The Regional Rural Banks (RRBs) are fast losing not only their ‘regional and rural’ character but, unfortunately, their inherent social banking nature, the very purpose of their establishment fifty years ago. Started with five RRBS ~ one each in West Bengal, Rajasthan and Haryana and two in UP ~ on a pilot basis, on 2 October 1975, they are now spread to 700 districts in 26 States and three union territories, Puducherry, Jammu and Kashmir, and Ladakh; only two states, Goa and Sikkim, and five union territories do not have an RRB, yet.
The reform measures introduced in the RRB sector in different phases starting from the early 1990s were definitely not with the intent to strengthen their original goals, which they had admirably delivered in certain respects, but with new tasks, pure commercial as opposed to social benefit. The new approach of the government guided by the goals of the overall neo-liberal economic policies, has facilitated the changes, regardless of the fact that the rural credit doesn’t fit into the market forces doctrine in view of its critical importance in developing the farm sector, farmers’ welfare, and rural employment. Moreover, the RRBs’ experiment was far superior to all the earlier measures put in place since the early years of independence for strengthening rural institutional credit.
A cursory review of the earlier steps for strengthening rural institutional credit reveals the importance of RRBs, particularly the current need to revive their establishment goals. Even the British government, for whom their own colonial interest was supreme, had to focus its attention on the government’s lending to the farm sector, as evidenced by passing of the consolidated law, the Land Improvement Loans Act in 1883. To facilitate the setting up of rural credit societies, the government enacted the first-ever cooperative Act in the country in 1904; it subsequently brought subject of the cooperatives under the states’ legislative competence in 1919, following the Montague-Chelmsford Reforms.
Later, the independent Indian government considered supporting agriculture as its top priority and found credit to be an important input for farm development, and thus, an issue of national importance; the first Prime Minister Jawaharlal Nehru said, it is apt recall here, “anything can wait, but not agriculture!”. The RBI undertook the first rural credit survey in 1951-52 to take stock of the agricultural credit scenario in the country. The survey highlighted the deplorable state of the then-existing rural credit scenario. It found that the cooperative system, the only institutional arrangement at that time, was neither effective nor adequate to deal with the problem of rural credit.
Worse was the informal segment comprising traditional money lenders who fleeced the farmers with usurious interest rates and the exploitative conditions attached to their lending, leading to borrowing farmers ending up in eternal bondage or losing what little assets they had to their creditors. The major among several steps following recommendations of the committee on direction on Rural Credit Survey (Gorawala committee 1955) was the conversion of the Imperial Bank into State Bank of India, with the main goal of taking banking to rural areas. The SBI initially set up 400 branches within the next five years, meeting its mandate. Several other steps, including the strengthening of cooperatives, were also initiated.
A National Credit Council (NCC) was set up in 1967 to assess credit demand and supply. The prioritization of areas for credit deployment and the coordination of credit allocation with national priorities were its other tasks. Later, in 1968, social control on banks for channelizing credit towards the areas of national importance was experimented with. As social control without government ownership was not found to be effective, fourteen major commercial banks were nationalized in 1969, and another six in 1980. Although banks made good progress after nationalization, their reach, particularly to the poor, continued to be nowhere near the expectations.
The Banking Commission (under R.G.Saraiya) in its report in 1972 recommended, among other things, increasing banking coverage in rural areas and for an appropriate institutional arrangement suitable to rural requirements to bridge the wide gap between rural credit need and supply, particularly in relation to the small and marginal farmers. Despite all these concerted efforts, including outright nationalization of banks, it was found that credit was not reaching the needy in the quantity required and in the method convenient to them. Therefore, the government in 1975 appointed a working group under the chairmanship of M Narasimham, then Additional Secretary in the Finance Ministry, to study the problem and recommend the establishment of a suitable lending institution for the poor in rural areas. Based on the recommendations of this working group, the government established the Regional
Rural Banks in 1975 through an ordinance, without even waiting for parliament to make a law; the presidential ordinance was later converted into the Regional Rural Banks Act, 1976. The preamble of the Act clearly set out the goals of the new institution. It reads, “… 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 the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs, and for matter connected therewith and incidental there to, be it enacted by the parliament in the Twenty-seventh Year of the Republic of India.” The sole intention of the RRBs was to help small and marginal farmers and others below the poverty line in rural areas.
In order to cater to the credit and other related needs of these segments, the new institutions adopted the good features of the existing twin institutions, local feel and familiarity of cooperatives, and business-like operation of commercial banks, while discarding the bad features of both. RRBs were supposed to run on a low-cost basis, unlike commercial banks, yet with the efficiency of commercial banks in the discharge of their assigned tasks. The RRBs were set up as scheduled commercial banks in the central sector. Their share capital in the original Act was shared by three agencies: central government ~ 50 per cent; a sponsoring commercial bank – 35 per cent and the state government where the RRB is operating ~ 15 per cent. The RRBs’ character was designed as rural-oriented, purely regional, and purely social banks in the public sector.
The area of operation of each RRB was restricted to one or two districts, a homogeneous agroclimatic area which would facilitate the formulation of uniform lending schemes. Thus, 196 RRBs evolved with more than 14,000 branches by 2005 before their amalgamation plan started following the Prof V.S Vyas Committee. The entire amount of their finance went to their target group: the small and marginal farmers and persons below the poverty line in the rural areas before their functional reforms started in 1992-93.
(The writer is a development economist and commentator on economic and social affairs)