While the motive of the Regional Rural Banks was social profits as opposed to commercial profits, some commercial losses were unavoidable and were supposed to be treated as the social cost for the benefit of financing the farmers and rural poor.
Photo:SNS
While the motive of the Regional Rural Banks was social profits as opposed to commercial profits, some commercial losses were unavoidable and were supposed to be treated as the social cost for the benefit of financing the farmers and rural poor. The income and employment generated through bank finance were considered as the real profit of these social banks. So, in their lending, the banks were prohibited from insisting on any collateral.
Only the output/assets created out of the loans were treated as security. For instance, if a small farmer was lent money for crop production, the crop to be produced was hypothecated, not the land on which the crop was grown. So, the commercial losses were not unanticipated but were in the very design of the RRBs. True that by the early 1990s, before the reforms, 173 of 196 RRBs were in losses, and only 23 earned some profit. Then came the reforms, overwhelmed by the losses. The character of the RRBs has changed; not a simple change but a sea change. For achieving economies to scale, now the 196 RRBs are condensed into 28, one-state-one RRB as opposed to the original one district-one RRB concept. So the regional nature of regional rural banks has disappeared.
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These 28 RRBs have 22,069 branches as of March 2024 ~ roughly 14 per cent of commercial bank branches. Of them, 1,766 branches are located in urban and metropolitan areas, and 20,303 in rural and semi-urban areas (20 per cent of such commercial banks’ rural branches of 1,00,686). The urban and metropolitan presence of RRBs denotes their urban interest or discarding of their rural character. More than the presence of branches in urban areas, the fund utilization of RRBs in urban areas is more worrisome; it opposes the goal of ploughing back the rural resources into rural areas themselves.
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The RRBs’ credit deposit ratio, which used to be more than 100 per cent has come down to 71.4 per cent (the highest in thelast 33 years), meaning less and less credit as a proportion of deposits is being given as loans. Similarly, the investment of RRBs in the shares and securities market is increasing; its ID (Investment Deposit) ratio during 2022-24 ranged between 48 and a little above 52 per cent (about 17 per cent above their SLR Investment Deposit ratio).
That means the rural areas are deprived of their much-needed credit to that extent. Yes, the RRBs’ profitability has increased enormously, Rs. 7,571 crore net profit in 2023-24 (the highest ever); their reserves and owned funds stood at Rs. 65,701 crore as on 31 March 2024. But this profitability has its costs; there is a trade-off between commercial viability and equity goals. The RRBs have been brought on par with other commercial banks in their lending and interest rates, etc. With the interest rates being freed with a tall order of increasing profitability, the RRBs have become more commercial than the most commercial banks in certain areas of their lending, e.g., Gold loans and SHG (Self Help Groups) lending in some RRBs.
So, all the original concepts of pure social, regional, rural, and low-cost are no longer observable in RRBs now. Yet RRBs, because of their cultural background, are still better in social banking compared to the commercial banks: their rural and semi-urban branches are 92 per cent against all commercial banks (including RRBs) at 62 per cent. RRBs’ deposits were Rs 6.60 lakh crore by March 2024. Though they account for 3 per cent of scheduled commercial bank deposits in quantum, their share in the number of accounts is 11.2 per cent evidencing the coverage of a large number of small amount accounts. Also in PMJDY accounts, RRBs have the highest average deposit amount per account (Rs 4,292) compared to all other types of banks’ average (Rs 4,040).
Similarly, the share of RRBs’ lending of Rs 4.70 lac crore was just 2.8 per cent of the total commercial bank lending. But their share in the number of loan accounts was 7.4 per cent as of March 2024, signifying the small people’s preference in RRBs. Another important feature is that 87 per cent of the RRBs’ lending has gone for the priority sector, while agriculture took a 67 per cent share by March 2024. RRBs’ role in SHG lending is second to none; with 41.16 lakh SHGs bank-linked with savings of Rs 19,018 crore by March 2024, they account for a 29 per cent share in total SHGs savings linked to banks in the country. In terms of credit linkage, RRBs account for 28 per cent with 19.13 lakh accounts. Instead of strengthening these performances, the focus is on further commercializing the RRBs with the proposed induction of private capital.
The RRB Act has been amended to allow capital infusion from the market in such a way that the combined share of the Centre and sponsor bank can be reduced to 51 per cent against the present level of 85 per cent (50 plus 35), whereby the private players will have a role relatable to their share in the business of RRBs. That means the commercial profit goal will take precedence over social profit, and banks will become purer commercial banks, which goes against the interest of small and marginal farmers who account for more than 90 per cent of the farming community, and whose protection is vital for protecting the income and employment securities in India. Will the government introspect now and use Gandhiji’s talisman, “recall the face of the poorest and weakest person and consider if the contemplated action will benefit them and restore their control over life and destiny”, to judge the veracity of its RRB reform policies?
If this is done, the deliberate efforts of the government over the years to distance the RRBs from their original goals will become clear to it. The commercial viability goal has prompted the government to convert pure social banks, RRBs, into purer commercial banks. It made their separate existence redundant in terms of their original goals and thus made them ready to integrate/merge with the commercial banks.
Also, it has paved the way for the entry of private players who will now claim their pound of flesh from the once poor person’s bank. All this at a time when there is an enormous need for rural credit and rural banks. This type of RRBs’ reorientation through private participation or mergers is wrong if rural people matter. The government should halt this process. Will it?
(The writer is a development economist and commentator on economic and social affairs)
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