Regional Rural Banks (RRBs): Objectives, Functions & More | UPSC Notes

Regional Rural Banks (RRBs) are a distinctive feature of the Indian banking system, established to meet the credit needs and facilitate financial inclusion of the rural population. RRBs are basically designed to meet the credit and other financial needs of the agricultural sector, among other rural segments, at a basic level in banking and finance. Established as regional entities, they work right at the grassroots level by responding to the economic aspirations of the rural community and facilitating agricultural development. RRBs target these regions, so as to reduce economic disparity within the urban and rural sectors, also trying to contribute towards balanced regional development and inclusive growth.

This topic directly relates to the General Studies Paper-III of the UPSC syllabus that comprises the issues pertaining to the Indian Economy in the regard of agriculture, rural development, employment, and inclusive growth. Concepts covered herein shall help students understand the role, objectives, and challenges of regional rural banks better as the questions relating to the rural economy and financial institutions repeatedly appear in both Preliminary and Mains examinations.

Regional Rural Bank Meaning

A Regional Rural Bank is an organization created to carry out the job of facilitating banking services for both rural and semi-urban areas of India. They are also established under the Regional Rural Banks Act, 1976, and are jointly owned by the Government of India, the respective state government, and sponsor banks. The objective of setting up RRBs is to bridge the credit gap in the rural areas, facilitate financial inclusions, and undertake agricultural and rural development.

Establishment of Regional Rural Banks in India

The concept of Regional Rural Banks was laid in 1975 on the basis of recommendations provided by the Narasimham Working Group during the regime of Indira Gandhi as the then Prime Minister. Narasimham Working Group recommended the establishment of these banks with the aim of improving the rural finance system to provide sufficient and efficient credit facilities to the backward rural areas and also to the less privileged categories of farmers. The Parliament thus enacted the Regional Rural Banks Act, 1976, which led to the formation of the first five RRBs on October 2, 1975. Incidentally, one of them was the Prathama Bank, the first RRB of India.

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Objectives of Regional Rural Banks in India

The objectives of the Regional Rural Banks mainly include:

• Provision of Credit: Adequate and timely credit facilities shall be provided to small and marginal farmers, agricultural laborers, artisans, and small entrepreneurs in the rural areas.
• Financial Inclusion: Financial inclusions of the rural population by providing basic banking and other financial services.
• Rural Development: To assist developmental activities in rural areas, especially with regard to agriculture, small-scale industries, and trade.
• Employment Generation: Help generate employment opportunities by promoting small and micro-enterprises.
• Poverty Alleviation: Help alleviate poverty by strengthening rural economic activities.

Functions of Regional Rural Banks

RRBs perform various functions in regard to their mandate on financial inclusion and rural development. Among others, these are:

• Deposit mobilization: RRBs mobilize rural savings through various deposit schemes available, just like other commercial banks.
• Disbursal of Loans and Advances: They offer short-term and medium-term loans to farmers, artisans, and small entrepreneurs for agricultural and non-agricultural purposes.
• Implementation of Government Schemes: RRBs play a very important role in the implementation of different government-sponsored schemes for rural development, including the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and Pradhan Mantri Jan Dhan Yojana (PMJDY).
• Financial Services: They provide various facilities regarding remittances, payment services, and DBT.
• Supportive Services: RRBs also provide educational loans, housing loans, and facilities for microfinance and SHGs.

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Regional Rural Banks List

The number of Regional Rural Banks in operation currently, as of June 2023, is 43. Some of the prominent RRBs are as follows:

• Prathama UP Gramin Bank
• Andhra Pragathi Grameena Bank
• Aryavart Bank
• Baroda UP Bank
• Kerala Gramin Bank
• Karnataka Vikas Grameena Bank
• Madhyanchal Gramin Bank

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Significance of Regional Rural Banks in India

The role of RRBs in the Indian context has been linked with several aspects discussed below.

• Financial Inclusion: This is due to the increased access to the banking facilities within the rural sector. As a result, it reduces the gap between rural and urban financial services considerably in the context of RRBs.
• Support to Agriculture: Along with giving necessary credit for agricultural activities, this also contributed to increased agricultural productivity and further improved rural livelihoods.
• Poverty Alleviation: RRBs have assisted in poverty reduction through direct and indirect support to income-generating activities.
• Policy Implementation: The RRBs are a very important agency in implementing various government schemes connected with rural development and poverty alleviation programs.
• Generation of Employment: They generate employment opportunities in rural areas by promoting micro and small enterprises.

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Challenges Faced by Regional Rural Banks in India

Despite their contributions, a number of issues arising in the operations of RRBs are a hurdle to smooth functioning:

• Limited Resources: The tiny resource base restricts the capacity of the RRBs to extend adequate credit and other banking facilities.
• High Non-Performing Assets: Basically, because of the default risk associated with agriculture and small-scale lending, the quantum of NPAs for RRBs is normally high.
• Technological Lag: Most RRBs suffer from technological lag, which ultimately affects their efficiency and customer service standards.
• Administrative Issues: The fragmented administrative control and management problems are usually the obstacles to the effectiveness in the operations of RRBs.

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Recommendations of Major Committees for Reforming RRBs

A few committees have evaluated the working pattern of RRBs and prescribed recommendations to bring improvements in their functioning:

• Narasimham Committee (1991 & 1998): Suggested recapitalization of RRBs, merger, and amalgamation for better viability.
• NABARD's Review (1984): Suggested measures to improve operational efficiency and financial health.
• Rangarajan Committee, 2009: Suggested amalgamation of RRBs and proposed increase in their capital base, integration with core banking solutions, among other recommendations.
• Vyas Committee, 2004: The committee viewed the necessity for developing professional competency in the staff of RRBs through better training and capacity building.

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Way Forward

Regional Rural Banks are taking various steps for enhancing their efficiency and effectiveness:

• Technology Integration: Greater use of advanced digital banking solutions, integration with core banking systems to improve efficiency in operations and services delivered to customers.
• Capital Augmentation: Recapitalizing the RRB capital base and available financial support from their stakeholders.
• Training and Capacity Building: Periodic training programs are arranged for RRB staff to enhance their skills and knowledge.
• Focus on NPA Management: Firming up NPA management practices by putting in place more stringent credit monitoring mechanisms.
• Diversification of Services: Expansion towards modern banking products and services.

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