The concept of regional rural banks (RRB) was envisaged to increase the reach of banking system in rural India in 1975 as a mode for financial inclusion (much before the term itself became popular). These banks have since then grown in size, profits and business over the years, although there have been ups and downs.
Inevitably, consolidation in this segment of the banking industry gained pace in the middle of the last decade. But the move towards implementing technology solutions such as core banking solution (CBS) gained momentum in the year 2011.
The RRBs also gone ahead along with their ‘big brothers' - the public sector banks and private banks in terms of expansion of their branches, but their share in the total banking network came down over the years. The initial steps for next round of consolidation in RRBs started with the Government sending a proposal to sponsor banks in this regard.
CORE BANKING
One of the major highlights of 2011 was the RRBs' move to implement technology solutions such as CBS in a big way. The move was based on the report of the working group on technology upgradation of RRBs set up by the Reserve Bank of India (RBI) in 2008.
The working group had suggested that all RRBs begin moving towards CBS and achieve 100 per cent coverage by September 2011. However, of the 82 RRBs in the country, 65 implemented CBS at the end of September 30, 2011. This progress is noteworthy as the RRBs have a number of limitations.
LIMITATIONS
A majority of them are situated in remote rural areas where regular supply of electricity is a major problem.
Mr C. Sambasiva Reddy, Chairman of the Karnataka Vikas Grameena Bank (KVGB), a major RRB in Karnataka, told Business Line that the erratic grid power supply was one of the factors that came in the way of the implementation of CBS for his bank. However, Mr Reddy said, his bank overcame this by installing solar power packs in 112 branches.
Another challenge for RRBs was training their manpower in new technology. Narrating the challenges in training and mindset change of KVGB, Mr Reddy said his bank gave pre-migration training to all its staff members before migration to CBS.
The implementation of CBS involves huge cost for setting up of infrastructure such as data centre, disaster recovery site, connectivity and other monthly recurring charges. One of the RRBs having more than 400 branches, which implemented CBS this year, incurred a cost of around Rs 12 crore.
An update by Nabard (National Bank for Agriculture and Rural Development) said that 22 weak RRBs were assisted with sanction of Rs 197.64 crore for the implementation of CBS in their branches till November-end. Of this amount, disbursements were made to the tune of Rs 77.27 crore. This move was based on the Union Finance Minister's discussion with Chairmen of RRBs in July 2010 where it was decided to support 28 weak RRBs for CBS implementation.
The regulator is hopeful of getting a better result from the CBS implementation in RRBs. In an address at the FICCI-IBA conference on Global Banking in August, Mr H.R. Khan, Deputy Governor of RBI, had mentioned that a CBS-enabled RRB opens up immense possibilities in terms of products and services.
He had then suggested that the sponsor banks need to integrate the CBS of RRBs with their own core banking. This would enable the customers of RRBs to enjoy the same benefits as the sponsor banks.
The establishment of RRB branch network dates back to 1975. With the bank nationalisation in 1969 not giving the desired results in expanding rural base of banks, the Government came out with a new credit agency to operate in rural areas in the form of RRBs in 1975. This expansion of rural banking network lasted for more than a decade.
During the first 10 years of their formation, the number reached 183 banks with a large number of them coming up in Uttar Pradesh, Rajasthan, Bihar, and Madhya Pradesh. By 1987, 196 RRBs were present in 363 districts in the country. But this model's path was not so rosy, as it took long years for many RRBs to attain break-even point. It was time to restructure their operations and the Government initiated the first round of amalgamation of RRBs in the country in 2005.
Over the past six years, the number of RRBs has been steadily brought down and now stands at 82 at the end of March 2011. Consequently, RRBs, which controlled one-fifth of the banking network in the country, are now losing their share in the total branch network.
RRBs share in total banking network which was at 19.85 per cent as on March 31 2007 is now down to 17.22 per cent as of March 2011. Post consolidation, RRBs added only 1,212 branches. In spite of this, nearly three-fourths of branches of RRBs still continue in rural areas. However, the industry average of rural braches was around one-third of the total branch network during 2010-11.
Of this, the rural share of public sector banks was 31.54 per cent, old generation private sector banks was 15.21 per cent and new generation private sector banks was 7.84 per cent.
PROFIT GROWTH IMPROVES
However, the decline in share of network did not come in the way of RRB's net profits. During 2010-11, they recorded a net profit of Rs 1,988 crore (Rs 1,884 crore). It was mainly because of a nearly 30 per cent decline in provisions and contingencies during the period.
According to Dr N.K. Thingalaya, a regional rural banker who headed an RBI working group on RRBs in 1995, the expansion of service area after amalgamation has helped increase net profits of these banks. Earlier, RRBs were confined to one or two districts. The amalgamation of different RRBs of the same sponsor bank in a State helped the new entity increase business and profits.
Another banker, who headed one of the RRBs post-consolidation, said that increase in competency of the staff, management quality, support from sponsor banks and National Bank for Agriculture and Rural Development (Nabard) through refinance at reasonable rates, comparatively large share of low-cost deposits, lower operational costs and expertise acquired in asset management over time were instrumental in the growth in net profit. Added to this, RRBs are now allowed to do para-banking activities such as life and non-life insurance business, contributing them in their non-interest income generation.
In November, the Government came out with a proposal for amalgamating geographically contiguous RRBs in a State setting the tone for the second round of amalgamation among RRBs.
In a letter dated November 28 to the Chairmen of sponsor banks of RRBs, the Department of Financial Services (DFS) of the Union Ministry of Finance said that geographically contiguous RRBs sponsored by different banks within a State could be amalgamated with a single sponsor bank. Such amalgamation will help in optimising the use of modern technology, it said.
VISION
Providing an aspirational goal for RRBs, Dr Thingalaya said: “I have been saying all along that RRBs should be super market selling all financial products not like a ration shop selling rationed commodities to the target group.” He was quick to add that it has begun in a small way in some RRBs.