Regional Rural Banks (RRBs) were set up as government-sponsored, regional based rural lending institutions under the Regional Rural Banks Act, 1976. RRBs were configured as hybrid micro banking institutions, combining the local orientation and small scale lending culture of the cooperatives and the business culture of commercial banks. Their mission was to fulfill the credit needs of the relatively unserved sections in the rural areas -small and marginal farmers, agricultural labourers and socio-economically weaker sections.
Shareholding pattern of RRBs among the three sponsoring entities is 50:35:15 among central government, sponsoring bank and state government respectively.
Recapitalization and amalgamation of RRBs
RRBs became financially weak with many having high NPAs because of the difficult loans they are giving. A committee chaired by Dr. K.C. Chakrabarty reviewed the financial position of all RRBs in 2010 and recommended for recapitalization of 40 out of 82 RRBs.
According to the Committee, the remaining RRBs are in a position to achieve the desired level of CRAR on their own. Accepting the recommendations of the committee, the central government along with other shareholders started to recapitalize eh RRBs by injecting funds into them. In the same manner the process of amalgamation continued.
Amalgamation of RRBs were made in two phases and the number of RRBs were brought down during the first phase significantly. In the second phase of amalgamation and restructuring, which is ongoing from 2012, geographically extensive RRBs within a State under different sponsor banks are amalgamated to have just one RRB in medium-sized states and two or three RRBs in large states. Amalgamation of RRBs into sponsoring banks and their merger brought down the number from 196 in late 1990s to 56 by 2016.
Most of the reform measures enabled the RRBs to make a smart recovery without being a burden and at the same time keeping their original risky mission of extending lending to the rural people. But still their NPAs remains high at around 6% (gross) and in the future also their activities need additional capital in the context of advanced capital requirements and regulatory standards. Hence, to enable them to acquire more capital the government has enacted RRB Amendment Act (2015). The amendment is aimed to help them to mobilize resource from financial markets. This Act let them to mobilize additional capital by keeping a combined government holding of at least 51%.
RRBs Amendment Act 2015
The Regional Rural Banks (Amendment) Act, 2015, came into effect from 4th February 2016. The Act raises the amount of authorised capital to Rs 2,000 crore and states that it cannot be reduced below Rs One crore. The Act allows RRBs to raise capital from sources other than the existing shareholders -central and state governments, and sponsor banks. Here, the combined shareholding of the central government and the sponsor bank cannot be less than 51%.
For the sponsoring banks, they can provide various initiating assistance to the RRBs beyond the initial five years (previously, the sponsoring bank’s responsibility will be over in five years). The Act states that the central government may by notification raise or reduce the limit of shareholding of the central government, state government or the sponsoring bank in the RRB. For this, the central government may consult the state government and the sponsor bank.