Regional Rural Banks (RRBs) Listing on Stock Exchanges

In News

• Recently the draft guidelines were issued by the Finance Ministry for Regional rural banks (RRBs) listing on stock exchanges.
  • RRBs play a crucial role in credit disbursement in remote areas.

More about the news

• According to the draft guidelines issued by the Finance Ministry, Regional rural banks (RRBs), will be eligible to list on stock exchanges and raise funds.
• The RRBs should fulfill the following criteria:
  • RRBs should have a net worth of at least Rs 300 crore over the previous three years.
  • Such banks must also have capital adequacy of 9 percent in each of the previous three years and recorded operating profit of at least Rs 15 crore for a minimum of three out of the preceding five years. 
  • There should not be any accumulated loss and 
  • The RRB should have offered at least a 10 percent return on equity in three out of the previous five years, according to the norms.
• As per the draft norms, the responsibility of identifying suitable lenders for issuing initial public offering (IPO) has been left with the respective sponsor banks. 
• The sponsor bank would take into account the relevant norms and regulations of the Securities and Exchange Board of India (Sebi) and Reserve Bank of India (RBI) regarding capital raising and disclosure requirements while identifying RRBs for IPO
• Recently the Indian Banks’ Association (IBA) was asked to take the initiative to ensure technological advancements at RRBs, which is a key prerequisite to modernising them.

About Regional Rural Banks (RRBs)

• Regional Rural Banks Act, 1976:
  • Regional Rural Banks (RRBs) were set up as government-sponsored, regional based rural lending institutions under the Regional Rural Banks Act, 1976.
  • The RRBs were established as per the recommendations of the Narasimham Committee to cater to the rural credit needs of the farming and other rural communities.
    • The Prathama Grameen Bank was the first bank to be established on 02nd October 1975. 
    • The Syndicate Bank became the first commercial bank to sponsor the Prathama Grameen Bank RRB.
  • 2015 amendment to the Act:
    • The Act was amended in 2015, whereby such banks were permitted to raise capital from sources other than the Centre, states and sponsor banks.
• Operation:
  • Regional Rural Banks (RRBs) are government-owned scheduled commercial banks of India that operate at the regional level in different states of India.
  • The area of operation is limited to the area notified by the government of India covering, and it covers one or more districts in the State.
• Ownership:
  • The equity of the Regional Rural Banks is held by the stakeholders in a fixed proportion. This proportion is 50:35:15, distributed as:
    • Central Government – 50%
    • Sponsor Bank – 35%
    • State Government – 15%
• Aim:
  • They were created to serve rural areas with basic banking and financial services. 
    • However, RRBs also have urban branches.
• Functions:
  • RRBs perform various functions such as providing banking facilities to rural and semi-urban areas, carrying out government operations like disbursement of wages of MGNREGA workers and distribution of pensions, providing para-banking facilities like locker facilities, debit and credit cards, mobile banking, internet banking, and UPI services.
• Objectives of RRBs:
  • To provide cheap and liberal credit facilities to small and marginal farmers, agriculture labourers, artisans, small entrepreneurs and other weaker sections. 
  • To save the rural poor from the moneylenders. 
  • To act as a catalyst element and thereby accelerate the economic growth in the particular region.
  • To cultivate the banking habits among the rural people and mobilize savings for the economic development of rural areas. 
  • To increase employment opportunities by encouraging trade and commerce in rural areas. To encourage entrepreneurship in rural areas. 
  • To cater to the needs of the backward areas which are not covered by the other efforts of the Government. 
  • To develop underdeveloped regions and thereby strive to remove economic disparity between regions. 
  • Identify the financial need especially in rural areas.
• Role of RRBs:
  • To accept deposit
  • To grant advances
  • To provide ancillary banking services
  • To supply inputs and equipments to farmers
  • To provide assistance in the marketing of their products
  • To maintain Godowns 

Status of RRBs & ways of Raising capital

• RRBs are sponsored by Public Sector Banks (PSBs). 
  • There are currently 43 RRBs supported by 12 public sector banks with 21,856 branches across 26 states and 3 Union Territories — Puducherry, Jammu & Kashmir and Ladakh.
  • These banks have 28.3 crore depositors and 2.6 crore borrowers. A total of 30 out of 43 RRBs together earned a net profit of Rs 1,682 crore in FY’21.
• In 2015 RRBs were permitted to raise capital from sources other than the Centre, states and sponsor banks.
• The RBI has given RRBs the option to issue perpetual debt instruments as another way to obtain regulatory capital.
  • RBI has also made these instruments eligible for inclusion as extra tier-1 capital, subject to certain restrictions. 

Way Ahead

• RRBs incur losses mostly because many of these branches do not have enough business as they focus mainly on offering government’s schemes like direct benefit transfer in the rural areas of the country.
• Participation of local people in the equity share capital of the RRB should be encouraged.
• The State Government should also take a keen interest in the growth of RRB.

Source: TH