STUDY OF RURAL BANKING IN INDIA

INTRODUCTION

Agriculture and rural sectors play an important role in India's overall development strategy in
terms of income and employment generation and poverty alleviation.Great significance has,
therefore,been accorded to developing appropriate institutions and mechanisms for catering to
the credit requirements of these sectors. In spite of the various measures taken by the
government and RBI through social control and nationalization of major commercial banks in
1969,a large proportion of rural poor remained outside the banking fold.
A Working group (Chairman:M.Narasimham) was set up in 1975 to explore the possibilities
of evolving an alternative rural credit agency benefit to rural poor. The Group recommended
formation of a new set of regionally-oriented rural banks which would combine the local feel and
familiarity of rural problems characteristic of cooperatives and the professionalism and large
resource base of commercial banks, Regional Rural Banks(RRBs) were set up as sequel to this
recommendation. The Government of India promoted RRBs through the RRBs Act of 1976 to
bridge the gap in the flow of credit to the rural poor.
The RRBs have a special place in the multi agency approach adopted to provide agricultural
and rural credit india. These banks are state-sponsored,regionally based and rural-oriented.
Regional Rural Banks (RRBs) form an important segment of the rural financial sector. They
were conceived as institutions that combine the local familiarity of the cooperatives with the
business capabilities of commercial banks. This sector has an exclusive role in improving
financial inclusion and catering to vital sectors like agriculture and allied economic
activities.Public policy, therefore ,aims at keeping this sector viable and strong through various
forms of active intervention.
Besides the RRBs, commercial and cooperative banks have been catering to the credit
requirements of the rural sector. While the commercial banks, with their focus on profitability had
certain limitations in accelerating agricultural credit, the cooperative banks efforts were also
hampered by several financial weaknesses. Though over the years RRBs have been able to
expand their outreach and business and meet the credit requirements of the poor, several
weaknesses have emerged, eroding their profitability and viability.
The recent focus of the government of India on doubling the flow of credit to the agricultural
sector has warranted a re-look at the relative roles of cooperatives banks,RRBs and commercial
banks. As the very objective of setting RRBs was to extend adequate credit to the rural
borrowers and particularly the economically weaker sections, owing to their rural orientation,
there is a growing realization that RRBs could be used as an effective vehicle for credit delivery
in the rural areas. There is therefore.
Need to devise ways and means to improve the health and viability of RRBs so as to
reposition them in the credit delivery mechanism in india. With their increasing strength and
spread, RRBs would have to enlarge their client base and the principal vehicles for financial
inclusion and rural banking in the country. However,technological changes are sweeping the
banking sector.In order to survive effectively in the present scenario,the RRBs need to be
adequately equipped in terms of technology to provide efficient customer service to their
clientele, while the commercial banks have gone ahead in computerisation of their operations
and mosts banks are in an advanced stage of implementing total core banking solutions(CBS),
the RRBs are lagging behind in this area.
The expectations of the central and the state governments from RRBs are also increasing.It is
envisaged that RRBs are able to render the same quality of service that commercial banks are
able to give to their clients. Further, the government , in order to reduce intermediation and
reach out directly to the beneficiaries under several of its programmes, proposes to reach these
persons through the electronic mechanisms. It is thus becoming imperative for RRBs to become
increasingly technologically sound so as to offer competitive services to their clients. The
renewed emphasis on agricultural and rural development by the government of India would lead
to a growing demand for different types of financial needs of the rural economy becoming
diversified.The present structure of rural credit may not be able to cater to the same.
RRBs would be called upon to play a greater role in providing such services due their rural
character and feel. RRBs have to take over a larger of credit disbursements calling for much
resource mobilization, as also greater efforts for much larger resources mobilization, also
greater efforts for their institutional strengthening. Rural Sector in the Indian economy
developing economies lives in rural areas and 69 percent of the total working regarded as one
of thewhere 76 percent of the total Working Population depends on agriculture for their
livelihood (Statistics on Indian Economy, RBI, 2006). Report on human development has ranked
India's development index at 126 out of 177 countries (Human Development Report, 2006) The
economy in India is very much influenced by the development of its rural sector and the
government has been initiating various programmes during the Plan Periods for its overall
development. The entire planning period for rural development is divided into four phases
encompassing different approaches.
The first phase (1951-1966), the initial three Plan Periods, laid emphasis on Restructuring
agrarian Relations, institution building and community development. The second phase
(1966-1985), beginning with the Fourth Five Year Plan,focused primarily on technology-based
growth for agricultural development and helped the country to become self-sufficient in
food-grains. During the third phase, from the late eighties early nineties,the focus shifted to
growth with equality. The variousProgrammes initiated during this period included Integrated
Rural Development Programme (IRDP), Drought Prone Area Development Programme (DPAP)
and others. During the fourth phase, which began in the nineties, the government Started
endeavoring for economic reforms not only in the banking sector.

1.2 Post-Independence History of Banking in India

The history of Indian banking, during the post-Independence Era, can be divided into three
distinct phases. During phase I(1947-1969), banks under private ownership were forced to cater
services to a special category of clientele. The second phase (1969-1991) was characterized by
social banking,resulting in the emergence of large public sector banks with rapid expansion of
branch networks. The third phase (1991 onwards) portrayed a prudential higher accounting and
disclosure standards at par with the best practices of international standards.Necessity is
regarded as the mother of all inventions. In1991, the Indian economy was facing a grave crisis
on all fronts-forex reserves touched an abysmal low, increased deficit in oil pool account and
severe resource crunch had a throttle hold on the economy. It was at that juncture, the new
Parliament under the stewardship of Shri P.V. Narasimha Raodecided to go in for sweeping
changes on the economic frontand with Dr. Manmohan Singh, as Finance Minister, the
government unveiled the economic reforms package. The Package was framed to serve as a
boost for an ailing economy.
Financial and banking sector reforms were also a part of thepackage.Moreover, in the wake
of economic liberalization and increased global integration, there was a constant need for
greater transparency in banking operations including supplying correct and timely data of vital
parameters reflecting the strengths and weaknesses of banking institutions.
Until1991,institutions were functioning in an environment with restricted interest rates,
government control and skewed development.During the post-liberalisation era, restrictions
were relaxed,resulting in growing financial disintermediation, emergence of new financial
products and services, greater need for professional acumen and wider use of technology.
1.3 Rural financial institution
Rural banking forms one of the significant parts in Indian Banking. Many economists and
policy makers opine that thefuture growth of banking sector in India depends to a large extent
on the robust performance of the Rural FinancialInstitutions (RFIs). Among the factors
responsible for economic development and poverty alleviation in rural sector,the role of the RFIs
is considered very significant, as a substantial portion of the institutional rural credit by the RFIs
is used for rural development to support formation of ruralcapital. While increased investment
generally leads to higher productivity, the majority of the rural people in our country find
themselves in the vicious circle, where low productivity leads to low savings, resulting in low
capital formation and ultimately low investment.
This low-level income equilibrium(Nelson, 1956) can only be broken by what Leibenstein
termed as Critical Minimum Effort (Chakravarthi, 1967). The preRequisites for this effort include
availability of appropriate technology and adequate supply of capital.However, the rural banking
sector is still under penetrated in our country. According to RBI (2005), of the total branch
network of scheduled commercial banks in the country(roughly 68,300), nearly 48 percent of the
branches(approximately 32,400) are in the rural sector. But in terms of business, the rural
branches have mobilized only 14 percent of the total deposits.Similarly, the rural advances
constitute only14 percent of the total advances banking system, just prior to the introduction of
the concept of doubling of credit in ruralIndia. In the year 2001 the per capita rural deposits of
Rs.2150 formed only 1/10" of the per capita GDP; while the per capita deposits were 160
percent of per capita GDP for urbanIndia. In the same year, the per capita credit in rural India
was only Rs. 900 or 4 percent of GDP; while it was 100 percent ofGDP(1.e. Rs. 20,600) for
urban India. The number of credit accounts in rural areas was only 3.4 percent of the rural
population as against 10 percent of population in urban areas. Nachiket Mor, Deputy MD of
ICICI Bank, pointed out that the credit demand in rural India is expected to touch Rs.
1,330billion, whereas the supply is justRelease, November 07, 2006).about Rs. 40 billion
(PressThe government recognising the importance of an efficient the rural financial system has
taken several steps over the past years to build an extensive formal rural credit structure. There
Is a bank branch or a primary credit co-operative in every third village in India (Census, 2001).
Generally speaking, physical outreach of RFIs is not an issue in India, however, sustainable
growth of these institutions is very much in demand as less comes from than half of the credit
usage by rural households the formal sources till now. Hence, there is a need for degradation of
the rural banking system in India through performance evaluation in the context of the necessity
of institutional rural credit.
1.4 Regional Rural Banks (RRBs)
In India, institutional rural credit is usually arranged by c0-operative banks, commercial banks
and regional rural banks orRRBs (popularly known as gramin banks) through their
various wings. Since 1975, RRBs have been regarded as one of the most important sources of
institutional financing for rural credit in India. These institutions are established exclusively to
meet the excess demand for institutional credit in the unbanked rural areas, particularly among
the economically and socially marginalized sections. In other words, RRBs have emerged, as
institutions that 'combine local feel and familiarity with the rural problems which the
co-operatives possess and the degree of business organization, ability to mobilize deposits,
access to
central money markets and modernized outlook which the commercial banks have.
Among the 196 RRBs operating as scheduled commercial banks within the framework of
multi-agency systems in India,nine are functioning in West Bengal (March, 2005). These
specialized institutions after much experimentation have ultimately emerged as development
inducing institutions with a network of branches spread over the remote villages of the
country. It has been documented from the studies on the performance of RRBs, that they are
undergoing a continuous improvement in services in many areas and have also made
their presence felt among the rural people in the areas of agriculture credit (Wadhva 1980;
Sudhakar 1984; Mehta 1984;Singh 1985; Parmar et al. 1988; Pariyan 1988; Savaraiah 1988;
Bapna 1989; Kalkundrikar 1990; Krishnan 1990; Dixit et al.1994). These institutions have
emerged as an instrument to salvage the poorest among the poor from the mire of squalor.
The emancipation of rural poor in India is greatly influenced by successful discharge of duties by
the RRBs.
Although the performance of RRBs may be gauged from the success of poverty alleviation
programmes for which they are dedicated as catalysts, their achievements as commerCial
banking organizations can never be ignored. The objective of social equity cannot be
accomplished unless the RRBs register a sustainable growth in terms of expansion of credit
facilities through earning profit. There is a strong belief that the banks have social responsibility
– not only to meet the credit needs of the society but also to extend facilities at concessional
rate of interest. As such, to respond to the socio-economic need, there should be continuous
urge to reconcile efficiency and social equity consideration and combine social banking with
efficient
banking.
At the end of the expansion phase (the year 1987 marks the end of addition to the number of
RRBs) commercial viability of the RRBs emerged as an important issue for the policymakers. It
was pointed out that the RRBs to survive as a credit institution, could not remain viable for long
time(Agriculture Credit Review Committee or Khusro Committee1989; Velayudham and
Sankaranarayanan 1990; Committee On Financial Systems orNarasimham Committee, 1991).
Thus,it was perceived that the RRBs should come out as leading financial institutions to change
the rural economy and also to fulfil the objectives for which they emerged. Failure of the
RRBs, it was opined, in delivering goods or providing inadequate in meeting the challenges of
growing credit needs of the toiling rural masses, would lead to drain on public exchequer and
consequently, a burden on our economy as a whole. Since the past few years, a huge public
fund has been with the RRBs for rural people. Therefore, it is quite necessary to examine the
working of RRBs and appraise their performance,since in a demographic set up, every citizen
has the right to know how the public money is being used.In view of the divergent services
rendered by the RRBs, an evaluation on the performance of RRBs in West Bengal is
seriously felt. The present study aspires to make an overall evaluation on region-wise
performance of RRBs in India,particularly in West Bengal, in respect to restructuring of rural
banking and also in satisfying the financial needs of the poor rural folk.

Development of Regional Rural

Banks (RRBs) in India
2.1 The Genesis
The idea of setting up RRBs cropped up when the Maclagan Committee (1915) and many other
important commissions and committees went into the question of agricultural finance. The
Royal Commission on Agriculture (1926), the Indian CentralBanking Enquiry Committee (1931),
the Bhansali Mehta Committee (1938) and the Agricultural Finance Sub-Committee, popularly
known as Gadgil Committee (1944)initially recommended the creation of Agricultural
CreditCooperation, where cooperatives performed very unsatisfactorily. The Cooperative
Planning Committee (1949)and the Rural Banking Enquiry Committee (1949)
recommended the importance and role of cooperative credit structure in rural credit and their
supplementary role in the commercial banking structure.The Rural Credit Survey Committee
(1954) advised reorganization of the commercial banking system to unfold the
problem of rural credit and was later supplemented by the state sponsored State Bank of India.
The Committee on CooperativeCredit, commonly known as Vaikuntha Mehta Committee
(1960), the study group on RBI on Agricultural CreditArrangements for Cooperatively Less
Developed States in theNorthern and Eastern Region (1963-64), the Cooperative
Credit Review Committee (popularly known as theVenkatappiah Committee (1969) and the
Gadgil Committee Studied the institutional arrangements for agricultural credit in
the context of social objectives. The All India Rural CreditReview Committee (1969) finally
inferred that commercial banks must supplement the rural credit work of the cooperatives.
2.2 Banking Commission (Chairman: R.G. Saraiya), 1972 The proposal for setting up of a chain
of 'rural banks' was FIrst mooted by the Banking Commission, appointed by the
ment of India under the chairmanship of Shri R.G.Saraiva during 1972. The Banking
Commission was set up in1072 for a comprehensive reconsideration of the structure and
operations of the commercial banks in tune with the credit institutions during that period and to
suggest suitable measures for their operations. The terms of reference of the Commission
included the review of the working of the cooperative banks and to make recommendations with
a view to ensuring a coordinated development of commercial and cooperative banks particularly
in the context of its 'recommendation for extending the geographical and functional coverage of
the commercial banking system'.
After investigating various issues for expansion of activities of commercial banks in rural areas
and their limitations, the Banking Commission expressed serious concerns on the initiatives of
these institutions to promote rural financing in India. It was opined, that in the large and
a complex situation in the field of rural credit in India, there remains a large gap even after the
maximum possible branch expansion has been tried by the commercial banks'. This gap
was interpreted not only in quantitative terms by meeting the credit needs of the rural folk but
also towards spreading the concept of banking in all rural areas for developing banking
habits in the unbanked and under-banked areas. TheCommission also conceived that there
could not be "any onesolution to this extensive residual problem, rather, all possible
alternatives should be tried'. In this context, it was proposed to introduce a newW genus of 'rural
banking' in areas 'where thecOoperative credit structure is found weak'. According to the
Banking Commission, the concept of such 'rural banks' could be framed in one of the following
three ways:
by converting certain viable primary agricultural societies in 'rural cooperative banks' offering a
full range of banking facilities as well as certain closely allied non-banking services;by
structuring a good primary agricultural credit society as a subsidiary of a commercial bank; or
by establishing an exclusive type of 'rural banks sponsored by the commercial banks and
supported by the local participation.Hence, the Commission proposed a multi-pronged
programme for banking development in rural areas through promoting cooperative credit
societies, rural branches of commercial banks and sponsored rural banks. A rural bank
established under the second and third mode was named as a rural subsidiary bank for
maintaining its unique feature with that of the rural cooperative bank created in the first way. It
was envisaged that 51 percent of capital of a rural subsidiary bank would be held by the
sponsoring bank and the balance by people of the areas of its functioning. It was further
specified that the rural banks, whether a rural cooperative bank or a rural subsidiary bank,
should extend their banking facilities,including credit, not only to their members (or
shareholders)
but also to the general public within their respective areas of operations by creating a new class
of 'associate members'. The Proportion of credit and other related conditions for granting
such credit would be determined in advance along with certain favorable terms and conditions.
The Commission further expressed the possibility to organize rural banks for a compact group of
villages covering a population ranging from 5000 to 20,000. However, 'in sparsely populated
areas, it may be necessary to organize a rural bank as a development bank to start with'. The
Commission believed that, the banking entity in rural areas should essentially be cooperative in
character and would provide a wider range of services than those of primary agricultural credit
societies.The Commission also explained further the details of capital structure, management
structure, personnel policies,dividend policy for shareholders, deposit insurance, interest
te policy, linkages with other government bodies, including government corporations in respect
to its procurement functions in rural areas, terms of borrowing, minimums of liquidity to be
prescribed etc. Considering the initial practical difficulties in opening up such banks and its
phased expansion the Commission recommended that as a requirement of hsi diary of
commercial banks, a very limited number of rural banks should start their operations during an
initial phase of 5 years. The main objective of these institutions should be: (a)
lowering the costs of rural banking, (b) operating such banks with local staff in an environment
that the poor people in the villages would find most homely, (c) increasing awareness to the
weaker sections of the rural society about the newly formed credit institutions rectifying the
present deficiency inoperation and (e) furthering development of the rural poor.
2.3 New Economic Programme
The Union Government, however, made little effort on theBanking Commission's proposal for
establishing a chain of rural banks till middle of June, 1975. The Twenty-PointProgramme (also
called Twenty-Point Economic Programme For the New Economic Programme) announced by
the
Government, provided an opportunity for rethinking on setting up rural banks for providing rural
credit. Some of the points recommended in this Programme, specifically aimed at ameliorating
the lot of the weaker sections of the rural society,covered a 'plan for liquidation of rural
indebtedness; and legislation for moratorium on recovery of debts from landless
laborers, small farmers and rural artisans'. The CentralGovernment also issued guidelines to the
concerned state governments with the instructions of discharging debts of the
marginal farmers holding up to 2.5 acres of irrigated land and scaling down the debts of small
farmers holding between 2.5 and 5 acres of such land. A moratorium on the recovery of
debts through the courts for both categories of farmers for a period of one year was also
suggested.It was further recommended that the debts of those holding irrigated land should be
scaled down as per currently defined conversion ratios (between holdings of irrigated vs. non-
irrigated land) in the concerned state. As per the guidelines.several state governments also
enacted legislation discharging and scaling down of the debts of the small and marginal
farmers, rural artisans, landless laborers and other weaker sections of the rural society. Such
legislation led to a vacuum for meeting both the production and consumption of credit to the
weaker sections of the society.
2.4 Working Group (Chairman: M. Narasimham), 1975 The Union Government, as a part of New
EconomicProgramme, seriously considered the idea of setting up rural banks as an alternative
source of credit to meet the requirements of weaker sections of the rural society. As per the
programme, these specialized institutions with attitudinal and operational ethos entirely different
from those of the traditional banks would act as the subsidiaries of public sector banks to cater
to the credit needs of the rural poor. The Working Group,under the Chairmanship of M.
Narasimham was appointed onJuly 1, 1975 and was asked to submit its report within one
month. On July 30, 1975, the report was submitted by the working group.The Group perceived
the existence of a large vacuum in the rural credit market in India between its demand and
supply both in terms of functional needs (especially of the weaker sections of the society) and
adequate geographical coverage in far-flung villages of the country. It believed that the existing
credit institutions, neither in their present form of execution nor with any possible adaptation or
reorganization would be able to meet the gap. Moreover, a degree of adaptation and
improvisation was called for to contribute towards rural upliftment essentially through the
provision of credit to the weaker sections of the society.The Working Group finally went in favor
of the establishment of a new type of rural financial institution,popularly known as 'regional rural
bank' (RRB) or gramin bank', which would be, state sponsored regionally based, rural oriented
and would combine the local feel of village cooperatives as well as degree of professionalism of
the commercial banks. The areas of operations of these institutions should be judiciously
planned and demarcated and would operate to avoid duplication of works and perform efficiently
enough to cope up with the socio-economic conditions and requirements. The Group clarified
further that the role ofRRBs would be to supplement and not to supplant the other rural financial
institutions in the field. The region-wise performance of these institutions as suggested by the
Group Referred to the 'region' not necessarily a 'district', but an economic' region, possibly a
backward region with homogenous' agro-climatic and socio-economic condition.The primary
objectives would be to promote rural development through institutional rural credit system and
also to get rid of rural poverty. These RRBs should be to mobilize resources from the respective
areas (region) of operation and deploy them within the same region, lending mainly to small and
marginal farmers, landless laborers, the small traders and the rural artisans for productive
purposes.
The Group envisaged that every RRB should enjoy the status of a 'scheduled commercial bank'
with its authorized capital of Rs. 1 crore and issued and paid-up capital initially at Rs. 25 lakh.
The whole of the equity would comprise of contribution by the Government, the sponsoring
commercial bank or banks , the concerned state government and other institutions and
individuals (interested in the local area) in proportion of 50:25: 10: 15. The lead bank in the
respective areas of operation would act as the sponsoring commercialbank of a RRB. The
Working Group, however, highly emphasized the need for active participation of the concerned
state governments for the success of the bank. In the matter of absolute lending rates to
individual borrowers, the Group Recommended that the rate charged by the RRBs should be
the same as that of the cooperative of farmers' service societies
and land mortgage bank within their areas of operations.Managerial personnel as well as some
staff, initially, would have to be borrowed from the sponsor bank on a definite pay scales and
allowances as applicable to employees of concerned state governments; but the RRBs should
gradually set up long-term plans to employ and train the needed staff preferably from
neighboring manpower resources, especially the rural educated young person.
The recommendations, ultimately, for setting up of RRBs were accepted by the Government.
The first five recommended RRBs commenced their business on and
from 2nd October, 1975 in four states at Moradabad andGorakhpur in Uttar Pradesh, at Bhiwani
in Haryana, at Jaipur In Rajasthan and at Malda in West Bengal, under the RRBordinance,
1975. The ordinance was subsequently replaced by the Regional Rural Banks Act, 1976 (9th
February, 1976).

2.5 Establishing a RRB: The Basic Requirements The basic requirements for setting up RRBs
as recommended by the Union Government are discussed below:

2.5.1 Objective:
The Regional Rural Bank Act, 1976 discusses in detail about incorporation, regulation and
winding up of RRBs. According to this Act, the RRBs have been set up
'with a view to developing rural economy by providing credit and other facilities, particularly to
the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs, and for
matters connected therewith and incidental thereto for the purpose of development of
agriculture, trade, commerce, industry and other productive activities in the rural areas'.
Thus, the key objectives of RRBs include comprehensive development of weaker sections of
rural society and enhancement of existing institutional credit infrastructure the role of informal
credit agencies, particularly the moneylenders.25.2 Jurisdiction: The operations of RRBs are
restricted in particular districts of a state with their control branches, the performance of whom
will be confined to the local limits of the said district. Usually, a RRB for its activities will have a
compact area of one to five districts with homogeneity in agro-climatic conditions and rural
patrons. Its branch offices will usually cover one to three blocks and be in a position to finance
five to ten farmer service societies (FSSs).
2.5.3 Sponsorship: A scheduled commercial bank (mainly public sector bank) will sponsor a
RRB. The sponsor bank will introduce such an entity in consultation with the concerned State
Government and the Central Government and must have authorization from the Reserve Bank
of India. The Sponsor bank will provide necessary support to RRB in multiple ways like,
subscription to share capital, making adequate provision for managerial and other staff
assistance (to be mutually agreed upon within the first five years of existence)and financial help
(refinancing facilities) on mutually negotiable terms.
2.5,4 Capital Structure: The authorized capital of caRB should be Rs, I error and its issued
capital would be Rs25 lakh. The three contributions to the issued capital will include the Central
Government, the respective state governments and the sponsor bank.
2.5.5 Management Structure: A nine-member Board ofDirectors headed by a Chairman will run
the operation of aRRB. The Board will constitute with the following members:Chairman to be
nominated by the Central Government- 1;Not more than three directors to be nominated by
theCentral Government'- 3;Not more than two directors to be nominated by the state
government' - 2;Not more than three directors to be nominated by theSponsor Bank'- 3.
The Central Government may raise the strength of theBoard to 15 and suggest the manner in
which the additional numbers are to be filled in. The remuneration, as applicable to
the employees of RRBs, should be at par with the employees of the state government and local
authorities of comparable level and status in the area of operation of the institute.
2.5.6 Training Facilities for RRB Staff: Understanding The demand for specialized staff, the
Reserve Bank of Indiamakes necessary arrangement for training at its own College of
Agricultural Banking in Pune. In this regard, the RBI also arranges zonal training centers for the
officers of RRBs.
2.5.7 Banking Business: Since RRBs enjoy the equal status of scheduled commercial banks,
they are empowered to mobilize deposits and to grant short-term and medium loans (both for
production and consumption) directly (whether individually or in groups) to the small and
marginal farmers,agricultural laborers, rural artisans, small entrepreneurs andalso (indirectly) to
all types of cooperative societies and the persons of small means engaged in any productive
activity and farmers service societies (FSSs) functioning within their areas of jurisdiction. It was
expected that 60 RRBs, as explained byGOL, w would be capable enough to lend more than
Rs.300 crore within one year of their functioning.26 Special I Concessions and Privileges
allowed to RRBsThe Reserve Bank of India, in order to support these specialized institutions in
their formative years, has sanctioned a number of concessions for their smooth functioning. The
major features of these concessions and privileges are summarized below:
1. The RRBs can offer a uniformly higher rate of interest on deposits for all periods of maturity
up to five years. The Interest rate may be fixed by half a percent over the rates payable by the
scheduled commercial bank; however, there should be at par with those offered by the District
Central Cooperative Banks (DCCBs) functioning within the same area of operation of the RRBs
and half a percent less than the rates on deposits payable by the village level primary
agricultural credit societies.
2. The rates of interest to be charged by the RRBs on itsdirect advances to the beneficiaries
belonging to the specified categories of the rural society would be at par with the rate charged
by the primary agricultural credit societies operating within the same areas of operation.
3. The RRBs are also allowed to lend up to 15 percent of its aggregate of paid-up capital and
deposit mobilized; the rest are to be arranged through refinancing from theGovernment (50
percent) and from the sponsoring bank(up to 35 percent).The RRBs are allowed to avail
refinancing facilities from the RBI as is enjoyed by the cooperative banks. The RBI1ormulated a
moderate refinancing scheme (with effect since 0l10.1976) by which the RRBs could avail
themselves of refinancing facilities at 2 percent below the bank rate.. The RBI enabled the
RRBs, through amendment of the relevant act to enjoy refinance facilities from the tw
special funds of the Government e.g., the NationalAgricultural Credit (Long-term operations)
Fund and the National Agricultural Credit (Stabilization) Fund.
6. The facilities accessible from the Deposit InsuranceCorporation of India have also been
extended to the RRBs subject to the condition that their depositors can avail insurance up to
maximum Rs. 20,000 of deposits.
7. From January 1977, the RBI designed a special scheme under which a RRB could freely
transfer its own funds from its head office to the different branches through the branches of the
public sector banks functioning within the areas of operation of the respective RRBs.
8. The RBI permitted certain relaxation, as well, to the RRBsin respect to cash and liquidity
requirements as applicable for the scheduled commercial banks. The cash reserve to
be maintained by RRBs was fixed at 3 percent of their aggregate of total demand and time
liabilities as compared to 6 percent applicable to the commercial banks.Moreover, the definition
of cash for determining the cash reserve was broadened to embrace the balance to be
maintained by RRBs with the State Bank of India and also with any nationalized bank (i.e. all
public sector banks).For minimum statutory liquidity requirements of eligible assets, the RRBs
are required to maintain a ratio of only 25 percent of their aggregate of total demand and time
liabilities as compared to 33 percent as followed by the commercial banks.
9. For income tax benefits, the RRBs are treated as equivalent in status to the cooperative
credit institutions under the Regional Rural Banks accounts.

2.7 Steering Committee for Framing up Policies of the RRBs at National Level
The Union Government set up a Steering Committee (1976) at the national level to prepare and
coordinate policies and operational details of the RRBs. The objective of the committee was to
frame necessary guidelines and also to monitor and review the progress and problems of these
entities in their functioning. It was suggested that the RRBs would be located in such areas
where: (a) the existing cooperative banks and commercial banks were not competent enough to
cater to the need of satisfying the large credit gap; (b) a majority of the population belonged to
the weaker section of the society:; and(c) the potential for future agriculture development of the
area was bright. In defining an 'under-banked' district, the SteeringCommittee adopted the
operational norm of a minimum population of 75,000 per branch office of the commercial bank
in the concerned district. A district having a population of less than 75,000 per branch of
commercial bank was considered a comparatively well-banked district.

2.8 Development of Regional Rural Banks in India

As on July 31, 2009, the total number of RRBs in India Stood at 84. The GOI initially set up five
RRBs since the promulgation of the Regional Rural Banks Ordinance onOctober 2, 1975. The
sixth RRB was set up during December1975 in Bihar (Bhojpur Rohtas Gramin Bank). By the
end ofDecember 31, 1976, there were 40 RRBs functioning in 16 states across India with 489
operating branches. The number ofRRBs in the country went up to 48 by the end of December
31,1977 in 16 states with a total number of 1187 branches. Sincethen there had been a
continuous growth in number of RRBstill 31" December, 1987 (Table 2.2) Since 1987, no new
RRBwas set up in India. However, the number of operating branches increased from 17 to
14,484 during the 30 year period from 1975 to 2005, registering an increase of 852 times;
and most importantly, the number of districts covered advanced from 12 to 523 during the same
period.