Draft Guidelines for Listing of Regional Rural Banks

Why in the News?

The Government has issued draft guidelines for listing Regional Rural Banks in the stock market.

Key Points:

About

Draft Guidelines:

• Regional Rural Banks (RRBs) should have earned an operating profit of a minimum ₹15 crores for at least three out of the previous five years.
• There should not be any accumulated loss and the lender should have given a return on equity of a minimum of 10% in three out of the preceding five years.

What are Regional Rural Banks?

• The concept of RRBs was proposed by the Narasimham committee.
• Objective: To provide credit and banking facilities to the rural poor, who were hitherto not served by commercial banks.
• RRBs were established under the provisions of an ordinance passed on 26 September 1975 and the RRB Act 1976. 
• These were envisaged as low-cost institutions combining the local feel and familiarity of cooperatives and the professionalism of commercial banks.
• These banks are under the ownership of the Ministry of Finance, Government of India. 
• The equity of the Regional Rural Banks:
  • Central Government – 50%
  • Sponsor Bank – 35%
  • State Government – 15%

Functions:

• Provide easy and accessible banking
• Support and promote local artisans, MSMEs (Medium-Small Sized Businesses), and agricultural farmers
• Mobilise regional financial resources
• Operate on the district as well as state-level

Role of RRBs

• They provide
  •  ancillary banking services.
  • deposit and grant advance.
  • supply inputs and equipment to farmers
  • Assist in the marketing of products and services of farmers.

Benefits:

• They provide banking facilities to the rural people who were hitherto not served by commercial banks.
• They help in the development of agriculture and small-scale industries in rural areas.
• They promote thrift and entrepreneurship among rural people.
• They create employment opportunities in rural areas.
• They help in checking Migration from rural to urban areas

Challenges

• Many of the RRBs branches do not have enough business as they cater mainly to government schemes in rural areas.
• RRBs are unable to collect sufficient deposits due to the low level of savings of rural customers.
• The branches of RRBs are concentrated more in some specific states and districts which causes a Regional imbalance in banking facilities.
• The authorised capital of RRBs is very low compared to that of commercial banks.
• RRBs are generally dependent on their sponsor banks for day-to-day operations as well as for financial assistance.

Way forward

• There is a need to increase their authorised capital to expand their business and serve the rural people effectively.
• RRBs should be given more autonomy so that they can make decisions without depending on their sponsor banks.
• Further, to reduce the cost of operations of RRBs their branch network should be by rationalised using technology.