review of literature - shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/29778/11/11_chapter...
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REVIEW OF LITERATURE
In this chapter, an attempt has been made to review the empirical studies related
to RRBs and commercial banks. This chapter has been divided into two sections viz;
section 2.1 and section 2.2. Section 2.1 reviews the empirical studies on the working of
RRBs in India highlighting the problems and prospects of RRBs; section 2.1 provides
the review of studies on technical efficiency and total factor productivity growth of
RRBs as well as a brief outline of empirical studies of commercial banks conducted at
national and international level.
SECTION 2.1
Dutta (1976) discussed the need for rural bank branches through the establishment of
RRBs. He commented that the present structure of banking had been successful in
attending the desirable kind of branch expansion and in advancing adequate credit to
agriculture and other high-priority sector. There was a need for a new structure.
Moreover, wasteful competition should be eliminated with the introduction of a system
which offered banking service in depth in the areas allocated to different units. There
was a need for regionally grouped compact zones, each served by a single public sector
zonal bank with full stake in the development of the zone and with a quick
communication link with its constituent branch offices. Although recent experience had
not shown much economies of scale, yet it did not take into account the fact that there
had been large dis-economies from the search for far flung fields of operation. The
economies of scale would appear with the expansion of scale within a compact area.
System should be such in which monetary policy could be made quickly effective
through a relatively small number of decision making authorities, which in their turn,
could effectively supervise and control the banking operations in their respective areas.
Mukherjee (1976) recommended the establishment of RRBs. He opined that to write
off the debt of small and marginal farmers, and agricultural labourers from the money-
lenders, the institutional sector like RRBs would have to fulfill that gap 100 percent and
that, too, in a very short period. The intention was to have rural touch and local feel i.e.
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a familiarity with rural problems. RRBs should supplement and not replace the other
institutional agencies. RRBs had a two way relationship both with commercial banks on
the one hand and farmer and service society on the other hand.
Dantwala (1977) committee appointed by the Reserve Bank of India (RBI) to review
the working of RRBs submitted its report to RBI in February, 1978. The review
committee observed that there was a need to establish a new institution of RRBs to
fulfill the credit gap. The committee’s view was that credit gap should be measured
with reference to geographical, functional and sectional consideration and also by the
criteria of the degree of substitution of informal credit by formal credit. The
geographical gap would indicate the regional dispersal of institutional credit in the rural
areas. The committee recommended that RRBs would be very useful credit institutions
to the weaker sections of the society like, small farmers, landless laborers, village
artisans, etc. The committee felt that the RRBs can make a substantial contribution
towards improving the quality and quantity of credit flows to the rural areas by
becoming an integral part of the rural credit structure.
Kant (1977) undertook a definitive and comparable appraisal of the performance and
problems by selecting two of first five RRBs started on October 2, 1975, namely, the
Haryana Kshetriya Gramin Bank, Bhiwani (Haryana) and the Jaipur Nagaur Aanchalik
Gramin Bank, Jaipur (Rajasthan) till period. The study found that working of the RRBs
was influenced by specific local conditions which vary from place to place. These
RRBs suffered from many problems. Therefore, the study suggested the need to bring
out some of the key issues so that their performance could be improved to make it
imperative to conduct case studies of their performance and problems. This paper
presented the findings of two such case studies. It was suggested that the working of
these banks should be reorganized and revitalized for improving their performance. The
study explored that Dantwala committee is already at work for examining the working
of these banks and tried to suggest their future set up. The findings of these studies
would also be helpful for reviewing the working of such banks and for thinking of their
reorganization in the future.
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Wadhva (1977) presented the findings of the workings of two selected RRBs, namely,
Haryana Kshetriya Gramin Bank in Bhiwani District, Haryana and Jaipur Nagaur
Aanchalik Gramin Bank in Jaipur District, Rajasthan. The case study on the workings
of the above two banks had been made for the first three years i.e., 1975-77. The study
explained that the RRBs established for fulfilling certain targets had been recognized as
the development banks for rural poor in India, yet these banks were under-nourished.
Further, their working was under several restrictions which were completely beyond
their control. Therefore, based on the findings of this study, a set of recommendations
was made to the policy-makers for achieving effectively the objectives for which the
RRBs were set up.
Kamat (1978) made some important observations on the functioning of the RRBs. He
observed that in India there was multi-agency approach to finance agriculture. These
were co-operative banks, commercial banks and the RRBs sponsored by commercial
banks. The role of RRBs was to supplement the institutional agencies and not to replace
the other institutional agencies in the field of agriculture finance. The working group
recommended that the RRBs should not enter direct lending and compete with co-
operative banks.
Singh, P. (1978) studied the performance of Farrukhabad Grameen Bank from 1975 to
1977. The study revealed that the bank concentrated mostly on crop loans and even the
recovery performance was unsatisfactory. A small amount of loan was provided for the
purchase of milk animals and to small businessmen and rural artisans. No advance was
provided for the purchase of tractors or installation of tube wells. The study concluded
that both RRBs and commercial banks are the new entrants in the field of rural finance
and therefore, there was shortage of trained and experienced personnel. Moreover, they
lacked rural background which had affected the recovery situation adversely.
Agriculture Finance Corporation (1986) conducted a study on two RRBs, namely,
the Mala Prosha Gramin Dharwar in Karnataka and The Royal Seems Gramin Bank in
Andhra Pradesh over the period ranging 1975 to 1985 on behalf of NABARD. The
study examined the viability of these two RRBs. The study revealed that viability of
RRBs was essentially dependent upon the fund management strategy, margin between
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resources mobility and their deployment, and on the control exercised on current and
future costs with advances. RRBs incurred losses due to defects in their systems. Also,
the proportion of the establishment costs to total cost and expansion of branches were
the critical factors which affected their viability. The study recommended that there
should be improvement in infrastructure facilities and opening up of branches by
commercial banks in such areas where RRBs were already in operation. There was also
need to redress the problems faced by banks so that their viability could be maintained.
However, the main limitation of the study was that its generalizations were based on the
study of only two RRBs, while each bank in different places had different problems.
Chauhan et al. (1991) studied the availability and adequacy of credit and its impact on
rural income and savings with specific reference to the operations of the Etawah
Kshetriya Gramin Bank in Uttar Pradesh for the period 1984 to 1985. Borrowers were
divided into four categories viz; small and marginal farmers, landless labors, rural
artisans and small traders. The findings revealed that during the period 1984 to1985 the
availability of credit per borrower was the highest for landless labor. However, it was
found that the demand for loans exceeded the supply by about eight per cent for the
other three categories of borrowers. Further, it was found that 35 per cent of total loan
was put to unproductive use to the urgent consumption needs particularly in case of
landless labor and a very little surplus income existed within the sample ranging from 7
to 16 per cent for the average household. It was credit activities and schemes that
encouraged the mobilization of savings among the rural poor.
Balishter and Singh (1992) studied the performance of the Etawah Kshetriya Gramin
Bank, in Uttar Pradesh for the period 1984-1988. The study assessed the performance
on the basis of coverage, growth in deposits and deposit accounts, composition of
deposits, total loan advanced, loan advanced to the weaker sections of the rural
community, purpose-wise loan advanced, recovery position and profit and loss account.
The findings highlighted that the Etawah Kshetriya Gramin Bank achieved progress
with respect to deposit mobilization criteria as compared to other criteria. This success
was achieved mainly from the side of weaker sections of rural society through small
savings accounts. As per the guidelines provided by RBI, the bank should maintain 2:1
ratio while financing to agricultural and non-agricultural activities. The study suggested
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that advances must be provided to rural cottage industry as it provided employment to
rural people. It suggested the need for big efforts to make the bank into a financially
viable and self-sustaining initiative.
Kumar (1993) studied the progress and performance of the RRBs in India from 1979-
80 to 1989-90. The study selected various performance indicators such as number of
RRBs, number of districts covered, number of branches, amount of deposits and
advances provided to different categories. The findings of the study suggested that the
RRBs should mobilize deposits in order to increase the amount of advances. Further,
the quantum of loan per account for allied activities and short-term loans would
decrease with the increase in area coverage. The comparative analysis highlights that
some states like Orissa, Kerala, West Bengal, Tamil Nadu, Tripura, Bihar, Karnataka
and Assam had shown poor performance throughout the study period, whereas the other
states had shown better performance. They suggested that the poor performer banks
should increase their advances for agriculture purposes and also provide adequate short-
term loans to the farmers as per their requirement.
Deagirikar (1997) examined the non-performing assets of Aurangabad-Jalna Garmin
banks in Maharashtra for the year 1998. The findings of the study revealed that NPAs
was a serious problem faced by the banks. The indicators i.e., a number of suit filed
accounts, mounting overdue, number of sick units in integrated rural development
programme ( IRDP) showed that assets management of the bank on sound lines had not
been ensured. The availability of data on NPAs was based on accounting procedure and
management policy, and hence did not reflect the true position. The analysis indicated
that IRDP may be held responsible for large NPAs. It was verified by calculating the
ratio of NPAs of IRDP to total NPAs of each branch. This ratio was 45:55 percent
which indicated the close relation between them. The study suggested the need of
proper monitoring and follow- up in collaboration with government and voluntary
agencies. Moreover, the head office should have had undertaken diversified lending
operations and mobilized larger business for attending viability in branches.
Deshpande et al. (1999) analyzed the impact of deregulation of interest rates on 15
RRBs for the period 1996-97. This study was prepared just for shifting the loss making
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RRBs into profit making RRBs. The study found that RRBs though operate with a rural
focus, were primarily scheduled commercial banks with a commercial orientation.
Further, impact of deregulation of interest rates on profitability was felt more strongly
through increased interest cost compared to increased interest income. Combined
impact of advances and deposits on profitability was found to be restricted. They agreed
with Haslem for his seminal contribution by recognizing two broad sets of factors; i.e.,
internal factors and external factors that influenced the performance of banks. The
internal determinants originated from the balance sheets and profit and loss accounts of
the bank concerned and were termed as micro or bank-specific determinants of
profitability, whereas the external determinants condition the operation and
performance of financial institutions and reflected forces that affect the economic
environment of banks.
Hosmani (1999) analyzed the performance of Malaprabha Grameena Bank in
Karnataka from 1980 to1998. He used multistage stratified random sampling procedure
for selecting the samples. Kendall’s coefficient of concordance was used for analyzing
the credit flow and Gini’s coefficient for knowing the extent of concentration. A
comparative assessment had also been made for the period of establishment and period
of development. The study found that liquidity solvency position of the bank was
sound. The pattern of credit flow to the beneficiaries remained unchanged as indicated
by significant Kendall’s Coefficient of Concordance (0.90) and a lower inequality in
credit distribution among beneficiaries was indicated by Gini’s Coefficient (0.12). The
study recommended for operating NRI account, export financing, procedure
simplification, credit enhancement, long run planning and periodical evaluation for
enhancing the performance of bank.
Kalra and Singh (2000) studied the ability of RRBs to succeed as an institutional
reform in the field of rural credit and the important factors that affected their
profitability by examining the functioning and performance of two branches-Thulliwal
and Ghanaur of Malwa Gramin Bank in Punjab. The data consisted of 817 borrower
households of these branches during the agricultural year 1996-97. The study found that
the bank's earnings from the large farmers, who were economically more viable, were
better. The improvements in productivity per employee, especially with more increases
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in advances per account, helped the Malwa Gramin Bank to improve their recovery
percentage and to overcome the losses and earn profits over time. The break-even levels
of the volume of business, deposits, advances, and income per branch were estimated at
Rs. 215 lakh, Rs. 137 lakh, Rs. 78 lakh and Rs.16 lakh respectively. Almost all the
branches of MGB were earning profit, as they were all viable. The findings suggested
that deposits, expenditure, advances and income would help to improve the profitability
parameter.
Kumar (2001) conducted a case study of the performance of Vashali Kshatriya Garmin
Bank from 1985 to 1998. The study was bifurcated into two reforms period i.e., pre-
reforms period from 1985 to 1990 and post-reforms period from 1991 to 1998. The
study found that during pre-reforms period, the bank provided financial facilities to the
poor for agriculture and non-agriculture purposes and to the priority sector. It had been
observed that performance of the bank was unsatisfactory in terms of deposits, advances
and credit-deposit ratio. It showed that higher income group had received the largest
benefits; the bank had been working with a bias in favour of elites among beneficiaries.
After the financial sector reforms, there had been continuous increase in performance of
the bank. Reforms measure had been taken to make the banks viable. From the perusal
of performance of Vashali Kshatriya Garmin Bank, it emerged that majority of
beneficiaries did not know the procedure of advancing, the purpose and need of the
loan. The bank’s branches had inadequate staff. The study also revealed that bank had
progressed in quantitative terms but not in qualitative terms. The study suggested that
mobilization of adequate deposits was essential, the beneficiaries should be given the
opportunities regarding the need and procedure of repayment, the bank should educate
the people about the scheme and the provision of guarantor should be discontinued for
providing loans to the weaker section.
Tulsyan (2001) undertook an analytical sample study on banking sector reforms in
Alauli block, a reserved constituency of north Bihar with coverage of five Munger
Kshetriya Gramin Bank in the area. Information had been collected concerning 500
beneficiaries from farmers’ families. All of them had been assisted with income
generating assets during the period 1993-94. The study revealed that RBI had been
entrusted with the responsibility of supervision of all rural banks and RBI discharged its
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responsibility very successfully. Apart from these, there had been continuous decline in
the profitability of these banks. Further in the list of poverty alleviation programmes, no
mention was made of human resources in rural banks. There was always high level of
overdue due to poor quality of lending. Efficient administration was not provided to the
bank branches. There was no comprehensive blue-print present for the reforms in RRBs
which had been un-coordinated. What was needed was much experimentation and
modification to cope with unforeseen problems. The findings suggested RRBs should
use the locally obtained funds for effective disbursement of rural finance. Post-
monitoring over the end use of credit should be strictly undertaken by the bank with
utmost sincerity. Efficient administration should be provided to the bank branches.
Malhotra (2002) discussed the issue of location with reference to 22 different
parameters that had an impact on the functioning of RRBs in India for the year 2000.
The study stated that geographical location of RRBs did not have any effect upon the
performance of RRBs. Rather, sponsored banks affected their performance. Umbilical
cord had its effect on the performance of RRBs but financial health of the sponsor bank
was not considered directly to infer about the umbilical cord hypothesis. This was the
main limitation.
Prasad (2003) examined the performance of all RRBs in the context of pre and post -
financial sector reforms period during the period 1975 to 2002. In the first two and a
half decades of RRBs inception i.e., from 1975 to 1990, there was increase in number of
banks, district coverage and deposit mobilization of the banks. But after this period,
these banks faced various problems like increased over dues, controlled of multi-agency
system, untrained staff, increased establishment costs, losses etc. Further, the balance
sheets of 156 RRBs out of 196 RRBs had shown losses. The study further explained
that on the basis of the recommendations made by various committees, a number of
policy change or measures for development of RRB’s had been introduced. The
important amongst them were the diversification of business activities, application of
prudential norms, restructuring of RRBs, development action plans, memorandum of
understanding, deregulation of interest rates etc. During 2001, out of 196 RRBs, 187
were covered under the restructuring programme. Moreover, the loss making RRBs
were decreased to 152 in 1991, and further to 26 in 2002 and at the same time, these
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started making profits. Similarly, various measures that were initiated for revamping the
RRBs had resulted in overall growth in the financial health of RRBs to sustain their
growth.
Yadappanvar and Nath (2003) conducted a case study of Aurangabad-Jaina Gramin
Bank which had been operating since 1983.This study showed that the bank had
achieved significant progress on several fronts such as at branch level, per employee
business, loans advances and deposits. Above parameters had strong positive
association which was committed under memorandum of understanding. Analysis of
data relating to the branches of the Bank earmarked that each of the branches had
certain location specific functional advantages as well as problems. Hence, they differed
a great deal in terms of operational efficiency parameters. The significant factors
contributing to the viability of these branches seemed to be the interest spread of loans
especially on high yielding advances, growth in target advances and productivity per
employee and establishment costs. The basic problem of non-viability of these bank
branches resulted from low rates of return on advances to weaker sections and it was
suggested that the problem could be solved by giving large volume of advances on
higher rates of interest to priority sector and non-target groups. This study concluded
that right motivational climate, teamwork and supportive work culture had helped to
bring out the best in the employees. There was a deliberate strategy to bring down the
ratio of investment credit to working capital loans. This resulted in great profitability
from its loan portfolio.
Bhatt and Thorat (2004) analyzed the efforts of institutions and incentives in shaping
the performance of RRBs. The lackluster performance of the RRBs during the last two
decades could be largely attributed to their lack of commercial orientation. Instead of
adopting international best practices in microfinance, especially in terms of reducing
transaction costs for clients and lending to individuals based on an appraisal of their
ability and willingness to repay , these internally inefficient banks made loans based on
political and social considerations that defied the very fundamentals of prudent
underwriting. The unsustainability of the RRBs, has led some observers to advocate a
greater role for non-government organizations and self-help groups in rural financial
intermediation. The progress in liberalizing the policy framework was indeed
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commendable and the RRBs had a powerful incentive to minimize lending, under the
current environment of reforms, especially to disadvantaged groups. The study
suggested aligning the institutional objectives of increasing outreach and sustainability
with the private incentives of bank clients and staff. A number of policy-level changes
were recommended. Moreover, the next leg of reforms focused on aligning the
incentives of these stakeholders by giving greater importance to the RRBs’ internal
organizational contexts and larger policy environments.
Chavan (2004) analyzed the growth and regional distribution of rural banking of
underprivileged region of east, northeast and central part of India over the period 1975
to 2002. The study revealed that these regions got profit only before 1990. But these
gains reversed in the 1990s and cutbacks in rural branches in rural credit deposit ratios
were the steepest in the eastern and north-eastern states of India as introduction of the
policies of financial liberalization had unmistakably worsened regional inequalities in
rural banking in India.
Agarwal (2005) evaluated the growth process of all RRBs from 1975 to 2003. The
study found that all RRBs had to face various types of problems such as poor loan
recovery, increasing NPAs and poor C-D ratio etc. The study suggested that it was right
time to consider operational amalgamation of all RRBs of the same sponsor bank in a
state. That would improve business opportunities and also enable them to overcome
deficiencies, i.e. prudent deployment of their funds, career progression of staff, dilution
of local feeling etc. In other words, the RRBs should be true to their name; i.e., RRBs
should be operative in a region comprising 10 to 15 districts and not merely restricted to
1 or 2 districts as present. To start with, 3 or 4 adjoining RRBs of the same sponsor
bank could be merged. The amalgamation process might start with small states and
states having high recovery performance. This study recommended that if tangible
reforms were not introduced in the RRBs to make them work in a competitive
environment, these institutions might fail to achieve the success which they were
destined for.
Bose (2005) briefly reviewed the three phases of Regional Rural Banking in India – the
inception and expansion phase from 1976 to1990 and the reforms phase from 1991 to
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2003. The study concluded that the first phase was more focused on outreach and was
not devoid of a blueprint for viability, though the notion of viability for the RRBs was
much more pronounced than what it denoted under the neo-liberal reform era. It was
true that the commercial principles of banking were put under stress, especially in the
later part of the 1980s, which needed corrective steps, and indeed many of the policy
recommendations of that time were geared to improve recovery and reduce losses
incurred by these banks. However, it was generally held that these improvements could
be done within the parameters set for the RRBs, which in turn were determined by the
overall vision of rural banking. The reform phase focused on commercial profitability
for the RRBs. The reforms of the RRBs were similar to reforms of the commercial
banks. The same set of policies was implemented, and the same set of standards was
also set to calibrate their performance. RRBs relocated to more promising areas;
investments in government securities and PSU bonds and debentures increased, while
banks were hesitant to increase their loan portfolios; credit was extended mainly under
non-priority sector heads so that the proportion of priority sector loans declined; interest
rates on lending were deregulated which resulted in high interest rates charged by the
RRBs; credit to deposit ratio became less than half of the pre-reform levels indicating
increased net transfer of resources from the rural poor to the urban rich; regional
imbalances aggravated; and the small borrowers, the principal clients of the RRBs were
overwhelmingly sidelined. By the beginning of the present decade, the carefully built
structure of rural development banking in India had all but collapsed. The third phase of
Regional Rural Banking i.e., the reforms phase implemented the recommendations of
the government’s own Estimates Committee (2002-03) fully so that both the volume of
credit and the terms of credit to the rural areas, and to the targeted population, could
begin to improve. More generally, the incentive environment currently in place, which
forces banks to respect commercial viability ‘only’ without any obligation towards
RRBs primary banking activities, had to be urgently replaced. The formation of zonal
and state RRBs by merging the various RRBs would be a welcome move. Several
sponsor banks had announced their plans to merge the different RRBs sponsored by
them in a state while the more profitable RRBs are being merged with the parent bank.
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Many more RRBs are amalgamated so that further branch rationalization would be
possible and dislocation of the RRB staff be made easy.
Ahmad (2006) made an attempt to analyze the business performance of all RRBs
covering deposits, outstanding advances and loans, investment, credit- deposit ratio and
recovery of loans. The study covered the period from 1975 to 2000. The findings
revealed that these banks incurred huge losses due to poor business performance from
1975 to 1994. But after 1995, the position had improved a lot after the implementation
of the Bhandari committee recommendations. RRBs were being completely restructured
by infusing fresh capital, cleansing of balance sheets, allowing non-target group lending
and investment of surplus funds in securities, where attractive returns are available.
Moreover, the viability of RRBs depended on several factors such as level and quality
of business, recoveries, leadership, and shareholders’ support and in addition to the size.
Merger depended upon the stronger partner’s ability to absorb the weaker RRBs and
compatibility of area and sponsor banks, subject to acceptance by all stakes-holders
including RRBs employees. This study suggested the need of liquidation for non-viable
RRBs.
Misra (2006) examined the problems associated with all RRBs from 1994 to 2003
which were specific to certain sponsor banks or states in which they operated. This
study is based from the asset side of the RRBs balance sheet. Various estimation
techniques such as Net income as a percentage to total assets (NITA), umbilical cord
hypothesis, fixed effect and panel GMM were employed so as to interpret the factors
that contribute to their financial health. All the RRBs were categorized into profit
making and loss making ones. RRB earning profits consecutively for the past three
years from the terminal year of the study had been classified as profit making and the
rest as loss making. Such a classification led to 150 RRBs falling in the profit making
category and rest 46 as loss making. The exploratory analysis revealed that the problem
of the loss making RRBs was neither confined to some specific states nor to a group of
sponsor banks. In the absence of any strong systematic pattern so as to suggest that the
performance of RRBs was driven by the peculiarities of any particular sponsor bank or
a specific state in which they operate GMM estimation results indicated that the loan
portfolio management for the profit making RRBs was an area of concern. Investments
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contributed positively to the financial performance of the profit making RRBs.
Advances while had a positive impact, investments however, turned out to be
inconsequential for the performance of loss making RRBs. The results further indicated
that the umbilical cord hypothesis was operational. The sponsor bank contributed
positively to the financial health of the profit making RRBs. For the loss making RRBs,
the sponsor bank acted as a drag on their performance. The loss making RRBs on the
other hand, could have done better, had the sponsor banks played a proactive role,
especially in their investment portfolio management.
Pal and Sura (2006) assessed the growth pattern of all RRBs in terms of the credit
distribution as well as geographical distribution. Ratios and time series data from
inception 1975 to 2005 were utilized. The study found that the RRBs had achieved
tremendous growth in term of number of bank and its branches. It had extended its
service to every nook and corner of the country covering 487 districts in 26 states. Out
of the 26 states, Uttar Pradesh had the highest number of 36 RRBs followed by Madhya
Pradesh with 19, and Bihar with 16 RRBs, and these three states constitute 36 percent
of the total RRBs in India However, the distribution of banks was not same in different
states. The highest bank numbers were in Uttar Pradesh with 36 banks and the RRBs
were yet to start activities in Delhi, Goa, Sikkim and all Union Territories. Moreover,
the overall position of RRBs in India was not quite encouraging. The poor credit-
deposit ratio was still making big dent on the desired functioning of RRBs. Since the
RRBs were banks for poor people, their presence in all the states of country especially
in underdeveloped states and Union Territories was strongly realized. The study
suggested that the government should spread the branches of RRBs to grass root level to
provide banking and credit service to the needy people in rural India. Moreover, it was
also the responsibility of the bank management and the sponsored bank to take the
charge for corrective measures to raise the credit-deposit ratio of the bank. The gap
between C-D ratio of commercial banks and RRBs need to be minimized so that the
rural India should gain benefit of credit policy.
Kumar (2008) studied the case for the de-amalgamation of RRBs for the year 2005 and
concluded that GOI’s decision to amalgamate 196 RRBs was not supported by
NABARD/RBI. Since the RRBs were established under a special act passed by the
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parliament, the decision to amalgamate all 196 RRBs at the national level needs to be
ratified by the parliament. The ratification must be preceded by the de-amalgamation
notification to be issued the GOI for all RRBs and a full-scale debate in the parliament
was required on such amalgamations. If the finance minister/GOI did not stand on its
prestige, the best option available was the de-amalgamation of RRBs. Further, it would
be ironic if RRBs, which were conceived by the Indira Gandhi regime were allowed to
die when her daughter-in-law who is wielding the real power under the United
Progressive Alliance government. Perhaps, the United Progressive Alliance government
would look into the situation and restore RRBs to their original mandate in the interests
of rural poor. The irony was further confounded by the Congress claims, ‘Congress ka
hath garib ke sath’, which had pulled back the RRBs from the rural poor by their
amalgamation. Hence, the GOI should issue a notification in the official gazette for de-
amalgamation of RRBs immediately.
Satyasai (2008) examined a few structural constraints that hamper the credit delivery
system and also discussed some of the measures taken to improve the situation. The
study found that the public policy on rural credit in India focused on institutionalization
as a means of providing cheaper credit to the farmers. As a result, the share of private
moneylenders had decreased substantially from 93 per cent in early-1950s to 31 per
cent by 1991. Disturbingly enough, they emerged as an important source, more so for
the resource-poor with a share of 39 per cent by 2002. Further, the multi-agency system
onset for giving a wide choice to farmers turned out to be ineffective due to deficiencies
of design and architecture. Also ailing cooperatives, backtracked RRBs and commercial
banks with waning interest in rural credit contributed to the ineffectiveness of the
multiagency system, hampering the credit delivery. In the study several measures were
taken to revitalize the system from time to time. Co-operatives were being given
package assistance for revival following the Vaidyanathan committee report. RRBs had
been amalgamated and were being given capital to cleanse up their balance sheets.
Commercial banks had been successfully involved in farm credit package for doubling
the credit and other initiatives of government of India. The self-help group bank linkage
had been promoted on a large scale to supplement rural credit delivery. But, its high
transaction costs make it a costly alternative, especially when the business is handled
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solely by non-government organizations and Mutual Fund Institutions. There should be
thorough overhauling of the rural credit system and its restructuring is the need of the
hour. However, it wouldn’t be effective if done alone in isolation without revitalizing
the Indian agriculture itself.
Dhananjaya (2009) conducted a case study to analyze the efforts of saving
mobilization of Pragati Gramin Bank in Deodurga Taluk, Raichur district in Northern
Karnataka during the year 2007. The study found that bank had evolved many saving
products keeping in view the preferences of the customers. It used campaigns, special
deposit mobilization fortnight, targeting farmers clubs etc. as saving mobilization
strategies. Bank officials were mainly involved in such mobilization campaigns. In spite
of all these efforts, the penetration to the rural segment was not adequate. More
importantly, all these strategies did not succeed in changing the mindset of the people
towards savings. The people opened accounts mainly for availing loans and government
subsidies. Analysis of the various savings products of Pragati Gramin Bank and
perception of customers on these products has brought out three important elements.
First people preferred easy liquidity option. This was common in both rural and less
developed region. Second important element was the accessibility. Though most of the
bank branches of RRB were located in rural areas, they were still inaccessible to many
villages. People preferred door step services, but banks were not in a position to provide
such facilities. In this connection, operation of the banking corresponding model
seemed to be appropriate. Finally, the customer’s preferred safety rather than high
returns on their deposits. This made many rural customers to open the account in the
RRBs. Keeping in view the backwardness of the region and less favorable attitude of
people for savings, Pragathi Gramin Bank tried to provide additional feature of
insurance for the saving bank account. This additional feature had made the product
more meaningful and at the same time it helped bank to mobilize more deposits from
large number of accounts.
Nand et al. (2009) analyzed credit delivery and performance of Haryana Gramin Bank
in financing agriculture in Hisar and Ambala Districts during the year 2007-08 fitted
chi-square test and simple linear regression technique. The study was based on multi-
stage random sampling technique One branch from each district i.e., Neoli Kalan
42
Branch in Hisar (22 branches) and Patvi branch in Ambala (9 branches) were selected
randomly. Two villages from operational area of each selected branch were selected
randomly and finally 60 farmers from feeding villages of each selected branch were
selected at random. The results concluded that deposits and loan advances of Haryana
Garmin bank had been continuously increasing over the period in the study area. The
bank had highest deposits and loan advanced in Hisar as compared to Ambala. The
CGR of deposits and loan advanced in both districts exhibited positive sign. The
recovery of loan advance showed increasing trend as result of enhanced income of
farmer-borrowers, use of credit for income generating enterprises better assessment of
borrowers at the time of credit advancement. The recovery of loan outstandingly
reached up to 91 percent in the year 2007-08 in the study area. The higher percentage of
loan recovery indicated better performance of bank. The value of chi-square test
indicates significant association between land holding categories and educational status
of farmer-borrowers. In case of crop loans, the bank advanced loan 91.79 percent and
89.06 percent of total credit demanded in Hisar and Ambala districts. While these
figures were 83.3 percent and 87.50 percent of total demanded in case of livestock. It
was also observed that the certain amount of loan advanced for purchase of inputs used
in crop production, animals and farm implements and tractors was diverted towards,
celebration of social ceremonies, repayment of loans, purchase of grains and edible
products, construction of houses and its repair on all categories of farms. The study
suggested that the banks should advance the adequate amount of loan for productive
purposes and repayment of loan should be linked with income of borrower. The
consumption loan should be advanced to the farmers to avoid the diversion of loan
advanced for agriculture and allied activities.
Ibrahim (2010) used ANOVA and ‘t’ test to investigate the impact of merger/
amalgamation on the performance of regional rural banks in India, undertaken in 2005-
06. The study was confined to number of branches, district coverage, deposits
mobilized, credits and investments made by the Indian RRBs during 2002 to 2009.
RRBs covered 511 districts as on 31st March, 2002 increased to 616 as on 31st March,
2009. The increase over the period was 1.20 times. The study revealed that number of
RRBs decreased from 196 in the year 2001-02 to 86 in 2008-09. This was due to the
43
amalgamation that took place in the year 2005-2006, covering 525 districts with a net
work of 14,494 branches. However, the number of branches had been significantly
increased from 14,390 in 2001-02 to 15,181 in 2008-09. The increase over the period
was 1.05 times. C-D ratio increased from 41.8 in the year 2001-02 to 56.4 in 2008-09.
Amount of investment of the bank had been increased from Rs 30,532 crore in the year
2001-02 to Rs 65,910 crore in 2008-09. The mean level of loans (i.e., 39345.38) was
less than that mean level of investments (i.e., 42226.25). The study suggested that RRBs
should extend their services in to un-banked areas and increase their credit-deposit ratio.
The process of merger should not proceed beyond the level of sponsor bank in each
state.
Sharma and Sharma (2010) analyzed the comparative performance of the Himachal
Gramin Bank and Parvatiya Gramin Bank on the basis of investment, loan and
advances, resource mobilization and non-performing assets for the year 2000-09 applied
standard deviation, coefficient of variation, compound growth rate, t-test . The study
found that the investment position of the Himachal Gramin Bank was much better than
the Parvatiya Gramin Bank; both the banks had made a commendable progress in the
credit expansion during the period under study. The compound growth rate was noted to
the tune of 15.94 and 20.19 percent of the Himachal Gramin Bank and the Parvatiya
Gramin Bank respectively. The compound growth rate of the Himachal Gramin Bank
and the Parvatiya Gramin Bank in terms of dispensation of the credit was noted to the
tune of 16.13 percent and 19.02 percent respectively. The t-value depicted that there
existed a significant difference in the credit dispensation of both the banks. It was
observed that both the RRBs had made remarkable progress in attaining its objective of
the rural credit. The total resources of both the banks had followed an upward trend of
growth and maintained it throughout the period under study. The compound growth rate
of the Himachal Gramin Bank and the Parvatiya Gramin Bank had been revealed as
11.82 percent and 8.56 percent respectively. The deposit mobilization was found to be
the major contributor in the total resources of these RRBs. The borrowings which
include borrowings from the NABARD, sponsor bank and IDBI/SIDBI had also played
a considerable role in the resource mobilization of both the banks. The Parvatiya
Gramin Bank had been found to be more conservative in comparison to the Himachal
44
Gramin Bank with regard to NPAs management, because the NPAs to the total assets
ratio for the Parvatiya Gramin Bank had decreased during the last few years of the
study. This might be due to better management of the NPAs by the bank and the use of
better methods of loan recovery.
Swami et al. (2010) analyzed the trends in deposits and credit deployments of regional
rural banks in the state of Karnataka during the post- reform period from 1992 to 2008.
Kendall’s coefficient of concordance (W) was computed to study changes in the pattern
of the flow of sect oral credit lending by the RRBs over the study period that in the area
of deposit mobilization, the RRBs had made a notable progress .This achievement was
possible probably due to RRBs tried their best to reach a large number of households in
their service areas. Further, it observed that the expansion of branches to cover the
unbanked area and population might have contributed towards significant growth in
deposits. The total advances increased continuously over the years, except in 2006
wherein the advances declined compared to preceding year possibly because of the
amalgamation process. Credit-deposit ratio of the banks indicated the measure of
creation of credit out of deposit mobilized. This ratio of RRBs was fluctuating
throughout the study period. It was around 100 percent during the first two years (i.e.,
during year 1992, 1993) and then started declining and reached to 78.9 percent in 2000.
But after year 2000, C-D ratio was increasing and reached to 91 percent in 2008. The
share of credit towards agriculture to total bank credit of RRBs remained more than 55
percent during the study period. In addition average credit distributed towards
agriculture to total bank credit of RRBs stands to 59.5 percent in the same period. This
clearly showed the efforts of regional rural banks in favor of agriculture development in
Karnataka. The advances to personal loans seemed to be more preferred sector after
agriculture sector by the RRBs. In our study, it had been observed that credit towards
rural artisan industries and other small scale industries had showed the declining trend.
The study also pointed out that the share of credit to other small scale industries has
declined from 14.0 percent in 1996-97 to 7.8 percent in 2004-05. It seemed that due to
liberalization in the lending policy as the consequence of banking reforms, RRBs are
also shifting their focus on personal advances from village industries credit.
45
Aparna (2011) evaluated the impact of amalgamation on various aspects of the Deccan
Grameena Bank in Andhra Pradesh in achieving the objectives of amalgamation from
2005-06 to 2008-09. The outstanding advances to non-priority sector recorded an
increase of 36.04 percent in the year 2007-08 over the previous year 2006-07.
Moreover, the bank had recorded an increase of 22.8 percent in the number of self help
groups financed in 2007-08 over the previous year. The volume of business of the bank
showed a significant improvement after amalgamation. A business growth of 23.60
percent was registered during 2006-07 over previous year 2005-06. In the year 2008-09
the growth rate over 2007-08 was 26.21 percent. The proportion of gross NPAs to total
advances declined from 4.75 percent in 2005-06 to 1.77 percent in 2008-09. The asset
quality of the bank has tremendously improved after amalgamation due to its improved
recovery performance. The rate of recovery improved sharply from 79 percent during
2006 to 80.64 percent in 2009. The operating cost which was at 2.06 percent in the year
2006 is marginally reduced to 1.26 percent as on 31st March, 2009. The wage bill in
proportion to total assets reduced from 1.47 percent in 2006 to 1.06 percent in 2009.
The risk and other costs followed the same trend and reduced by 0.44 percent during the
same period. The findings concluded that the recent policy, related to amalgamation had
resulted in significant growth in the financial aspects of the bank. The study suggested
that amalgamation policy had provided the way for cross subsidization which had
increased the business volume as well as outreach of the bank to a great extent.
Rangaswamy and Gopalappa (2011) tried to focus on the performance of the credit
delivery by various institutions like co-operative credit banks (CCBs), RRBs and CBs
to the agriculture sector over a period of time i.e., from 1990-91 to 2008-09. Data
analysis was carried out by using simple statistical methods like percentages and
averages. During this period financial sector reforms had taken place. This reforms
period could be classified into two parts. The first part was from 1990-91 and again
from 1999-2000 and the second part was from 2000-01 and again from 2008-09. The
study concluded that overall growth rate of the institutional credit was very high as it
had become a more popular source of finance to the farmers in rural areas. This was
mainly because funds were available in abundance for the RRBs and CBs, whereas for
the CCBs it was much less. In 1991-92 the share of CCBs in agricultural credit was
46
more than 50 per cent which declined to 17 per cent by 2008-09. Whereas, the share of
CBs increased and their share stood at 74 per cent in 2008-09. This was mainly because
of the advent of financial sector reforms under economic liberalization. The share of
RRBs had been hovering around nine per cent in recent years. In addition to this, the
government of India had been trying to take up many policy initiatives to strengthen the
agricultural credit in the rural areas through various financial innovations viz., micro-
finance and kisan credit cards. In this connection the share of non-institutional sources
in credit supply to agriculture had declined from 92.70 per cent in 1951 to 29.70 per
cent in 2010. Further, the study suggested that the organized credit should increase
further so that cent per coverage was achieved and farmers’ exploitation by the private
money lenders was reduced.
Reddy and Prasad (2011) used CAMEL model for evaluating the performance of two
RRBs, Andhra Pragathi Grameena Bank and Sapthagiri Grameena Bank during the post
reorganization period i.e., 2006-2010. Further, in case of gross non-performing assets
(GNPAs) to Net advances and total Investments to Total Assets Sapthagiri Grameena
Bank performed better than that Andhra Pragathi Grameena Bank. The average NPAs
to net advances of Sapthagiri Grameena Bank and Andhra Pragathi Grameena Bank are
0.4280 and 1.6640 with mean difference 1.236‘t’ value for between the banks is 3.066
with ‘p’ value 0.015 i.e. Sapthagiri Grameena Bank out performed Andhra Pragathi
Grameena Bank. With respect to net NPAs to total Assets the average of Sapthagiri
Grameena Bank was 0.3120 where as it was 1.344 for Andhra Pragathi Grameena Bank
with mean difference 1.032. ‘t’ value between banks was 3.049 wit ‘p’ value 0.016
therefore null hypothesis was rejected i.e. Sapthagiri Grameena Bank performed better
than Andhra Pragathi Grameena Bank. The study further found that the average total
assets to total deposits of Sapthagiri Grameena Bank and Andhra Pragathi Grameena
Bank were 107.524, 100.6240 respectively. The mean difference was 6.90 with‘t’ value
2.895 and ‘p’ value 0.020 therefore null hypothesis was rejected i.e. the performance of
Sapthagiri Grameena Bank was better than Andhra Pragathi Grameena Bank. In terms
of business per employee the performance of two sample banks did not differ
significantly, where as the Andhra Pragathi Grameena Bank had proved to be good at
profit per employee. Therefore the performance of sample banks did not differ
47
significantly. In terms of spread to total assets, the performance of Andhra Pragathi
Grameena Bank had excelled over the Sapthagiri Grameena Bank. Similarly in terms of
net profit to assets the Andhra Pragathi Grameena Bank outperformed the Sapthagiri
Grameena Bank. The average interest income to total income of Andhra Pragathi
Grameena Bank and Sapthagiri Grameena Bank were 91.6680 and 88.0040
respectively. Under non-interest income to total income, the mean difference between
Andhra Pragathi Grameena Bank and Sapthagiri Grameena Bank was 4. Null
hypothesis was rejected i.e. Andhra Pragathi Grameena Bank performed better than
Sapthagiri Grameena Bank. The average liquidity assets to total assets of Andhra
Pragathi Grameena Bank and Sapthagiri Grameena Bank were 20.6820 and 17.5120
respectively. The mean difference between two sample banks was 3.170 with ‘t’ value
0.497 and ‘p’ value 0.633. Hence the performance of two sample banks did not differ
significantly. Similarly the performance of two sample banks with respect to
government securities to total assets did not differ significantly.
Gandhimathi et al. (2012) employed compound growth rate to analyze the impact of
the pre and post- economic reforms period on the distribution of agricultural credit in
India. The pre-reforms period was considered from 1971 to1991 and the post-reforms
period was taken from 1991 to 2008. The findings of the study revealed that in the pre-
reforms period, the commercial banks achieved 16.0905 percent of compound growth
of direct agricultural credit disbursement. It was followed by the regional rural banks
(10.3294 percent). In the post-reforms period, the regional rural banks were dominant in
the growth of direct agricultural credit disbursement (21.7494 percent). In both pre and
post-reforms periods, the co-operatives had attained less growth of direct agricultural
advances. The highest growth of direct agricultural advances disbursement was
achieved in the post-reforms period (18.9461 percent). The highest compound growth
rate of direct agricultural advances outstanding was attained for the regional rural banks
in both pre and post-reforms period. In the pre-reforms period, it was 22.1281 percent.
In the post reform period, it was 21.1913 percent. The co-operatives had less percentage
growth of direct agricultural advances outstanding in both pre and post-reforms period.
In the post-reforms period, 15.4884 percentage of compound growth rate of direct
agricultural credit was attained, whereas only 12.6483 percent of compound growth of
48
direct agriculture advances was achieved in the pre-reforms period. The study
concluded that the co-operative banks dominated in the total agricultural credit
disbursement in the pre-reforms period, whereas the dominance of the commercial
banks was higher than the co-operative banks in the post-reforms period.
Ibrahim (2012) analyzed the role of RRBs in rural credit from 2002-03 to 2008-09.The
study concluded that there had been tremendous achievement in disbursing loans to
both the sectors. The priority sector loans constituted higher in percentage throughout
the study. RRBs had lent money to the agricultural sector through the short-term and
term-loans for the development of the agriculture sectors in the economy. The
disbursement of short-term loans and the term-loans of the RRBs had very strong
positive correlation. The linear correlation co-efficient is 0.98576 which was close to
+1. This means that the demand for short-term loan increased the demand for the term-
loan. Also the loans provide by the RRBs to various groups in the priority sector
showed an increasing trend. The years 2007-08 and 2008-09 registered higher growth.
When compared to the loans to non-agricultural activities, the highest share was
recorded in the agriculture. RRBs had been quite successful in its agricultural loans.
The banks had been able to mark a rising trend in its loans outstanding with 46 percent
in the year 2002-03 to 64 percent in 2008-09 in agriculture sector. Further analysis
revealed that the loan outstanding to non-agriculture had been decreasing from 54
percent in 2002-03 to 36 percent in 2008-09. Even though the standard deviations of the
percentages of the agricultural and non-agricultural loans outstanding by the RRBs
remained of the same value i.e. 6.626067, the coefficient of variation differed. Hence,
the agricultural loans outstanding were more consistent than that of non-agricultural
loans outstanding. However, it was the responsibility of the banks and the management
to look into the matter of providing sufficient amount of loans to non-priority sector as
well. The gap between short-term loans for crop and the term-loans for agricultural and
allied activities needed to be minimized. The banks needed to encourage the agricultural
sector by providing larger amount of term loans. Generally, non-agricultural sector
indirectly helped the rural economy in many ways.
Ishwara and Cirappa (2012) analyzed the impact of pre and post-amalgamation on the
financial performance of the RRBs during the period 1980 to 2009. The study found
49
that RRBs alone had 45 per cent of the total self-help groups in the country. RRBs had
also issued over 40 lakh kisan credit cards to the farmers. C-D ratio of 50 RRBs was
more than 60 percent that for 87 banks was less than 40 per cent in March 2004.
Further, the study explained due to amalgamation in 2005, 28 RRBs turned into nine
new RRBs sponsored by nine banks in six States. After amalgamation, RRBs
transformation had resulted in a 200 per cent increase in net profits, a 100 percent
increase in business, a gradual reduction in the number of loss-making banks and an
addition of 1000 outlets. All this had been because of consolidation among RRBs. The
study revealed that RRBs seemed to have better non-performing assets (NPAs)
management with net NPAs coming down every year after the amalgamation. In 2005-
06, the net NPAs stood at 3.96 percent. It declined to 1.98 per in 2008-09. RRBs are
extending loans to non-agricultural sector in rural areas also. They were broad-basing
their credit pattern. Financing of vehicles for rural transportation helped villagers, as
they sold their produce in urban areas. Moreover, the reduction in number of RRBs had
not resulted in any sudden reduction in staff strength since there was no termination of
services of employees after amalgamation.
Kaye (2012) studied the various credit facilities provided by RRBs and its impact in
augmenting income, generation of employment, alleviation of poverty and improving
the living standard of the rural tribal people in Arunachal Pradesh to different sectors of
rural economy. And impact of the information was collected from the field survey
through structured questionnaires administered over a sample of 200 tribal beneficiaries
who received loan and advances during the period from 2005 to 2009, 20 beneficiaries
from different categories of people had been selected, located in different areas, i.e.,
five branches from plain area and five from hill area. It was found that before availing
bank credit, an average beneficiary in the study area was employed for about 102
standard days in a year However, during the post-loan period; such employment was
estimated at 184 standard days in a year with an additional employment of 82 days. The
overall average incremental income per beneficiary from pre to post-loan period was
estimated at Rs. 1500, indicating a net growth in the income to the tune of around
21percent after availing loan banks. Out of 200 beneficiaries only 29 percent reportedly
invested in farm assets during the post-loan period with an average investment of
50
Rs.4719. On the other hand, majority of beneficiaries reported that their investments
were generally towards the accumulation of non-agricultural capital. It was therefore,
observed that average amount of investment was higher in non-agricultural assets than
the other assets, which accounted for 29 percent in agricultural sector and 45 percent in
non-agricultural sector during the post-loan period as compared to pre-loan period.
Further, there was significant trend in improving standard of living of the rural people
in the study area. About 57 percent of borrowers (113 beneficiaries) reported that their
economic conditions and social status had improved. Out of 113 beneficiaries, 52 has
attained better standard of living with high income, better housing conditions and
acquiring of good number of assets after availing loan from the APRB branch. Primary
reasons for the improvement was mainly found in increase of annual net income and
incremental income, accumulation of assets, housing condition etc. The study suggested
that RRBs should concentrate more on financing SHG, co-operative and small business
entrepreneurs, etc. for better returns and profits.
Sharma (2012) used ratio analysis and t test to analyze the impact of amalgamation on
the average financial performance of RRBs on the basis of five parameters viz.,
traditional lending-borrowing functions, social commitment, profitability,
diversification and operational cost. These parameters studied through variables viz;
credit-deposit ratio, investment-deposit ratio, return on assets ratio, operating profit
ratio, interest income ratio to total assets average , non-interest ratio and intermediation-
cost ratio. The study analyzed the significance of difference in these variables occurred
during 1999 to 2011. As the amalgamation of regional rural bank was started in 2005,
therefore the period of six years from 1999 to 2000 and 2004 to 2005 was considered as
pre-amalgamation period and the data of six years from 2005 to 2006 and from 2010 to
2011 had been considered as post-amalgamation period. The findings highlighted that
the mean value of average performance of RRBs during post-amalgamation period was
comparatively better than the pre-period. However, the individual studies of different
years revealed some variations in the trend. The growth rate of aggregate income of
RRBs decelerated to 19.5 percent in 2009 from 20.0 percent during last year. The non-
performing assets had shown a significant decline after the amalgamation in terms of
gross as well as net non- performing assets. Similarly, return on equity had also shown
51
advancement in post- period. The study concluded that the amalgamation of RRBs had
equipped them in a better way to attain the targets of rural development and financial
inclusion.
Shukla et al. (2012) examined the changing share investment credit advanced to
agriculture by different institutional credit agencies. Those were, co-operatives banks,
scheduled commercial banks and regional rural banks and disparities across states in
term of credit flow. Agency-wise flow of total agricultural credit as well as agency wise
proportion of short-term and term-credits in the total agricultural credit was worked out
for the post-liberalization period from 1992-93 and again from 2005-06. Term-credits
flow was estimated on per hectare basis to examine disparities across states at two
points of time, pre-liberalization period of 1985-86 and post-liberalization period of
1995-96. The findings concluded that co-operative banks dominated the scene in
agricultural credit flow till 1995-96 despite its share in credit supply declining from
61.8 per cent in 1992-93 to 47.6 per cent in 1995-96. Commercial bank credit over-took
co-operative banks in 1996-97 with its share in total agricultural credit consistently
increasing from 48.4 per cent in 1996-97 to 69.5 per cent in 2005-06. Share of RRBs in
total agricultural credit also increased consistently from 5.48 per cent in 1992-93 to 8.43
per cent in 2005-06. The total agricultural credit flow from all institutional agencies
shot up to Rs. 180486 crores in the 2005-06 from Rs 15169 crores in 1992-93 after
economic liberalization policy launched in 1991- 92. Further, co-operative banks credit
the share of term loan declined from 23.54 per cent in 1992-93 to 11.36 per cent in
2005-06. Within commercial bank credit, the share of term loan also declined in most of
the years barring over the 14 years period of 1992-93 to 2005-06. Within regional rural
bank credit also the share of term loan consistently declined from 41.16 per cent in
1992-93 and stood at 18.54 percent in 2005-06. In the post-liberalization period (1995-
96), inter-state disparities in the flow of term-credit to agriculture from commercial
banks declined in comparison to the inter-state disparities in the pre-liberalization
period (1985-86) as indicated by decline in coefficient of variation. Besides, there had
been an impressive increase in per hectare flow of term credit over the decade. The
study suggested for devising a conscious, implementable strategy for increasing
investment in the agriculture sector and also reducing interstate disparities therein.
52
Soni and Kapre (2012) analyzed the performance of Durg Rajnandgaon Gramin Bank
in Chhattisgarh during the period from 2009-11. He undertook income, expenditure,
assets, liabilities, recovery position and staff strength to full fill the objectives. The
growth in business mix over the previous year constituted 20.60 percent and deposits
have registered growth 18.00. The bank is extending effective customer services to the
utmost satisfaction of the customer and as such complaints were attended to
immediately. The recovery percentage of the bank stood at 81 percent. The bank did not
default at any occasion in making repayment from NABARD and sponsor bank. The
credit-deposit ratio of the bank were registering an increase of 3 percent over previous
level had gone up to 29 percent. Working results of the bank were registering 108.58
percent achievement. Overall, the study found that performance of bank had
significantly improved. The study also found a few problems faced by bank as not
mobilizing deposits because of severe competition from other banks and financial
institutions, lack of coordination in branch expansion, delay in the sanction of loans and
recovery procedure of bank were very poor.
SECTION 2.1
Reddy (2006) put into use the Data Envelopment Analysis (DEA) technique to examine
total factor productivity and scale efficiency changes in RRBs by using data of 192
banks and 27 parent public sector banks for the period 1996 to 2002. He divided his
study into two parts viz., first part analyzed the technical and scale efficiency of RRBs
whereas in second part he compared the total factor productivity growth of RRBs with
parent public sector banks. The inputs considered were interest expenses and operating
expenses, measures of the outputs considered were liquid assets, total advances, total
deposits and total income. The study concluded that technical efficiency of rural banks
was higher in service provision than in the parent public sector banks. The efficiency of
rural banks was higher in economically and socially developed regions as well as in low
banking density regions. Rural banks showed significant economies of scale in terms of
assets and number of branches under each bank. Banks located in economically
developed and low banking density regions exhibited significantly higher productivity
growth. Overall, there was a convergence of efficiency of rural banks during the study
53
period. There was no influence of parent public sector banks on the efficiency and
productivity growth of RRBs. The decomposition of productivity into technical
progress and technical efficiency growth indicated that technical efficiency change
contributed more to productivity growth than technical progress in both rural banks and
parent PSBs; however comparative contribution of technical progress was higher for
rural banks than parent PSBs. The findings also revealed that development of the
region, geographical location, banking density of the region, bank size indicators such
as total assets under operation and number of branches played a greater role in
determining the efficiency and TFP growth of RRBs than did the efficiency of the
parent PSBs. The study suggested for the opening of new banks in low banking density
regions as efficiency and productivity growth of rural banks in these areas were high.
Khankhoje and Sathye (2008) put into use non-parametric technique of DEA to look
into the improvement in productive efficiency of RRBs due to the restructuring strategy
undertaken in 1993-1994 for the period 1990 to 2002. He divided his study into two
restructuring period i.e., pre-restructuring period ranging from 1990 to 1993 and post-
restructuring period ranging from1994 to 2004. Interest income and non-interest income
were used as outputs and interest expenses and non-interest expenses were used as
inputs. As a major restructuring of these banks occurred in the year 1993-94, the mean
efficiency scores of pre-restructuring and post- restructuring years were compared using
ANOVA test. The mean efficiency score of the RRBs showed an increase in post-
restructuring years to 0.632 as compared to 0.455 during the pre- restructuring period.
The study found that efficiency of rural banks had significantly improved after
restructuring. The study compared the efficiency of RRBs and the commercial banks for
the year 1997-98. The mean efficiency of 196 RRBs in the year 1997-98 was 0.60. The
RRBs were on an average less efficient than commercial banks in the year 1997-98.It
may be as the latter are located nationwide and also in metropolitan and urban areas and
not necessarily in rural areas. The redeeming feature was that these institutions had
shown improved performance in recent years and restructuring measures seemed to
have a positive impact on the working in these institutions. The government of India
may have liked to consider the merger of these banks to bring about scale efficiency
improvements. Bigger size banks would have been able to afford new technologies and
54
that would have also been able to improve technical efficiency. This study
recommended the existing policy of bringing down non-performing assets as well as
curtailing the establishment expenditure through voluntary retirement scheme for bank
staff and rationalization of rural branches are steps in the right direction that could help
these banks improve efficiency further over a period of time studies on efficiency and
productivity of RRBs are considered scarce.
Mohindra and Kaur (2011) applied DEA to evaluate the effect of reforms on the
efficiency of 50 RRBs during the period 1991-92 to 2006-07 divided into two sub-
periods i.e., first-generation reforms period (1991-92 to 1997-98) and second-
generation reforms period (1998-99 to 2006-07). They employed loan able funds, fixed
assets and wages as input and advances and total income as output variables. The
findings reported that an average technical efficiency (TE) had turned out to be 78.5 per
cent, therefore technical inefficiency of banks came out to be almost 21.5 per cent.
Thus, the banks were required to curtail their input expenditures by 21.5 percent. The
comparative analysis of average TE scores between distinct periods revealed that the
degree of input waste was 24 per cent in first-generation reforms period which declined
to 19.5 per cent in second-generation reforms period. Therefore, the results concluded
that technical inefficiency had slowed down during second-generation reforms period.
In addition, average pure technical efficiency score estimated to be 91.5 percent and the
average scale efficiency score measured 84.6 percent. The comparative analysis of
average pure technical efficiency (PTE) and scale efficiency (SE) scores between
different periods indicated that PTE inefficiency was 10.2 percent in first-generation
reforms period, declined to 7.2 percent in second-generation reforms period. Therefore,
the degree of managerial incapability’s had declined by 3 percent during these periods.
Whereas, scale inefficiency measure of 17.5 percent in first -generation reforms period
declined to 13.7 percent in second- generation reforms period. The study also analyzed
the relationship between bank size (in terms of total assets) and scale economies of
RRBs and concluded that the large-sized RRBs experienced the highest level of 88
percent scale economies, followed by 84 percent of small-sized banks and 79 percent of
medium-sized banks. Accordingly these sizes of banks groups would have to change
their scale of operation by 12 percent, 16 percent and 21 percent respectively in order to
55
get in the front line. Finally, the empirical findings concluded that large-sized banks had
performed better than that their counterpart groups in terms of exhausting scale
economies.
Mohindra and Kaur (2011) studied the impact of deregulation on the efficiency of 38
RRBs banks during the second-generation reforms period spanning from 1998-1999 to
2008-09 using non-parametric technique of data envelopment analysis. They
incorporated interest expanded and operating expenses as input variable and interest
income and non-interest income as output variables. The findings reported that RRBs
had experienced technical efficiency to the tune of about 75 percent. Thus the banks had
to decrease their input by 25 percent and still they could produce the same level of
outputs. Further, pure technical efficiency and scale efficiency reported that 18 percent
points of technical inefficiency was due to managerial incapabilities in utilizing critical
inputs, while remaining part of the technical inefficiency attributed to the choice of sub
optimal scale of operation. The study also examined the efficiency of inter-bank
analysis of sample banks and concluded that out of 38 RRBs, not even a single bank
was found to be operating at optimal level having efficiency score equal to one which
meant that the banks were inefficient. Besides this, the empirical findings showed that
large- sized banks had performed better than small-sized and medium-sized banks in
terms of using scale economies.
Mohindra and Kaur (2012) analyzed the efficiency of 14 sample RRBs during the
period 1992-93 to 2008-09 dividing it into two sub-periods i.e. first-generation reforms
period (1992-93 to 1998-99) and second-generation reforms period (1999-2000 to 2008-
09) in order to examine the impact of reforms. They used DEA technique taking interest
expenses and operating expenses as input variables and deposits, investment and
advances as output variables. The study concluded that the sample banks had
experienced technical efficiency measure of 92 percent. Thus the banks could on an
average decrease their inputs by 8 percent in order to produce the same level of output.
The comparative analysis of average technical efficiency scores of banks between
distinct periods reflected that the degree of input waste was 7 percent in first-generation
reforms period increased to 8 percent in second-generation reforms period. This
increase in technical inefficiency was due to managerial incapabilities in utilizing
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critical inputs, while remaining part of the technical inefficiency may be attributed to
the choice of sub optimal scale of operation. Therefore the results concluded that
technical inefficiency has increased during second-generation reforms period. Further,
the decomposition of technical efficiency into pure technical efficiency and scale
efficiency showed that the pure technical inefficiency was nearer to 6 percent in first–
generation reforms period which declined to 5 percent in second generation reforms
period. This concluded that the degree of managerial incapabilities had declined by 1
percent during this period. On the other hand, scale inefficiency measure of 3 percent in
first-generation reforms period increased to 4 percent in second-generation reforms
period. Thus the level of the scale operations of the banks has increased during this
period. In addition to this, the studies also analyzed efficiency on the basis of the inter-
bank and concluded that the majority of banks observed had shown minimum efficiency
scores on most occasions and were not progressive in nature. Therefore the study
suggested that these banks would have to incorporate substantial changes in their
policies to keep in line with international standards.
Mohindra and Kaur (2012) analyzed the impact of deregulation on the productivity
changes of 50 sample RRBs during the period 1991-92 to 2006-07, further divided into
two sub-periods i.e. first-generation reforms period (1991-92 to 1997-98) and second-
generation reforms period (1998-99 to 1999-2007). DEA based Malmquist Productivity
Index has been applied on loanable funds, fixed assets and wages as inputs and
advances and total income as outputs. The empirical findings reported that sample
RRBs had practiced total factor productivity (TFP) growth at the rate of 1.45 percent
per annum during the period 1993-2007. This growth had been realized on account of
technological progress (i.e., 0.99 percent) and technical efficiency (i.e., 1.62 percent).
Thus the sample banks experienced more technical efficiency change due to the lesser
use of new technology. The findings further reported that banks had experienced
productivity gain in seven out of the fifteen sample years. The positive growth rates of
0.9 to 13.8 percent had been observed during the period 1992-93, 1997-2001 and 2006-
07. However, the productivity losses had been noticed in the remaining eight sample
years. The RRBs reported growth in terms of SEFFCH and PEFFCH index at the rate of
0.09 and 0.54 percent per annum during the period 1993-2007 respectively. The banks
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had witnessed scale efficiency progress in six study years and scale efficiency regress in
the remaining nine study years. Similarly, the sample banks had witnessed pure
technical efficiency growth in eight study years and pure technical efficiency loss in the
remaining seven study years. The study also examined the productivity of the inter-bank
analysis of sample banks and concluded that all the sample banks had experienced
positive as well as negative TFP growth pattern during the period.
There are notable studies of various research scholars related to the efficiency
and productivity of commercial banks in India.
Noulas and Katkar (1996) and Das (2000) analyzed the efficiency of public
sector banks for the year 1993 and 1998 respectively estimated efficiency measures of
public sector banks for the year 1998 and found that scale inefficiency was main
cause of overall technical inefficiency. Noulas and Katkar (1996) further analyzed
that public sector banks experienced increasing returns to scale during the study period
whereas; Bhattacharya, Lovell and Sahay (1997) carried out a study to assess the
productive efficiency of commercial banks from 1986-1991 which showed that public
sector banks experienced decreasing returns to scale. Efficiency is different in different
ownership structure of banks as were observed by various studies such as: Das (1997)
estimated the efficiency of scheduled commercial banks for various years: 1970, 1978,
1984, 1990 and 1996; Singh and Kumar (2005) measured efficiency of commercial
banks for the year 2002-03; and Rezvanian, Rao and Mehdian (2008) studied the
efficiency of Indian banking industry from 1998-2003 that showed higher efficiency in
foreign banks as compared to other ownership structure banks. Some other studies:
Kumar and Verma (2000-03) measured the efficiency the PSBs for the year 2001; and
Das, Nag and Ray (2005) analyzed the efficiency of the commercial banks for the
period 1997-2003 and found that large sized banks outperformed other sized banks.
Some studies were related to the performance of the public sector banks as the study of
Rammohan and Ray (2004) that compared performances of commercial banks for the
period 1992-2000; Sabha and Ravishankar (2000) estimated productivity of the
commercial banks for the period 1991 to 1994; and Sathye (2003) measured the
productive efficiency of commercial banks for the year 1998. Das, Nag and Ray (2005)
found that liberalization had not brought any significant change in the commercial
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banks for the time period 1997 to 2003; whereas the study of Ray (2012) found positive
impact of liberalization among Indian banks during the period 2000 to 2008. Gunjan,
M. (2006) assessed the efficiency of commercial banks for the period 1997-2000; Nath,
Pal and Mukherjee (2005) studied efficiency of commercial banks for the period
1996-1999; Sinha (2006) estimated efficiency of commercial banks for the years 1996
to 2003 and Sudesh and Pal (2007) measured the efficiency of commercial banks for
the period 2005-06. All these studies concluded that foreign sector banks and private
sector banks were better in performance than public sector banks.
The following studies examined the productivity of commercial banks as:
Satyanarayana (1996) measured the productivity of banks from 1969 to 1994 and
concluded that efficiency measurement should base on the market share concept.
Athma and Srinivas (1997) conducted a study to analyze the productivity of public
sector banks, private sector and foreign banks for the period 1982 to 1995 and the result
verified that the productivity-both per employee and per branch showed increasing
trend among all the three ownership groups, though it was relatively higher in the case
of private and foreign sector of banks. Zhao et al. (2007) studied the impact of
deregulation on total factor productivity growth of the commercial banks for the period
1992 to 2004; Kumbhakar and Sarkar (2003) conducted study during the period
1985-1996; and Kumar and Batra (2012) conducted a study during the period 2006 to
2011 and found remarkable performance of banks due to the impact of liberalization.
Various studies in different countries which have come up with similar findings
that scale inefficiency found to be the main cause of overall technical
inefficiency are: Yue (1992) estimated efficiency of Missouri banks during the period
1984 to 1990; Fukuyama (1993) determined efficiency of Japanese banks for the year
1990; and Favero and Papi (1995) measured the efficiency of Italian banks for the
period 1991. There are few studies that found growth in TFP index of banks during the
period of their respective studies viz. Berg et al. (1992) measured the productivity of
Norwegian banks during 1980-89 and Isik and Husan (2003) measured the
productivity of Turkish banks for three years 1988, 1992 and 1996. Barr et al. (1999)
evaluated the performance of commercial banks in United States for the period 1984 to
1998 and found that small sized banks outperformed other banks. Isik and Hasan
59
(2003) found that allocative inefficiency was the main responsible factor for cost
inefficiency in Turkey for three different years-1988, 1992 and 1996. Ratnam (2010)
analyzed the efficiency of commercial banks across Pakistan during the period 2001 to
2006 and observed higher efficiency in foreign banks as compared to other ownership
structure banks. The studies which found positive impact of deregulations are: Berg,
Forsund and Jansen (1992) studied Norwegian banks for the period 1980-89; Zaim
(1995) studied Turkish commercial banks for the period 1981-90; Grifell-Tatze and
Lovell (1997) studied commercial banks in Spain during the period 1986 to 1993;
Kumbhakar, Vivas, Lovell and Hasan (2001) scrutinized Spanish banks for two
different period 1986-1990 and 1991-1995 and Ahmed, Farooq and Jalil (2009)
accessed Pakistani commercial banks from 1990 to 2005. Drake (2001) analyzed
efficiency of United Kingdom banks for the period 1984-1995 and found scale
inefficiencies were more stern problems in U.K. banking than pure technical
inefficiencies whereas the study of Dogan and Fausten (2002) conducted on Malaysian
banking sector during the period 1989 to 1998 concluded that scale efficiency was not
contributing anything to the changes in mean productivity.
It is evident from the above review of empirical studies that there exists rich
literature on the working of RRBs in India highlighting the problems and prospects of
RRBs whereas very scant literature is available on the measures of the efficiency and
productivity growth of these banks using both the parametric and non-parametric
approaches. As far as commercial banks at national as well as international level are
concerned, sufficient literature is available on efficiency and productivity growth of
banks using these techniques. To bridge this research gap, this study on the efficiency
and productivity growth of RRBs using non-parametric approach i.e., DEA technique
has been undertaken. It attempts to offer more effective results as compared to
parametric approach, because DEA is a performance evaluation criteria. Further, results
of various studies on RRBs or commercial banks might be different due to difference in
choice of techniques, different set of input and output variables, different technique for
measuring of input and output variables, different time- periods, different regions,
nations and many more other responsible factors about the applied technique.
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