the period 1982 to 1995 and the result

verified that the productivity-both per employee and per branch showed increasing

trend among all the three ownership groups, though it was relatively higher in the case

of private and foreign sector of banks. Zhao et al. (2007) studied the impact of

deregulation on total factor productivity growth of the commercial banks for the period

1992 to 2004; Kumbhakar and Sarkar (2003) conducted study during the period

1985-1996; and Kumar and Batra (2012) conducted a study during the period 2006 to

2011 and found remarkable performance of banks due to the impact of liberalization.

Various studies in different countries which have come up with similar findings

that scale inefficiency found to be the main cause of overall technical

inefficiency are: Yue (1992) estimated efficiency of Missouri banks during the period

1984 to 1990; Fukuyama (1993) determined efficiency of Japanese banks for the year

1990; and Favero and Papi (1995) measured the efficiency of Italian banks for the

period 1991. There are few studies that found growth in TFP index of banks during the

period of their respective studies viz. Berg et al. (1992) measured the productivity of

Norwegian banks during 1980-89 and Isik and Husan (2003) measured the

productivity of Turkish banks for three years 1988, 1992 and 1996. Barr et al. (1999)

evaluated the performance of commercial banks in United States for the period 1984 to

1998 and found that small sized banks outperformed other banks. Isik and Hasan

59

(2003) found that allocative inefficiency was the main responsible factor for cost

inefficiency in Turkey for three different years-1988, 1992 and 1996. Ratnam (2010)

analyzed the efficiency of commercial banks across Pakistan during the period 2001 to

2006 and observed higher efficiency in foreign banks as compared to other ownership

structure banks. The studies which found positive impact of deregulations are: Berg,

Forsund and Jansen (1992) studied Norwegian banks for the period 1980-89; Zaim

(1995) studied Turkish commercial banks for the period 1981-90; Grifell-Tatze and

Lovell (1997) studied commercial banks in Spain during the period 1986 to 1993;

Kumbhakar, Vivas, Lovell and Hasan (2001) scrutinized Spanish banks for two

different period 1986-1990 and 1991-1995 and Ahmed, Farooq and Jalil (2009)

accessed Pakistani commercial banks from 1990 to 2005. Drake (2001) analyzed

efficiency of United Kingdom banks for the period 1984-1995 and found scale

inefficiencies were more stern problems in U.K. banking than pure technical

inefficiencies whereas the study of Dogan and Fausten (2002) conducted on Malaysian

banking sector during the period 1989 to 1998 concluded that scale efficiency was not

contributing anything to the changes in mean productivity.

It is evident from the above review of empirical studies that there exists rich

literature on the working of RRBs in India highlighting the problems and prospects of

RRBs whereas very scant literature is available on the measures of the efficiency and

productivity growth of these banks using both the parametric and non-parametric

approaches. As far as commercial banks at national as well as international level are

concerned, sufficient literature is available on efficiency and productivity growth of

banks using these techniques. To bridge this research gap, this study on the efficiency

and productivity growth of RRBs using non-parametric approach i.e., DEA technique

has been undertaken. It attempts to offer more effective results as compared to

parametric approach, because DEA is a performance evaluation criteria. Further, results

of various studies on RRBs or commercial banks might be different due to difference in

choice of techniques, different set of input and output variables, different technique for

measuring of input and output variables, different time- periods, different regions,

nations and many more other responsible factors about the applied technique.

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