A

DESSIRTATION REPORT

ON

“BANKING INDUSTRY”

(REGIONAL RURAL BANKs)

FOR THE PARTIAL FULFILLMENT OF DEGREE OF MASTER OF BUSINESS

ADMINISTRATION

SUBMITTED TO: SUBMITTED BY:

Mrs. GAURI BISHT DINESH CHANDRA JOSHI

SR. LETURER MBA 4 SEM

A.I.M.C.A. Roll No. - 09020500020

AMRAPALI INSTITUTE OF MANAGEMENT AND COMPUTER APPLICATION

Shiksha Nagar, Lamachaur, Haldwani

STUDENT DECLARATION

I hereby declare that I have undergone this project during my winter vacation. This report

is being submitted in partial fulfillment of MASTER OF BUSINESS ADMINISTRATION

under UTU.

This project has not been presented in any seminar or submitted elsewhere for the award

of any degree or diploma.

DINESH CHANDRA JOSHI

ACKNOWLEDGEMENT

“INTERDEPENDENCY IS A HIGHER VALUE THAN INDEPENDENCY”

Any accomplishment requires the effort of many people and this work is not different because

without proper guidance, training and constant encouragement no task can be completed either

small or big. I would like to acknowledge the enormous support received from the people whose

patience and support was instrumental in accomplishing this task.

I hereby take the opportunity to express my profound sense of reverence and gratitude to all of

them who have helped me in successful completion of the project. I wish to express my sincere

gratitude for guidance and valuable support to:

Mrs. Gauri Bisht, Management Department (AIMCA)

I am grateful for everyone’s guidance and encouragement. I am also grateful for the inspiration

and motivation given by my family, who is indirectly involved for the successful outcome of this

volume of project.

CONTENTS

TITAL PAGE INSTITUTE CERTIFICATE STUDENT DECLARETION ACKNOWLEDGEMENT CONTENT PAGE INTRODUCTION CHAPTER ARRENGMENT OBJECTIVE OF THE STUDY PERIOD OF THE STUDY METHODOLOGY SCOPE OF THE STUDY LIMITATION OF THE STUDY COMPANY’S PROFILE DATA ANALYSIS & INNTERPRETATION FINDINGS SUGGESSTION & RECOMMANDATION CONNCLUSION BIBLOGRAPHY

INTRODUCTION

1. Short title, extent and commencement :-

(1) This Act may be called the Regional Rural Banks Act, 1976.

(2) It extends to the whole of India.

(3) It shall be deemed to have come into force on the 26th day of September, 1975.

2. Definitions :-

In this Act, unless the context otherwise requires,--

"Board", in relation to a Regional Rural Bank, means the Board of directors of that Regional Rural Bank;

"Chairman", in relation to a Regional Rural Bank, means the individual appointed or re-appointed under sub-section (1) of section 11 as the Chairman of that bank;

"Director", in relation to a Regional Rural Bank, means a member of the Board of that bank;

"Notified area" means the local limits, specified under sub-section (1) of section 3, within which a Regional Rural Bank shall operate;

"Prescribed" means prescribed by rules made under this Act; "Regional Rural Bank" means a Regional Rural Bank established under sub-section (1) of

section 3; "Sponsor Bank", in relation to a Regional Rural Bank, means a bank by which such

Regional Rural Bank has been sponsored.

Review of Literature:-

RRBs though operate with a rural focus are primarily scheduled commercial banks with a commercial orientation. Beginning with the seminal contribution of Haslem (1968), the literature probing into factors influencing performance of banks recognises two broad sets of factors, i.e., internal factors and factors external to the bank.

The internal determinants originate from the balance sheets and/or profit and loss accounts of the bank concerned and are often termed as micro or bank-specific determinants of profitability. The external determinants are systemic forces that reflect the economic environment which conditions the operation and performance of financial institutions. A number of explanatory variables have been suggested in the literature for both the internal and external determinants. The typical internal determinants employed are variables, such as, size and capital [Akhavein et al. (1997), Demirguc-Kunt and Maksimovic (1998) Short (1979) Haslem (1968), Short (1979), Bourke (1989), Molyneux and Thornton (1992) Bikker and Hu (2002) and Goddard et al. (2004)]. Given the nature of banking business, the need for risk management is of crucial importance for a bank’s financial health. Risk management is a reflection of the quality of the assets with a bank and availability of liquidity with it. During periods of uncertainty and economic slowdown, banks may prefer a more diversified portfolio to avoid adverse selection and may also raise their liquid holdings in order to reduce risk. In this context, both credit and liquidity risk assumes importance. The literature provides mixed evidence on the impact of liquidity on profitability. While Molyneux and Thornton (1992) found a negative and significant relationship between the level of liquidity and profitability, Bourke (1989) in contrast, reports an opposite result. One possible reason for the conflicting findings may be the different elasticity of demand for loans in the samples used in the studies (Guru, Staunton and Balashanmugam, 2004). Credit risk is found to have a negative impact on profitability (Miller and Noulas, 1997). This result may be explained by taking into account the fact that more the financial institutions are exposed to high-risk loans, the higher is the accumulation of unpaid loans implying that these loan losses have produced lower returns to many commercial banks (Athanasoglou, Brissimis and Delis, 2005). Some of the other internal determinants found in the literature are funds source management and funds use management (Haslam, 1968), capital and liquidity ratios, the credit-deposit ratio and loan loss expenses [Short (1979); Bell and Murphy (1969); Kwast and Rose (1982)]. Expense management, a correlate of efficient management is another very important determinant of bank’s profitability. There has been an extensive literature based on the idea that an expenses-related variable should be included in the cost part of a 96 RESERVE BANK OF INDIA OCCASIONAL PAPERS standard microeconomic profit function. In this context, Bourke (1989) and Molyneux and Thornton (1992) find that better-quality management and profitability go hand in hand.

As far as the external determinants of bank profitability are concerned the literature distinguishes between control variables that describe the macroeconomic environment, such as inflation, interest rates and cyclical output, and variables that represent market characteristics. The latter refer to market concentration, industry size and ownership status. Among the external determinants which are empirically modeled are regulation [Jordan (1972); Edwards (1977); Tucillo (1973)], bank size and economies of scale [Benston, Hanweck and Humphrey (1982); Short (1979)], competition [Phillips (1964);

Tschoegl (!982)], concentration [Rhoades (1977); Schuster (1984)], growth in market [Short (1979)], interest rates as a proxy for capital scarcity and government ownership (Short, 1979). The most frequently used macroeconomic control variables are the inflation rate, the long-term interest rate and/or the growth rate of money supply. Revell (1979) introduced the issue of the relationship between bank profitability and inflation. He notes that the effect of inflation on bank profitability depends on whether banks’ wages and other operating expenses increase at a faster pace than inflation. Perry (1992) in a similar vein contends that the extent to which inflation affects bank profitability depends on whether inflation expectations are fully anticipated. The influence arising from ownership status of a bank on its profitability is another much debated and frequently visited issue in the literature. The proposition that privately owned institutions are more profitable, however, has mixed empirical evidence in favour of it. For instance, while Short (1979) provides cross-country evidence of a strong negative relationship between government ownership and bank profitability, Barth et al. (2004) claim that government ownership of banks is indeed negatively correlated with bank efficiency. Furthermore, Bourke (1989) and Molyneux and Thornton (1992) find ownership status is irrelevant in explaining profitability. While many of the above factors would be relevant, it would be instructive to scan the literature that has exclusively focussed on the RRBs.

The literature on RRBs recognises a host of reasons responsible for their poor financial health. According to the Narasimham Committee, RRBs have low earning capacity. They have not been able to earn much profit in view of their policy of restricting their operations to target groups. The recovery position of RRBs is not satisfactory. There are a large number of defaulters. Their cost of operation has been high on account of the increase in the salary scales of the employees in line with the salary structure of the employees of commercial banks. In most cases, these banks followed the same methods of operation and procedures as followed by commercial banks. Therefore, these procedures have not found favour with the rural masses. In many cases, banks have not been located at the right place. For instance, the sponsoring banks are also running their branches in the same areas where RRBs are operating. The issue whether location matters for the performance has been addressed in some detail by Malhotra (2002). Considering 22 different parameters that impact on the functioning of RRBs for the year 2000, Malhotra asserts that geographical location of RRBs is not the limiting factor for their performance. He further finds that ‘it is the specific nourishment which each RRB receives from its sponsor bank, is cardinal to its performance’. In other words, the umbilical cord had its effect on the performance of RRBs. The limitation of the study is that the financial health of the sponsor bank was not considered directly to infer about the umbilical cord hypothesis. Nitin and Thorat (2004) on a different note provide a penetrating analysis as to how constraints in the institutional dimension5 have seriously impaired the governance of the RRBs. They have argued that perverse institutional arrangements that gave rise to incompatible incentive structures for key stakeholders such

as political leaders, policy makers, bank staff and clients have acted as constraints on their performance. The lacklustre performance of the RRBs during the last two decades, according to the authors can be largely attributed to their lack of commercial orientation.

CHAPTER ARRANGEMENT

Chapter-1

History of Banking, Objective of study, Methodology, Scope of the study, Limitation of the study.

Chapter-2

Company’s Profile

Chapter-3

Data Analysis & Interpretation

Chapter-4

Suggestions & Recommendation, Conclusion, References.

CHAPTER - 1

HISTORY OF BANKING:-

As per Banking Regulation Act 1949, “Banking” means:-

“Accepting for the purpose of lending or investment of deposit of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.”

In simple words, bank refers to an institution that deals in money. This institution accepts deposits from the people and gives loans to those who are in need. Besides dealing in money, banks these days perform various other functions such as credit creation, agency job and general service.Bank, therefore, is such an institution, which accepts deposits from the people, gives loans, creates credit and undertakes agency work.

Without a sound and effective banking system in India, it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.

For the past three decades, India's banking system has had several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitan or cosmopolitan areas in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is as simple as instant messaging or dialing for a pizza. Money has become the order of the day.

COMPOSITION OF THE BANKING SYSTEM IN INDIA AS AT THE BEGINNING OF NEW MILLENIUM

At present, the number of nationalized banks is 20. Several Foreign banks were allowed to operate as per the guidelines of RBI. At present the banking system can be classified in following categories:

PUBLIC SECTOR BANKS:-

Reserve Bank of India State Bank of India and its 7 associate Banks Nationalized Banks (20 in number) Regional Rural Banks sponsored by Public sector Banks

PRIVATE SECTOR BANKS:- Old Generation Private Banks New Generation Private Banks Foreign Banks in India Local Area Banks Non Scheduled Banks

CO-OPERATIVE SECTOR BANKS:- State Co-operative Banks Central Co-operative Banks Primary Agriculture Credit Societies Land Development Banks Urban Co-operative Banks State Land Development Banks Scheduled Co-operative Banks

DEVELOPMENT BANKS:- Industrial Finance Corporation of India (IFCI) Industrial Development Bank of India (IDBI) Industrial Credit & Investment Corporation of India (ICICI) Industrial Investment Bank of India (IIBI) Small Industries Development Bank of India (SIDBI) National Bank for Agriculture & Rural Development (NABARD) Export-Import Bank of India.

Objective of the study

To find out the effectiveness of induction and orientation of RRBs in India. To know the role of Regional Rural Banks in economic development. The purpose of this study has been to determine whether the induction and orientation

progamme is used for employee development and whether it is emphasized as an important part of the industry process. Also whether the induction and orientation progamme helps in increasing company’s profitability.

METHODOLOGY

It is a way to systematically solve the research problem. In it we study various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. It is important for the researcher not only to understand the research methods and techniques but also the methodology. The research work constitute of survey, questionnaire and the right from it and from the article and websites owned by the organization and various other journals from different organization. Based on these secondary data the methodology once derived and conclusion was made.

For the study purpose the Secondary data collected through websites like GOOGLE, Wikipedia, and through various Journals etc.

SCOPE OF THE STUDY

The purpose of this study to know that the government is seriously to address the crisis in rural banking, it must reaffirm the commitment of the state to the policy of social and development banking, and reaffirm the part played by the credit system in redistribution and poverty alleviation. Commercial banks, Regional Rural Banks and cooperatives must lead rural credit revival, which is too serious and large-scale a task to be left merely to self help groups or NGO-controlled private-sector micro-credit organisations. The geographical and functional reach of public sector banking must be restored and extended, differential interest policies reinstated, and special loans-cum-subsidy schemes reintroduced on a large scale for all landless and poor and middle peasant households, scheduled caste and tribe households and other vulnerable sections of the rural population. Priority sector norms must be enforced, and, instead of an alternative such as investment in RIDF bonds, penalties must be imposed on any failure of banks to meet these public-interest targets.

LIMITATIONS OF THE STUDY

However, every care has been taken to make this report authentic in every sense. Yet, there were a few uncomfortable factors, which might have had their influence on the final report. It is said,” nothing is perfect” and if this quote is true I am sure there would be few shortcomings in this project also. Sincere efforts have been made to eliminate due to the limitations of the study. These are:-

The study was to be completed in a short time; the time factor put a considerable limit on the scope and the extensiveness of the study.

There was no earlier work or reference on this area relating to IGL to confirm findings.

CHAPTER -2

ORGENIGATION INTRODUCTION(REGIONAL RURAL BANKS)

Regional Rural Banks in India:-

The Narasimham committee on rural credit recommended the establishment of Regional Rural Banks (RRBs) on the ground that they would be much better suited than the commercial banks or co-operative banks in meeting the needs of rural areas. Accepting the recommendations of the Narasimham committee, the government passed the Regional Rural Banks Act, 1976. A significant development in the field of banking during 1976 was the establishment of 19 Regional Rural Banks (RRBs) under the Regional Rural Banks Act‚1976.

The RRBs were established “with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto” .

Offices and agencies :- (1) A Regional Rural Bank shall have its head office at such place in the notified area

as the Central Government may, after consultation with the Reserve Bank and the Sponsor Bank, specify by notification in the Official Gazette.

(2) A Regional Rural Bank may, if it is of opinion that it is necessary so to do, establish its branches or agencies at any place in the notified area.

Authorised capital :-

The authorized capital of each Regional Rural Bank shall be one crore of rupees, divided into one lakh of fully paid-up shares of one hundred rupees each: Provided that the Central Government may, after consultation with the Reserve Bank and the Sponsor Bank, increase or reduce such authorized capital; so, however, that the authorized capital shall not be reduced below twenty-five lakhs of rupees, and the shares shall be, in all cases, fully paid-up shares of one hundred rupees each.

Issued capital :-

(1) The issued capital of each Regional Rural Bank shall be twenty-five lakhs of rupees.

(2) Of the capital issued by a Regional Rural Bank under sub-section (1), 50% shall be subscribed by the Central Government; 15% by the concerned State Government and 35% by the Sponsor Bank.

(3) The Board may, after consultation with the Reserve Bank, the concerned State Government and the Sponsor Bank and with the prior approval of the Central Government, from time to time, increase the issued capital of the Regional Rural Bank; and, where additional capital is issued, such capital shall also be subscribed in the same proportion as is specified in sub-section (2).

Shares to be approved securities :- Notwithstanding anything contained in the Acts hereinafter mentioned in this section, the shares of a Regional Rural Bank shall be deemed to be included among the securities enumerated in section 20 of the Indian Trusts Act, 1882 (2 of 1882), and shall also be deemed to be approved securities for the purposes of the Banking Regulation Act, 1949(10 of 1949).

Management:-

(1) Subject to the provisions of this Act, the general superintendence, direction and management of the affairs and business of a Regional Rural Bank shall vest in a Board of directors who may exercise all the powers and discharge all the functions which may be exercised or discharged by the Regional Rural Bank.

(2) In discharging its functions, the Board shall Act on business principles and shall have due regard to public interest.

Board of directors :-

The Board of directors shall consist of the Chairman appointed under sub-section (1) of section 11 and the following other members, namely:--

1) Not more than three directors, to be nominated by the Central Government;2) Not more than two directors, to be nominated by the concerned State Government;3) Not more than three directors, to be nominated by the Sponsor Bank.

The Central Government may increase the number of members of the Board; so, however, that the number of directors does not exceed fifteen in the aggregate and also prescribe the manner in which the additional number may be filled in.

Term of office of director :-

A director (other than the Chairman) shall hold office for such period not exceeding two years, from the date when he assumes office, as the authority nominating him may specify at the time when the nomination is made, and may, on the expiry of the said period, continue to hold office until his successor has been nominated and shall also be eligible for re-nomination.

Chairman :- (1) The Central Government shall appoint an individual to be the Chairman of a

Regional Rural Bank and specify the period, not exceeding five years, for which such individual shall, subject to the provisions of sub-section (4), hold office as the Chairman.

(2) The individual, appointed as a Chairman under sub-section (1), shall, on the expiry of the period specified under that sub-section, be eligible for re-appointment.

(3) The Chairman shall devote his whole time to the affairs of the Regional Rural Bank and shall have, subject to the superintendence, control and direction of the Board, the management of the whole of the affairs of the Regional Rural Bank.

(4) The Chairman shall hold office during the pleasure of the Central Government.

(5) The Chairman shall receive such salary and allowances and be governed by such terms and conditions of service as may be determined by the Central Government.

(6) If the Chairman is, by infirmity or otherwise, rendered incapable of carrying out his duties or is absent, on leave or otherwise, in circumstances not involving the vacation of office, the Central Government may appoint another individual to act as the Chairman during the absence of the first-mentioned Chairman.

Meetings of Board:-

The Board of directors of a Regional Rural Bank shall meet at such time and place and shall observe such rules of procedure in regard to the transaction of business at its meetings as may be prescribed.

The Chairman of the Regional Rural Bank shall preside over every meeting of the Board, and, in his absence, such director as the Chairman may generally, or in relation to any

particular meeting, authorise in this behalf shall preside; and, in the absence of both the Chairman and the director so authorised, the directors present at the meeting shall elect one from among themselves to preside over the meeting.

Explanation— for the purposes of this sub-section, "absence" from a meeting means non-attendance for any reason whatsoever at the meeting, or any part of the meeting during which any business is transacted.

All questions at a meeting of the Board shall be decided by a majority of the votes of the directors present and voting; and, in case of equality of votes, the person presiding shall have a second or casting vote.

No director shall, as a director, take part in the discussion of, or vote on, any contract, loan, arrangement or proposal entered into or to be entered into, by or on behalf of the Regional Rural Bank, if he is, in any way, whether directly or indirectly, interested in the contract, loan, arrangement or proposal and, where a director is interested in any such matter, he shall, at the earliest possible opportunity, disclose to the Board the nature of his interest in such contract, loan, arrangement or proposal, and where he does so, his presence at the meeting shall not count for the purpose of forming any quorum at the time of any such discussion or vote, and if he does vote, his vote shall be void:

Provided that nothing contained in this sub-section shall apply to such director by reason only of his being—

A shareholder (other than a director) holding not more than 2% of the paid-up capital in any public company within the meaning of the Companies Act, 1956 (1 of 1956), or any corporation established by or under any law for the time being in force in India or any co-operative society, with which the Regional Rural Bank has entered into, or proposes to enter into, any contract, loan, arrangement or proposal; or

A director of the Regional Rural Bank as such.

Committees of Board :- The Board may constitute such committees, whether consisting wholly of directors or wholly of other persons or partly of directors and partly of other persons, as it may think fit, for such purposes as it may decide.

Fees and allowances of directors and members of committees :-

Every director and every member of a committee (other than the Chairman) shall be paid such fees and allowances as may be determined by the Central Government: Provided that no fees shall be paid to any director, or member of a committee, if he is an officer of the Central Government, State Government,

The allowances payable to a director or a member of a committee, who is an officer of the Central Government, State Government, Reserve Bank, Sponsor Bank or any other

bank, shall be paid by the Government or bank by which such officer is employed; and the allowances and fees payable to any other director or member of a committee shall be payable by the concerned Regional Rural Bank.

Staff of Regional Rural Banks :-

A Regional Rural Bank may appoint such number of officers and other employees as it may consider necessary or desirable for the efficient performance of its functions and may determine the terms and conditions of their appointment and service:

Provided that it shall be lawful for a Sponsor Bank, if requested so to do by a Regional Rural Bank sponsored by it, to send, during the first five years of the functioning of a Regional Rural Bank, such number of officers or other employees on deputation to the Regional Rural Bank as may be necessary or desirable for the efficient performance of its functions:

Provided further that the remuneration of officers and other employees appointed by a Regional Rural Bank shall be such as may be determined by the Central Government, and, in determining such remuneration, the Central Government shall have due regard to the salary structure of the employees of the State Government and the local authorities of comparable level and status in the notified area.

Notwithstanding anything contained in the Industrial Disputes Act, 1947, or any other law for the time being in force, no award, judgment, decree, decision or order of any industrial tribunal, court or other authority, made before the commencement of this Act, shall apply to the terms and conditions in relation to the persons appointed by a Regional Rural Bank.

The officers and other employees of a Regional Rural Bank shall exercise such powers and perform such duties as may be entrusted or delegated to them by the Board.

Business which a Regional Rural Bank may transact:-

Every Regional Rural Bank shall carry on and transact the business of banking as defined in clause (b) of section 5 of the Banking Regulation Act, 1949, and may engage in one or more forms of business specified in sub-section (1) of section 6 of that Act.

Without prejudice to the generality of the provisions of sub-section (1), every Regional Rural Bank may, in particular, undertake the following types of business, namely:- The granting of loans and advances, particularly to small and marginal farmers and

agricultural labourers, whether individually or in groups, and to co-operative societies, including agricultural marketing societies, agricultural processing societies, co-operative farming societies, primary agricultural credit societies or farmers' service societies, for agricultural purposes or agricultural operations or for other purposes connected therewith;

The granting of loans and advances, particularly to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry or other productive activities, within the notified area in relation to the Regional Rural Bank.

Closure of accounts:-

Every Regional Rural Bank shall cause it books to be closed and balanced as on the 31 st

day of December of each year and shall appoint with the approval of the Central Government auditors for the audit of its accounts.

Every auditor of a Regional Rural Bank shall be a person who is qualified to act as an auditor of a company under section 226 of the Companies Act, 1956 (1 of 1956), and shall receive such remuneration as the Regional Rural Bank may fix with the approval of the Central Government.

Every auditor shall be supplied with a copy of the annual balance-sheet and profit and loss account of the Regional Rural Bank, and a list of all books kept by the Regional Rural Bank, and it shall be the duty of the auditor to examine the balance-sheet and vouchers relating thereto, and, in the performance of his duties, the auditor—

a. Shall have, at all reasonable times, access to the books, accounts and other documents of the Regional Rural Bank;

b. May, at the expense of the Regional Rural Bank, employ accountants or other persons to assist him in investigating such accounts; and

c. May, in relation to such accounts, examine the Chairman or any officer or employee of the Regional Rural Bank.

Every auditor of a Regional Rural Bank shall make a report to that bank upon the annual balance-sheet and accounts and in every such report shall state:-

a. Whether, in his opinion, the balance-sheet is a full and fair balance-sheet containing all necessary particulars and is properly drawn up so as to exhibit a true and fair view of the affairs of the Regional Rural Bank, and, in case he had called for any explanation or information, whether it has been given and whether it is satisfactory;

b. Whether or not, the transactions of the Regional Rural Bank, which have come to his notice, have been within the powers of that bank;

c. Whether or not, the returns received from the offices and branches of the Regional Rural Bank have been found adequate for the purpose of his audit;

d. Whether the profit and loss account shows a true balance of profit or loss for the period covered by such accounts; and

e. Any other matter which he considers should be brought to the notice of the Regional Rural Bank.

Annual report to be furnished the shareholders :-

Every Regional Rural Bank shall, within sixty days from the date of closure of its accounting year, send to each of its shareholders a report as to its working and activities during the accounting year immediately preceding together with a copy of its balance-sheet, profit and loss account and the auditor's report in relation to the accounts of the said accounting year.

Disposal of profits :-

After making provisions for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and all other matters for which provision is, under law, necessary or which are usually provided for by banking companies, a Regional Rural Bank may, out of its net profits, declare a dividend.

Interest-tax not payable:-

Notwithstanding anything contained in the Interest-tax Act, 1974 (45 of 1974), no Regional Rural Bank shall be liable to pay any tax under that Act.

Power of Central Government to give directions:-

(1) A Regional Rural Bank shall, in the discharge of its functions, be guided by such directions in regard to matters of policy involving public interest as the Central Government may, after consultation with the Reserve Bank, give.

(2) If any question arises as to whether any such direction relates to a matter of policy involving public interest, the decision of the Central Government thereon shall be final.

Functions :-

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

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

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 RRB’s 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.

The State Bank of India is one of the major commercial banks having regional rural banks. There are 30 Regional Rural Banks in India, under the State Bank of India and it is spread in 13 states across India. The number of branches the SBI Regional Rural Banks is more than 2000. Several other banks, apart from the State Bank of India also functions as the promoter of rural development in India.

Objectives of regional rural banks

The importance of the rural banking in the economic development of a country cannot be overlooked. As Gandhiji said “Real India lies in Villages,” and village economy is the backbone of Indian economy. Without the upliftment of the rural economy as well as the rural people of our country, the objectives of economic planning cannot be achieved.

In fact, the real growth of Indian economy lied in the freeing of rural masses from acute poverty, unemployment, and socio-economic backwardness.

RRBs established with the explicit objective of:-

Bridging the credit gap in rural areas Check the outflow of rural deposits to urban areas Reduce regional imbalances and increase rural employment generation

The main objective of setting up the RRB is to provide credit and other facilities‚ especially to the small and marginal farmers‚ agricultural labourers artisans and small entrepreneurs in rural areas.

Each RRB will operate within the local limits specified by notification. If necessary‚ a RRB will also establish branches or agencies at places notified by the Government.

Each RRB is sponsored by a public sector bank‚ which provides assistance in several ways‚ viz., subscription to its share capital‚ provision of such managerial and financial assistance as may be mutually agreed upon and helps the recruitment and training of personnel during the initial period of its functioning.

CHAPTER -3

The Performance of Regional Rural Banks (RRBs) in India: Has Past Anything to Suggest for Future? 

Research Officer in the Department of Economic Analysis and Policy, Reserve Bank of India and presently working from the Patna office of the Bank. The views expressed here are of the author and not necessarily of the institution to which he belongs.

Discussions with Shri S. S. Mishra have been enlightening for the author. The author would like to thank an anonymous referee for valuable suggestions. The Author gratefully acknowledges the encouragement and inspirations of Dr. Narendra Jadhav, Dr. R. K. Pattnaik and Shri S. Ganesh. Biswa, Swarup Misra

Since their inception, regional rural banks (RRBs) have taken deep roots and have become a sort of inseparable part of the rural credit structure in India. The financial viability of the RRBs has, however, been a matter of concern since the 1980s, just five years after their existence. A number of committees have gone into the issue of their financial viability and possible restructuring. This study follows a deductive approach.

First the extent of the problem of the loss making RRBs has been studied to analyze if the problem is confined to some particular sponsor banks or States. Subsequently, an attempt is made to enquire as to factors that influence the performance of the RRBs and the role-played by the sponsor banks. The empirical analysis has been couched in terms of profit and loss making RRBs for a reasonably long (10-year) period to draw robust policy inferences.

Significant improvement in Regional Rural Banks Performance:-

The establishment of the Regional Rural Banks (RRBs) was initiated in 1975 under the provisions of the ordinance promulgated on 26.9.1975 and thereafter Section 3(1) of the RRB Act, 1976. The issued capital of RRBs is shared by Central Government, sponsor bank and the State Government in the proportion of 50%, 35% and 15% respectively. The area of operation of a majority of the RRBs is limited to a notified area comprising a few districts in a State. In the year 2005, a process was initiated for the structural consolidation of RRBs sponsored by the same bank within a State. As a result of amalgamation, 196 RRBs were reduced to 133 by way of amalgamation as on 31.3.2006 and have been further reduced to 102, as on date. The amalgamated RRBs will reap benefits of staff rationalizaton, increased quantum of advances and investments on the increased capital base and the benefit of larger

resources and economies of scale. RRBs are showing considerable improvement in their performance and their total business has been increased from Rs. 82463.94 crore in the year 2003-04 to Rs. 111041.40 crore in 2005-06. The Agricultural loans has increased from Rs. 7174.97 crore in the year 2003-04 to Rs. 15298.88 crore in the year 2005-06 and has thus more than doubled during the period of 3 years. Gross NPA has also reduced from 12.63% in the year 2003-04 to 7.28% in the year 2005-06, while Net NPA has reduced from 8.55% in the year 2003-04 to 3.92% in the year 2005-06 during this period.

Financial Institution & Services:- RRBs are oriented towards meeting the needs of the weaker sections of the rural

population consisting of:- Small and marginal farmers, Agricultural labourers, Artisans, Small entrepreneurs Mobilize deposits from rural households.

The institution of Regional Rural Banks was created to meet the excess demand for

institutional credit in the rural areas, particularly among the economically and socially marginalized sections.

RRBs are expected to make credit available to rural households besides inspiring carefulness.

To take the banking services to the doorstep of rural masses, particularly in hitherto unbanked rural areas.

To make 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. To mobilize rural savings and channelize them for supporting productive activities in

rural areas. To create a supplementary channel for the flow the central money market to the rural

areas through refinances To generate 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.

Evaluation of RRBs:-

The Committee constituted by the RBI in June 1977 to valuate the performance of RRBs concluded that with some modifications in their organisation and structure. The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development which inter alia examined the role of RRBs in the rural development work, suggested the following:

Preference for opening bank branches than commercial 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 and equity capital should also be raised.

The various facilities provided by sponsor banks should continue for 10 yrs in each case. Concessionary refinance by RBI should be continued

The control, regulation, and promotional responsibilities should be transferred from the GOI to RBI or NABARD.

RBI assistance :-– With a view to facilitate RRBs operations, the RBI gave RRBs direct access to refinance assistance at a concessional rate of three per cent below the bank rate. – Allowed to maintain a lower level of SLR than commercial banks. – Allowed to pay half per cent more interest on all deposits except those of three years and above. – Sponsor banks IDBI, NABARD, SIDBI, and other FIs are statutorily required under the RRBs Act to provide managerial and financial assistance to RRBs

Corporate & social responsibility:-We believe our first duty is to operate with integrity at all times so we can ensure the present and future well-being of our stakeholders. We strive to have a positive economic, environmental and social impact, providing responsible leadership in the marketplace, the workplace and in the communities where we live and work.RBC's vision is "always earning the right to be our clients' first choice." In order to accomplish this, we are committed to doing better for our clients, our investors, our employees and our communities, through a focused approach to corporate responsibility.Our priorities for corporate responsibility cover five areas:1) Economic Impact

Provide strong returns to shareholders Pay fair share of taxes Create employment Support small business and community economic development Foster innovation and entrepreneurship Purchase goods and services responsibility

2) Marketplace Provide access to basic banking services Develop and provide products responsibility Protect, educate and listen to consumers

3) Workplace Maintain progressive workplace programs and practices Respect diversity and promote inclusion Provide competitive compensation and total rewards, and enable growth through

training and development opportunities Foster a culture of employee engagement

4) Environment Reduce the intensity of our environmental footprint Promote environmentally responsible business activities Offer environmental products and services

5) Community Provide donations with a lasting social impact Sponsor key community initiatives Enable employees to contribute

RBC is committed to making a lasting social impact through inspired, responsible giving and by building strong partnerships with the charitable sector. Our approach is to support endeavours that empower organizations to make a difference and inspire others.

Reform process of RRBs:-

RRBs started their development process on 2nd October 1975 with the formation of a single bank (Prathama Grameen Bank). As on 31 March 2006, there were 133 RRBs (post-merger) covering 525 districts with a network of 14,494 branches. RRBs were originally conceived as low cost institutions having a rural ethos, local feel and pro poor focus. However, within a very short time, most banks were making losses. When the reform process in the banking sector was initiated, RRBs were taken up for a close look. The GoI in consultation with RBI and NABARD started the reform process thru’ a comprehensive package for RRBs including cleansing their balance sheets and recapitalising them. Extant lending restrictions were removed and space and variety available for investment of their surplus funds was expanded.Simultaneously, a number of human resource development and Organisational Development Initiatives (ODI) were taken up by NABARD with funding support of the Swiss Development Corporation (SDC) and with the tools of training and exposure visits, ODI, technology support, computerization and use of IT, system development, etc. for business development and productivity improvement. By end March 2005, there was a remarkable improvement in the financial performance of RRBs as compared to the position prevailing in 1994-95. The number of banks reporting profits went up to 166 of the 196 RRBs. As on 31 March 2006, of the total 133 RRBs (post merger), 111 posted profits and 75 of these RRBs were sustainably viable organisations having no accumulated losses as also posting current profits.The amalgamated RRBs were expected to provide better customer service due to better infrastructure, computerization of branches, pooling of experienced work force, common publicity / marketing efforts, etc. and also derive the benefits of a large area of operation, enhanced credit exposure limits and more diverse banking activities. As a result of the amalgamation, the number of RRBs was reduced from 196 to 133 as on 31 March, 2006 and to 96 as on 30 April 2007. Thus, 59 under the amalgamation process, 145 RRBs have been amalgamated to form 45 new RRBs.

District Coverage:-RRBs covered 525 out of 605 districts as on 31 March 2006. After amalgamation, RRBs have become quite large covering most parts of the State in many cases. Assam Gramin Vikas Bank,

an amalgamated RRB, covers 25 districts, the highest in the country, while five other amalgamated RRBs cover 10 or more districts each. However, 40 RRBs covered two districts and 16 RRBs covered a single district each in 2005-06. Increased coverage of districts by RRBs makes them an important segment of the Rural Financial Institutions (RFI) for financial inclusion.

Branch Network:-

The number of branches of RRBs increased to 14,494 as on 31 March 2006 from 13,920 branches as on 31 March 1989. The network of the 45 amalgamated RRBs (as on April 2007) was quite large and diverse varying from 85 to 680 branches. The Uttar Bihar KGB, an amalgamated RRB, has 680 branches, followed by Baroda Eastern UPGB with 539 branches. The branch network of stand-alone RRBs varied between 8 and 242 as on 31 March 2006.

Key Performance Indicators:-Reforms introduced in RRBs by GoI in consultation with RBI and NABARD have yielded positive results in respect of key performance indicators, as indicated under:

Key Performance Indicators : RRBs:-Amount Rs. Crore

Sr. No. Indicators 31.3.2005 31.3.2006 31.3.2007

1 NO. of RRBs 196 196 1332 No. of Districts Covered 518 523 5253 No. of Branches 14446 14484 144944 No. of Staff 69249 68912 686295 Owned Funds 5438 6181 66476 Deposits 56350 62143 713297 Borrowings 4595 5524 73038 Investment 36135 36761 411829 Loans Outstandings 26114 32870 3971310 Credit Deposit (CD) Ratio 46% 53% 56%11 Loans Issued 15579 21082 2542712 No. of RRBs Having Accumulated

Losses90 83 58

13 Accumulated Losses 2725 2715 263714 No. Of RRBs in Profit 163 166 11115 Net NPA (%) 8.55% 4.84% 3.99%16 Recovery (%) (as on 30 June) 73% 78% 80%17 Per Branch Productivity 5.71 6.56 7.6618 Per Staff Productivity 1.19 1.38 1.62

The following trends can be highlighted :

111 RRBs out of total 133 registered profit in the year 2005-06. 60 CD Ratio has been increasing from 46% on 31 March 2004 to 53% on 31 March 2005

and further to 56% on 31 March 2006. Recovery percentage has been improving from 73% during 2003-04 to 80% during 2005-

06. Consequently, net NPAs have declined from 8.55% on 31 March 2004 to 3.99% on 31

March 2006. Loans disbursement registered an impressive 35% annual growth in 2004-05 and 21% in

2005-06. Per branch productivity has increased from Rs. 5.71 crore on 31 March 2004 to Rs. 7.66

crore on 31 March 2006. Per staff productivity has increased from Rs.1.19 crore on 31 March 2004 to Rs.1.62

crore on 31 March 2006. There has been a decline in the total number of staff.

Performance under “Doubling of Agriculture Credit” : RRBs

More importantly, the performance of RRBs under GoI's initiative on doubling of agriculture credit in three years (from base year 2003-04) and greater coverage of small and marginal farmers have been impressive. They disbursed agriculture loans of the order of Rs. 12,404 crore during 2004-05 registering a phenomenal annual growth of 64% against the targeted 30%. During 2005-06, agriculture credit flow stood at Rs. 15,223 crore with a growth of 23%. Thus, RRBs have achieved the target of doubling of agriculture credit in 2 years. RRBs financed 18.58 lakh new farmers in 2004-05 and another 17.03 lakh new farmers in 2005-06.

RRB's Potential Role in Financial Inclusion

Post-merger RRBs represent a powerful instrument for financial inclusion. Their outreach vis-à-vis other scheduled commercial banks particularly in regions and across population groups facing the brunt of financial exclusion is impressive, as observed from an analysis of Basic Statistical Returns of the RBI and indicated in the following paragraphs. With merger infusing the much needed financial strength in RRBs coupled with the local feel and familiarity they command, RRBs are in a unique position to play a decisive role in financial inclusion.

In rural areas, RRBs account for a substantial 37% of total offices of all scheduled commercial banks. In semi-urban areas, their share comes to 15%. It goes without saying that exclusion is more severe in rural areas.

Offices of Scheduled Commercial Banks –Population Group and Bank Group-wise (March 2005)

Bank Group Rural Offices

No. % to Total

Semi urban Offices No. % to Total

Urban/Metro Offices No. % to Total

Total

No. % to Total

RRBs 11824 37 2284 15 537 2 14645 21SCBs Other than RRBs

20143 63 13335 85 21846 98 55324 79

Total 31967 100 15619 100 22383 100 69969 100

Manpower Deployment:-91% of the total workforce in RRBs is posted in rural and semi-urban areas as compared to 38% for other scheduled commercial banks (table below). Even in absolute terms, out of a total workforce of 179,423 deployed by all scheduled commercial banks in rural areas, RRBs share is 25% (45,062). This is significant considering that at all India level, manpower of RRBs constitute only 7% of the total manpower of all scheduled commercial banks.

Distribution of Employees of Scheduled Commercial Banks (March 2005)

Bank Group Total Employees

% of employeesposted in rural

branches

% of employeesposted in semiurban

branches

% of employeesposted in urban /metro branches

RRBs 65599 69 22 9SCBs Other than RRBs

834834 16 22 62

Total 900433 20 22 58

Savings Mobilisation:-At all India level, RRBs account for 12% of all deposit accounts of scheduled commercial banks and a meagre 3.5% of deposit amount. However, in rural areas, RRBs share in deposit accounts is a significant 31% and that in deposit amount 19%. This shows that the average deposit amount is lower in RRBs than other commercial banks, thereby implying RRBs' better reach to small depositors.

Deposits of Rural Branches of Scheduled Commercial Banks - Bank Group-wise(March 2005)

Bank Group No. of AccountsNo. (‘000) % to Total

Deposit AmountAmount(Rs. Cr.) % to Total

RRBs 43540 31 40957 19SCBs Other than RRBs 98368 69 172147 81

Total 141908 100 213104 100

RRBs as Self Help Promotion Institutions (SHPI):-

RRBs have not only provided financial services to the SHG-Bank Linkage Programme, but have also played a significant role as SHPIs. As many as 104 RRBs (31 March 2006) are also functioning as SHPIs with grant assistance from NABARD. Non-availability of good NGOs is a matter of concern especially in North-Eastern, Central and Eastern Regions. RRBs can play a vital role as SHPIs in such areas.

The foregoing paragraphs conclusively indicate that RRBs are well positioned to play a major role in financial inclusion particularly in areas / regions with high rates of financial exclusion. RRBs were originally created to cater to neglected sections / areas as they were expected to have sound financial management combined with local feel and familiarity. With the amalgamation of RRBs, they have acquired the critical mass in terms of financial strength to widen and deepen their outreach. With the requisite strength having been developed, RRBs are the best suited vehicles to widen and deepen the process of financial inclusion. However, utmost care must be taken to ensure that in the process of fulfilling the socio-economic objective of financial inclusion, RRBs' do not again fall into the vicious circle of deteriorating financial performance and deviation from their mandate. RRBs may be provided adequate promotional and developmental assistance to contribute substantially to financial inclusion in a way that the business generated out of inclusion efforts add positively to their performance.

Apart from SBI, there are many other banks which function for the development of the rural areas in India. These banks are listed below:-

Andhra Pradesh

Andhra Pradesh Grameena Vikas Bank Andhra Pragathi Grameena Bank Deccan Grameena Bank Chaitanya Godavari Grameena Bank Saptagiri Grameena Bank

Bihar

Madhya Bihar Gramin Bank Bihar Kshetriya Gramin Bank Uttar Bihar Kshetriya Gramin Bank Kosi Kshetriya Gramin Bank Samastipur Kshetriya Gramin Bank

Chhattisgarh

Chhattisgarh Gramin Bank Surguja Kshetriya Gramin Bank Durg-Rajnandgaon Gramin Bank

Haryana

Harayana Gramin Bank Gurgaon Gramin Bank

Jammu & Kashmir

Jammu Rural Bank Ellaquai Dehati Bank Kamraz Rural Bank

Assam

Assam Gramin Vikash Bank Langpi Dehangi Rural Bank

Jharkhand

Jharkhand Gramin Bank Vananchal Gramin Bank

Madhya Pradesh

Narmada Malwa Gramin Bank Satpura Kshetriya Gramin Bank Madhya Bharath Gramin Bank Chambal-Gwalior Kshetriya Gramin Bank Rewa-Sidhi Gramin Bank Sharda Gramin Bank Ratlam- Mandsaur Kshetriya Gramin Bank Vidisha Bhopal Kshetriya Gramin Bank Mahakaushal Kshetriya Gramin Bank Jhabua Dhar Kshetriya Gramin Bank

Gujarat

Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank

Himachal Pradesh

Himachal Gramin Bank Parvatiya Gramin Bank

Punjab

Punjab Gramin Bank Faridkot-Bhatinda Kshetriya Gramin Bank Malwa Gramin Bank

Kerala

Narmada Malwa Gramin Bank North Malabar Gramin Bank

Tamil Nadu

Pandyan Grama Bank Pallavan Grama Bank

Maharashtra

Marathwada Gramin Bank Aurangabad -Jalna Gramin Bank Wainganga Kshetriya Gramin Bank Vidharbha Kshetriya Gramin Bank Solapur Gramin Bank Thane Gramin Bank Ratnagiri-Sindhudurg Gramin Bank

Karnataka

Karnataka Vikas Grameena Bank Pragathi Gramin Bank Cauvery Kalpatharu Grameena Bank Krishna Grameena Bank Chikmagalur-Kodagu Grameena Bank Visveshvaraya Gramin Bank

Rajasthan

Baroda Rajasthan Gramin Bank Marwar Ganganagar Bikaner Gramin Bank Rajasthan Gramin Bank Jaipur Thar Gramin Bank Hodoti Kshetriya Gramin Bank Mewar Anchalik Gramin Bank

Orissa

Kalinga Gramya Bank Utkal Gramya Bank Baitarani Gramya Bank Neelachal Gramya Bank

Rushikulya Gramya Bank

West Bengal

Bangiya Gramin Vikash Bank Paschim Banga Gramin Bank Uttar Banga Kshetriya Gramin Bank

Meghalaya

Ka Bank Nogkyndong Ri Khasi- Jaintia

Arunachal Pradesh

Arunachal Pradesh Rural Bank

Manipur

Manipur Rural Bank

Mizoram

Mizoram Rural Bank

Nagaland

Nagaland Rural Bank

Tripura

Tripura Gramin Bank

Uttar Pradesh

Purvanchal Gramin Bank Kashi Gomti Samyut Gramin Bank Uttar Pradesh Gramin Bank Shreyas Gramin Bank Lucknow Kshetriya Gramin Bank Ballia Kshetriya Gramin Bank Triveni Kshetriya Gramin Bank Aryavart Gramin Bank

Kisan Gramin Bank Kshetriya Kisan Gramin Bank Etawah Kshetriya Gramin Bank Rani Laxmi Bai Kshetriya Gramin Bank Baroda Western Uttar Pradesh Gramin Bank Devipatan Kshetriya Gramin Bank Prathama Bank Baroda Eastern Uttar Pradesh Gramin Bank

Uttaranchal

Uttaranchal Gramin Bank Nainital Almora Kshetriya Gramin Bank

Banking facilities to be provided by March 2012 to habitations having population in excess of 2000

In July, 2009, a total of 129 un-banked blocks were identified in the country.  As a result of the concerted efforts made by the Government, Reserve Bank of India (RBI) and the Banks in providing banking facilities in the un-banked blocks, the number of such blocks has come down to 93 in February, 2010.   Low population density, inhospitable terrain, law and order problems and non-availability of the basic infrastructure have been indicated as the main impediments in providing banking facilities in these areas.  The Government is monitoring the progress made in this regard on an ongoing basis.

To reach the benefits of banking services to the hinterland it has been proposed to provide appropriate banking facilities to habitations having population in excess of 2000 by March, 2012.  These services will be provided by Banks using the Business Correspondent Model and other models with appropriate technology back-up, to cover around 60,000 habitations.

To extend the reach of banking to rural areas having a low penetration of bank branches, the RBI has liberalized the policy of branch licensing and permitted domestic scheduled commercial banks (other than Regional Rural Banks) to open branches in Tier 3 to Tier 6 centres (with population upto 49,999 as per Census 2001) without having the need to take permission from RBI in each case.  The detailed RBI circular is available at its website www.rbi.org.in.

During the current financial year, the State Bank of India (SBI), the State Level Bankers Committee (SLBC) Convenor for Uttarakhand has reported that it has already opened 16 new branches and has received approval for opening another 18 new branches in Uttarakhand.  As per the branch expansion programme of the Regional Rural Banks in Uttarakhand, the Uttaranchal Gramin Bank is to open 24 branches and the Nainital Almora Kshetriya Gramin Bank is to open 4 branches in the next two years in the State of Uttarakhand.

Implementation of RBI initiatives for financial inclusion:-

All the recent circulars relating to financial inclusion, viz., no frills accounts, GCC, One Time Settlement (OTS) for loans up to Rs. 25,000, use of intermediaries, etc., should be implemented by RRBs.

Local Area Banks:-The Finance Minister, in his August 1996 Budget, announced the concept of Local Area Banks (LAB) and following this, the RBI issued guidelines and sought applications for setting up LABs. Only 6 LABs were licensed to operate by RBI, of which 4 are currently functioning. Though the overall performance indicators of functioning LABs appear to be healthy, there have been a few instances of LABs having to close down. Keeping in view the inherent potential of LABs, RBI may consider revisiting the same and keep the option open to allow new LABs to come into operation, especially in districts / regions manifesting high levels of exclusion without compromising on regulatory prescriptions. LABs can integrate well with local financial markets and offer a host of financial services including savings, credit, remittances, insurance, etc.

Role of Regional Rural Banks in Economic Development:-

The importance of the rural banking in the economic development of a country cannot be overlooked. As Gandhiji said “Real India lies in villages,” and village economy is the backbone of Indian economy. Without the upliftment of the rural economy as well as the rural people of our country, the objectives of economic planning cannot be achieved. In fact, the real growth of Indian economy lied in the emancipation of rural masses from acute poverty, unemployment, and socio-economic backwardness. Keeping this end in view, various important plans and programmes of rural development have been conceived and implemented by the government of India since the commencement of first five-year plan from 1951-56. But an appraisal of the achievement of these programmes clearly reveals that much programmes failed to achieve the desired objectives due to the backward economic condition and lack of adequate finance to the poor people in the rural areas. Hence, bank and other financial institutions are of vital importance for development of rural economy of a country. The present study is a modest attempt to make an appraisal of the credit needs of the rural people and the way Regional Rural Bank, i.e., Arunachal Pradesh Rural Bank, has been extending its service to meet the same in the state of Arunachal Pradesh. It deals with the performance evaluation of Arunachal Pradesh. Rural Bank (APRB) for the economic development of the state.

The effect of RRBs on economic development:-

111 RRBs out of total 133 registered profit in the year 2005-06. CD Ratio has been increasing from 46% on 31 March 2004 to 53% on 31 March 2005

and further to 56% on 31 March 2006. Recovery percentage has been improving from 73% during 2003-04 to 80% during 2005-

06. Net NPAs have declined from 8.55% on 31 March 2004 to 3.99% on 31 March 2006.

Loans disbursement registered an impressive 35% annual growth in 2004-05 and 21% in 2005-06.

Per branch productivity has increased from Rs. 5.71 crore on 31 March 2004 to Rs. 7.66 crore on 31 March 2006.

Per staff productivity has increased from Rs.1.19 crore on 31 March 2004 to Rs.1.62 crore on 31 March 2006.

CHAPTER-4

FINDINGS

Lack of Computerization is a problem for the RRBs in some particular areas.

RRBs provides better credit plans and facilities to its customers but it should be prepare annual credit plans having a separate component for excluded groups, which would integrate credit provision with promotional assistance

The study tells that the area of working of RRBs is going wide. But the strengthening Board of Management is missing some time.

From our findings it is clear that mostly persons have availed loan from banks.

Most respondents have availed loan for horticulture and other respondents have availed loan for agriculture.

The study reveals that the persons are aware about new products and services offered by bank.

Through this study it is said that Regional Rural Banks are handling customer grievance very well.

Recommendations

RRBs should extend their services into unbanked areas and increase their credit to deposit (CD) ratio. As on 31 March 2006, 37 RRBs had CD ratio of less than 40%, 44 RRBs between 40% and 60% and 52 RRBs above 60%. The CD ratio variations ranged from 20% to 116%. As RRBs operate with branches in remote, interior and tribal-dominated areas, they have a special role to play in financial inclusion. The NRFIP, details of which are specified earlier, is of high relevance for RRBs, particularly those having CD ratio of less than 40%. The post-merger scenario of RRBs poses a series of challenges for them and needs to be addressed. The following areas would require attention from the point of view of financial inclusion.

Setting exclusive targets for microfinance and financial inclusion, Providing funding support & Providing technology support

Keeping the above in view, the following specific recommendations are made :

No further merger of RRBs:- There is a need for policy refinement regarding further merger of RRBs. The Vyas Committee had recommended merger of all RRBs in the same State. Currently, RRBs of the same sponsor bank are merged at State-level. By April 2007, the number of RRBs was reduced to 96. If sponsor banks are to have the requisite initiative to support their RRBs fully, they would need assurance that there will be no further mergers. The Committee is of the view that further merger of all RRBs at State-level is not required. It may also not be desirable if there has to be a firm reinforcement of the rural orientation of these institutions with a specific mandate on financial inclusion. The Committee, therefore, recommends that the process of merger should not proceed beyond the level of sponsor bank in each State.

Recapitalization of RRBs with negative Net Worth:- Recapitalization of RRBs with negative net worth has to be given a serious consideration as it would facilitate their growth, provide lenders a level of comfort and enable their achieving standard capital adequacy ratios. As on March 2004, 98 RRBs were in need of Rs. 3,050 crore for making the net worth positive. The position, as on 31 March 2006, is that 40 RRBs would require Rs.1, 718 crore.

Widening network and Expanding coverage:- As on 01 April 2007, RRBs were covering 535 districts. They may be directed to cover all unbanked areas in these districts, taking the village as a unit, either by opening a branch (wherever feasible) or through the BF / BC model in a time bound manner. As on

01 April 2007, 87 districts in the country were not covered by RRBs and their area of operation may be extended to cover these districts.

Strategic microfinance plan with NABARD support:- RRBs have the potential and capability to emerge as niche operators in microfinance. They are playing a major role in the SHG - Bank Linkage Programme especially also as SHPIs. It is significant that as an institution they have the expertise and potential to fulfill both the requirements of SHGs - formation plus nurturing and financial service provisions (credit plus). Their dual role has special meaning in areas which face severe financial exclusion and which do not have a sufficient presence of well performing NGOs. However, to upscale the programme to a level where it can really make a visible impact, RRBs need handholding particularly in the areas of training, promotion and development. NABARD may provide required assistance.

NABARD should prepare a strategic action plan RRB-wise, for promotion and credit linkage of SHGs. RRBs may be asked to form, nurture and credit link at least 3,000 SHGs in all districts covered by them in North-Eastern, Eastern and Central Regions. A Memorandum of Understanding (MoU) may be signed by RRBs with NABARD for a period of 5 years - with NABARD providing the promotional and development assistance out of the “Financial Inclusion Promotion and Development Fund” and RRBs forming, nurturing and providing financial services to SHGs. RRBs may accomplish the task with the support of individual rural volunteers, BFs, their staff members, etc. NABARD may closely monitor the programme - with focus on qualitative aspects.

NRFIP for RRBs:- The strategy recommended earlier in the Report for NRFIP for commercial banks would be equally applicable for RRBs. The process of undertaking a survey, identification of excluded households, dissemination of the information, setting of bank-wise / branch-wise targets, etc., could be followed. RRBs will have certain handicaps in executing the Plan. RRBs may endeavour to cover a large part of their incremental lending thru’ the group mode (SHGs/JLGs) as it will enhance their outreach to the financially excluded. Lending thru’ group mode would also keep NPAs at low level.

Pilot testing of BF / BC Model by RRBs RRBs should adopt the BF and BC models as a major strategy of financial inclusion. NABARD should extend the required support including running pilots in selected banks. The proposal for a technology based intervention under the BF/ BC model would be equally relevant for RRBs. However, RRBs would require some handholding in implementing the proposal. NABARD may identify 10 RRBs across the country, giving greater weightage to regions manifesting higher levels of financial exclusion and work in strategic alliance with these RRBs and their sponsor banks in implementing the proposal. The RRBs identified by NABARD for the project will require developing a core banking software for proper integration of the technology model proposed.

Separate credit plan for excluded regions:-

The Committee recommends that RRBs operating in predominantly tribal areas and having high levels of exclusion may prepare annual credit plans having a separate component for excluded groups, which would integrate credit provision with promotional assistance such as agricultural services and BDSs for the farm and nonfarm sectors respectively including entrepreneurship development and formation and strengthening of producer’s organisations like dairy cooperatives. Refinance and promotional support may be provided by NABARD to RRBs on a large scale for implementation of these credit plans.

Computerisation:- With a view to facilitate the seamless integration of RRBs with the main payment system, there is a need to provide computerisation support to them. Banks will be eligible for support from the Financial Inclusion Funds on a matching contribution of 50% in regard to districts other than tribal districts and 75% in case of branches located in tribal districts under the Tribal Sub Plan.

Strengthening Boards of Management:- Further, now that RRBs are being merged and are becoming large size entities, it is necessary that their Boards of Management are strengthened and powers delegated to them on policy and business operations, viz. introduction of new liability and credit products, investment decisions, improving market orientation in raising and deployment of resources, non-fund based business, career progression, transfer policy etc.

Tax Incentives:- From 2006-07, RRBs are liable to pay income tax. To further strengthen the RRBs, profits transferred to reserves could be exempted from tax till they achieve standard capital adequacy ratios. Alternately, RRBs may be allowed tax concessions to the extent of 40% of their profits, as per provisions under Sec. 36 (1) (viii) of the Income Tax Act.

CONCLUSION

The importance of the rural banking in the economic development of a country cannot be overlooked. As Gandhiji said “Real India lies in Villages,” and village economy is the backbone of Indian economy. Without the upliftment of the rural economy as well as the rural people of our country, the objectives of economic planning cannot be achieved.

In fact, the real growth of Indian economy lied in the freeing of rural masses from acute poverty, unemployment, and socio-economic backwardness.

Nevertheless, it is clear that if any government is seriously to address the crisis in rural banking, it must reaffirm the commitment of the state to the policy of social and development banking, and reaffirm the part played by the credit system in redistribution and poverty alleviation. Commercial banks, Regional Rural Banks and cooperatives must lead rural credit revival, which is too serious and large-scale a task to be left merely to self help groups or NGO-controlled private-sector micro-credit organisations. The geographical and functional reach of public sector

banking must be restored and extended, differential interest policies reinstated, and special loans-cum-subsidy schemes reintroduced on a large scale for all landless and poor and middle peasant households, scheduled caste and tribe households and other vulnerable sections of the rural population. Priority sector norms must be enforced, and, instead of an alternative such as investment in RIDF bonds, penalties must be imposed on any failure of banks to meet these public-interest targets.

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C. P. Chandrasekhar, C. P., and Ray, Sujit Kumar (2004), “Financial Sector Reform and the Transformation of Banking”, in Ramachandran and Swaminathan (forthcoming 2004)

Chandrasekhar, C. P. and J. Ghosh, 2002. The Market that Failed, A Decade of Neoliberal Economic Reforms in India. New Delhi: Leftword Books.

Chavan, P and R. Ramakumar, 2002, “Micro-credit and Rural Poverty: Analysis of Empirical Evidence”, Economic and Political Weekly, 37, 10, pp 955-965.

Chavan, Pallavi and Ramakumar, R. (2004), “Interest Rates on Micro-credit ”, in Ramachandran and Swaminathan (forthcoming 2004)

Greeley, M, 1997. ‘Poverty and Well Being: Problems for Poverty Reduction in Role of Credit’. In Who Needs Credit? Poverty and Finance in Bangladesh, eds Wood and Sharif, pp. London: Zed Books.

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