The weakening balance sheets of sponsor banks and the apathy of Central and State Governments to pump in more capital into regional rural banks (RRBs) may have put these rural credit-focussed banks on the mat in the matter of capital mop-up to fund growth.

However, the current dispensation would do well to keep the faith intact on RRBs while looking at measures to ensure that the low-cost model of these banks is restored.

Low-cost model

It may be recalled that RRBs were introduced in 1975 to ensure credit availability to the rural population. Although RRBs have done a commendable job on meeting rural credit-delivery targets, they have, in recent years, lost sheen because of the inability to preserve the low-cost model and raise capital.

Bringing the RRB staff pay scale on a par with those of the sponsor commercial banks has adversely impacted the low-cost nature of the model, say banking industry experts.

Moreover, RRBs are now at the crossroads on the capital front and are required to look at the markets for capital support – this would mean higher capital cost. The high-cost model in which RRBs now operate will reduce the appetite for pumping private capital or even institutional monies into them, say economy watchers and banking industry experts. Only the strong RRBs will succeed in accessing capital from the markets, they said.

Meanwhile, pressure is mounting on the Modi-led government to implement in right earnest Nabard’s suggestion to go in for the third round of consolidation of RRBs to help enhance their capital base and increase rural lending.

Already two phases of amalgamation of – initiated during the two UPA regimes – have been completed. The first phase initiated during 2004-05 and the second during 2011-12 led to a reduction in the number of RRBs from 196 to 56.

These 56 RRBs are spread across 28 States. During the next phase, it is being contemplated to bring down the number to 38. Except for Uttar Pradesh (which has three RRBs), most States have at the most three RRBs. The number of RRB branches increased to 22,014 branches as on March 31, 2018, from 20,024 branches as on March 31, 2015. Besides recommending the third phase of amalgamation of RRBs, Nabard had also suggested extension of recapitalisation support to RRBs and the capital raising from the market by strong RRBs, sources in Nabard said.

These steps will result in improving RRBs as better functioning entities, which would lead to improved rural credit delivery by RRBs, according to Nabard. During 2017-18, all RRBs together disbursed agriculture loans of ₹1.41-lakh crore, against the target of ₹1.40-lakh crore (achievement of 101 per cent). The achievement has been above 99 per cent during2015-16 and 2016-17.

In 2017-18, all RRBs together disbursed credit of ₹1.98-lakh crore, which was 24 per cent higher than the loans disbursed during 2016-17.

However, net profits of RRBs declined 32 per cent in 2017-18 to ₹1,506 crore (₹2,218 crore in 2016-17). RRBs reported a total credit outstanding of ₹2.53-lakh crore as on March 31, 2018. Over the last four years, total advances by RRBs recorded a CAGR of 12 per cent. With regard to loans disbursed under priority sector, RRBs recorded a CAGR of 17 per cent.

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