The Regional Rural Banks

The Regional Rural banks are relatively new banking institutions which were added to the Indian Banking scene since October, 1975. There are 196 Regional Rural Banks with a network of branches in the States of the Indian Union. These banks have been established by the Government of India in terms of the provisions of the Regional Rural Banks Act, 1976. The distinctive feature of a rural bank is that though it is a separate body corporate with perpetual succession and common seal, it is very closely linked with the commercial bank which has sponsored the proposal to establish it. The Central Government while establishing a rural bank at the request of the commercial bank specifies the local limits within which it shall operate. The rural bank may establish its branches or agencies at any place within the notified area.

The necessity of rural banks was felt because the then existing credit agencies – the co-operative banks and the commercial banks lacked in certain respects in meeting the needs of the rural areas. The weaknesses of these institutions in this regard may be summed up as follows:

The co-operative credit structure is weak so far as the managerial talent and post credit supervision and loan recovery are concerned. These institutions have not been able to mobilize adequate resources and therefore depend upon the Reserve Bank for re-finance to a large extent.

The commercial banks are basically urban-oriented, if they have to play a significant role in rural banking, their methods procedures, training and orientation shall have to be adapted to the rural environment. This is not likely to be achieved easily and quickly. Moreover, the cost of their operations is quite high due to high salary structure, staffing pattern and high establishment cost. Thus the commercial banks are unable to provide credit at cheap rates to the weaker sections in the rural areas.

The need was, therefore, felt for a new institution which should combine the merits of these two institutions without suffering from their drawbacks. A Rural Bank has been contemplated as an institution to combine the rural touch and local feel, a familiarity with rural problems and attitudinal identification with the rural economy which the co-operatives possess in large degree, with the modern business organization, commercial discipline ability to mobilize resources and access to the central money markets which the commercial banks have. In other words, the institution of rural banks is intended to be locally based rural oriented and commercially organized.

Capital: Initially the authorized share capital of each Rural Bank was Rs 1 crore, divided into 1 lakh shares of Rs 100 each. Fifty per cent of the issued capital was subscribed to by the Central Government fifteen percent by the concerned State Governments and thirty five percent by the sponsor bank. With the enactment of the Regional Rural Banks (Amendment) Act 1987 the authorized capital of each RRB has been raised to Rs 5 crores and paid up capital to Rs 1 crore . The Board of Directors of a Rural Bank may after consultation with the Reserve Bank and the sponsoring banks and with prior approval of the Central Government, increase the issued capital from time to time. The additional capital shall be subscribed in the same proportion as is specified above. The shares of the Rural Banks shall be deemed to be included in the securities enumerated in Section 20 of the Indian Trusts Act, 1882 and shall also be deemed it be approved securities for the purposes of the banking Regulation Act, 1949.

Business of a Rural Bank: A Rural bank in the normal banking business i.e. the business of banking as defined in Section 5 (b) of the Banking Regulation ct, 1949 and engages in one or more forms of business specified in Section 6[1] of that Act. A Rural Bank may, in particular, undertake the following types of business, namely:

The granting of loans and advances particularly to small and marginal farmers and agricultural laborers, whether individual or in groups and to co-operative societies(including agricultural marketing societies , agricultural processing securities, co-operative farming societies, primary agricultural credit societies or farmers’ service societies) for agricultural purpose or agricultural operations or for other connected purpose and the granting of loans and advances, particularly to artisans small entrepreneurs and persons of small means engaged in trade, commerce or industry or other productive activities within the notified area of a Rural Bank.