India: Can RRBs Stand Up to Their New Rivals?

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Sep 2015
India, September, 21 2015 - The Reserve Bank of India (RBI) is examining the efficacy of Regional Rural Banks (RRBs), which will be up against tough competition from 23 new banks — two new private sector banks, 11 payments banks and 10 small finance banks — in a year or two.

Expecting competition in the banking space to intensify further, the RBI has asked RRBs 18 questions. They centre on the positive aspects and drawbacks of the RRB scheme, whether the scheme should continue as it is, and how the banks propose to compete with small finance banks and the rural branch network of commercial banks. Further, the central bank has sought feedback on the benefits/drawbacks of a possible amalgamation of RRBs.

Currently, there are 56 RRBs in the country and these will be directly pitted against the 23 new banks. Once the new banks get going, they will make a play for the rural and semi-urban customers that the RRBs currently serve.

RRBs were established in 1975 under the provisions of an ordinance promulgated in September 1975, followed by the Regional Rural Banks Act, 1976.

The aim was to develop the rural economy and to create a supplementary channel to the “cooperative credit structure” with a view to enlarge institutional credit for the rural and agriculture sector.

The Government of India has 50 per cent shareholding in all RRBs. The government of the respective State where an RRB mainly operates, and its sponsor bank, hold 35 per cent and 15 per cent, respectively. As of March-end 2014, RRBs had a network of 19,082 branches.

SK Bhattacharjee, General Secretary, All India Regional Rural Bank Officers’ Federation, says a level playing field should be provided to RRBs vis-à-vis the new entrants in the banking space.

“The RRB boards typically do not have any autonomy. The sponsor bank directors, who are generally senior to the RRB chairmen, call the shots and enjoy the power of decision making,” said Bhattacharjee.

Government deposits

While emphasising that RRBs are best suited to serve the banking needs of rural and semi-urban areas, Bhattacharjee said all government deposits should be with RRBs instead of with SBI and other PSU banks.

Besides, all banking transactions of State Governments should be solely with RRBs, he added.

RRBs need to assume new avatars in the current banking landscape, he said.

The federation is of the view that all 56 RRBs should be transformed into mini public sector banks, with the Centre holding 51 per cent, sponsor banks 24 per cent and with the balance offloaded to the public.

In-principle approval

The Reserve Bank of India recently gave in-principle approval to 11 entities (including Aditya Birla Nuvo, Airtel M Commerce Services, Department of Posts and Reliance Industries) to launch payments banks.

It also gave approval to 10 entities (including Au Financiers, Capital Local Area Bank, Janalakshmi Financial Services and Suryoday Micro Finance) to start small finance banks.

Last month, Bandhan Bank, a wholly-owned subsidiary of Bandhan Financial Holdings (which in turn is owned by microfinance institution Bandhan Financial Services) commenced banking operations.

Infrastructure non-banking finance company IDFC is expected to start banking operations early next month.



 

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