Regional Rural Banks

Meaning
RRBs are oriented towards meeting the needs of the weaker sections of
the rural population consisting of small & marginal farmers, agricultural
labourers, artisans & small entrepreneurs.

Features of RRBs
As these banks were more suitable for rural development work,
preference should be given to them to open branches in rural banks.
The eligible business of commercial banks rural branches may be
transferred to RRBs
The losses in initial years of RRBs may be met by shareholders &
equity capital should also be raised.
The various facilities provided by sponsor banks should continue for
10 years in each case.
Concessionary refinance by RBI should be continued.
The control, regulatory and promotional responsibilities relating to
RRBs should be transferred from the Government of India to RBI or
NABARD.

Formation and Development of Regional Rural Banks

Cooperatives have been encouraged since 1904 and the commercial
banks were made to accept the responsibility of financing rural economic
activities from 1968under social control to relieve the poor peasants from
the clutches of moneylenders. Previously banks felt that financing
agriculture was not their job and that his responsibility would be withdrawn
soon. So the results of control and the working of cooperatives had not
been significant. Hence, the government of India had nationalized the 14
major commercial banks with the objective tochannelise the resources the
resources of commercial banks to rural areas. The impact of bank
nationalization on the growth of scheduled commercial banks in rural areas
is clear: the share of rural bank offices in total bank offices jumped from
17.6 per cent in 1969 to 36 per cent in 1972. The share rose steadily
thereafter, and attained a peak of 58.2 per cent in March 1990. Consequent

to the adoption of intensive agricultural programmers under IADP and

DPAP, Green Revolution etc. the demand for financial inputs has increased
enormously in the rural areas. Therefore it was felt that cooperative and
commercial banks alone would not be in a position to meet all the credit
needs of the expanding rural economic sector. Between 1966 and 68
various committees suggested that the rural credit structure was weak,
therefore some system of rural banks should be created to fill up the credit
gap in rural areas. These banks should extension in the rural areas for rural
people as such they must be located in rural areas and understand the
rural economic environment. Thus Regional Rural Banks were anew type
of institution, which combined
a. Local feel and familiarity with rural possess problems which co-operative
banks have.
b) Degree of business organization ability to mobilize deposit, access to
money market and modernized outlook which commercial banks have.
The Government of India promulgated the Regional Rural Banks Ordinance
on26th September 1975, which was later replaced by the Regional Rural
Bank Act1976. At to the end of June 1985, 183 Regional Rural Banks with
a network of10, 245 branches have been opened in the states of the Indian
Union. The total number of Regional Rural banks functioning in the country
as at the end of June1999 was 196 covering 451 districts spread over 23
states with the network of14,467 branches These banks have been
established by the Government of India in terms of the provisions of
Regional Rural Banks Act, 1976. The distinctive feature of a rural bank is
that though it is a separate body corporate with perpetual succession and
common seal, it is closely linked with the commercial bank which has
sponsored the proposal to establish it. The central Government, while
establishing a rural bank at the request of a commercial bank, specifies the
local limits within which it shall operate. The rural Bank may establish its
branches or agencies at any place within the notified area.

Reform process of RRBs

In order to provide access to low-cost banking facilities to the poor,
the Narasimham Working Group (1975) proposed the establishment
of a new set of banks, as institutions which "combine the local feel

and the familiarity with rural problems which the cooperatives

possess and the degree of business organization, ability to mobilize
deposits, access to central money markets and modernized outlook
which the commercial banks have.
RRBs started their development process on 2nd October 1975 with
the formation of a single bank (Prathama Grameen Bank).
As on 31 March 2008, there were 91 RRBs (post-merger) catering to
the credit requirements of 586 districts in 25 states with a network of
14,790 branches.

For Development/ Promotion/ & Effectiveness of RRBs.

RRBs are allowed up to December 31, 2000 to maintain cash reserves
at 3 per cent of their demand and time liabilities. A no. of measures taken
since 1995 not only to make RRBs viable but also to enable them to
function effectively. Apart from Re-Capitalization & infusion of equity, the
measures include deregulation of interest rates on advances and deposits
of above-one-year maturity, rationalization of branches and relaxation of
norms relating to investments by RRBs. In 1998-99, NABARD introduced
several policy measures for improving its overall performance. These are:
Quarterly/ Half-Yearly review of RRBs, especially weak one by the
sponsor banks.
Merger of RRBs coming under a sponsor bank & operating in
contiguous area.
Off-site Surveillance.
Framing of Appointment & Promotion Rules (1998) for the staff of
RRBs
Introduction of kisan credit cards for provision of credit of Farmers.
Encouraging RRBs to adopt self-help groups (SHG) for challenging
credit to the poor on a sustainable basis.

Working of RRBs

RRBs have done mainly two works:

Grant of Credit at cheap or concessional rates
Lending to individuals belonging to weaker sections without checking
the viability of the activity proposed to be undertaken.

Objectives of Regional Rural Banks

Regional Rural Banks were established with the following objectives in
mind:
i.)Taking the banking services to the doorstep of rural masses, particularly
in hitherto unbanked rural areas.
ii.)Making available institutional credit to the weaker sections of the society
who had by far little or no access to cheaper loans and had perforce been
depending on the private money lenders.
iii.)Mobilize rural savings and channelise them for supporting productive
activities in rural areas.
iv.)To create a supplementary channel for the flow the central money
market to the rural areas through refinances
v.)Generating employment opportunities in rural areas and bringing down
the cost of providing credit to rural areas.
With these objectives in mind, knowledge of the local language by the staff
is an important qualification to make the bank accessible to the people.

Functions of RRBs
Every RRB is authorized to carry on to transact the business of banking as
defined in the Banking Regulation Act and may also engage in other
business specified in Section 6 (1) of the said Act. In particular a RRB is
required to undertake the business of

(a) granting loans and advances to small and marginal farmers and
agricultural laborers whether individually or in groups, and to cooperative
societies including agricultural marketing societies agricultural processing
societies cooperative farming societies primary agricultural credit societies
or farmers service societies primary agricultural purposes or agricultural
operations or other related purposes, and
(b) Granting loans and advances to artisans small entrepreneurs and
persons of small means engaged in trade commerce industry or other
productive activities within its area of operation.
The Reserve Bank of India has brought RRBs under the ambit of priority
sector lending on par with the commercial banks. They have to ensure that
forty percent of their advances are accounted for the priority sector. Within
the 40% priority target, 25% should go to weaker section or 10% of their
total advances to go to weaker section.

Structure of Rural Credit

The credit facilities are available to rural agriculturists and artisans through
financial and non financial institutions which are:
Non Institutional
Professional money lenders
Agricultural money lenders
Relatives and friends
Traders and commission agents
Land lords and
Others
Institutional
Government
Cooperative Banks and
Commercial banks.

The non institutional credit sources are considered as exploitative and high
cost system. However, they are very much accessible and easily negotiable
with the lenders. It is observed that non institutional source of credit is
continued to be an important source in rural areas. Institutional lending or
credit or loans refers to loans provided by financial institutions.
Institutional Arrangement for Rural Credit
Commercial Banks

Co-operative Societies

RRBs

Rural Branches

Branches

Long Term Credit (Invt. Credit)

Short Term Credit (Production Cred

State Co-operative Banks

Federal Structure

Unitary Structure

District Central

Co-operative Ban

State Level
Agricultural & Rural Development Bank
Agricultural & Rural Development
Bank

Primary Development

Primary Agricultural Credit Societ

Bank

Branches