On the basis of Narasimham committee’s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
The RRBs were owned by three entities with their respective shares as follows:
- Central Government → 50%
- State government → 15%
- Sponsor bank → 35%
Regional Rural Banks were conceived as low cost institutions having a rural ethos, local feel and pro poor focus. Every bank was to be sponsored by a “Public Sector Bank”.
Regional Rural Banks are regulated by National Bank for Agriculture and Rural Development (NABARD).
Problems with Regional Rural Banks
- The original assumptions were belied as within a very short time, most banks were making losses.
- The RRB concept was based upon the policy that they would lend only to the weaker sections of rural society, charging lower interest rates, opening branches in remote and rural areas and keep a low cost profile.
- The Khusrau Committee of 1989, noted that the weaknesses of RRBs are endemic to the system and non-viability is built into it, and the only option was to merge the RRBs with the sponsor banks.
- The objective of serving the weaker sections effectively could be achieved only by self-sustaining credit institutions. RRBs were finding themselves unable to sustain because of the mounting losses due to imprudent commercial policy.
- Thus, Khusrau Committee (aka Agricultural Credit Review Committee) said that the RRBs have no justifiable cause for continuance and recommended their mergers with sponsor banks. But by that time, the branch network had expanded so large that it would be political unwise for the government to merge the RRBs with sponsor Banks.
Recommendations of Narsimham Committee on RRBs
- The Narsimham Committee in 1990s also reiterated that the RRBs should be merged with the sponsor banks.
- Regional Rural Banks (Amendment) Act, 2015 – Key Facts
Authorised capital: This amendment increases the authorised capital of each Regional Rural Bank (RRB) from Rs 5 crore to Rs 2000 crore divided into Rs 200 crore of fully paid share of Rs 10 each. As per the parent Act the Rs 5 crore share capital of RRBs is split into 5 lakh shares of Rs 100 each.
- Issued capital: It also provides that the authorised capital issued by any RRB’s shall not be reduced below Rs 1 crore and shares in all cases to be fully paid up shares of Rs 10 each. Shareholding:
- The Bill allows RRBs to raise capital from sources other than the central and state governments, and sponsor banks.
- Board of directors: The Bill adds provision that any person who is a director of an RRB is not eligible to be on the Board of Directors of another RRB. It also mentions that directors will be elected by shareholders based on the total amount of equity share capital issued to such shareholders.
- Tenure of directors: The bill raises the tenure of directors to 3 years from existing 2 years. The Bill also states that no director can hold office for a total period exceeding six years.
On 31 March 2016, there were 56 RRBs (post-merger) covering 525 districts with a network of 14,494 branches.