Regional Rural Banks: Restructuring Strategies

Abstract

The approach to banking in India underwent a sea change with the nationalization of 14 major commercial banks in 1969. Banking services, which had been the preserve of the urban population, were extended to the rural hinterlands of the country. This step was historic as more than 80 per cent of India’s population lived in rural areas. The trend towards inclusive banking again got a shot in the arm in the mid-1970s when a new set of commercial banks, the regional rural banks (RRBs), were introduced to improve the efficacy of the rural credit delivery mechanism. The genesis of the RRBs can be traced to the need for a stronger institutional arrangement for providing rural credit. The Narasimham Committee (Government of India, 1975) conceptualized the creation of RRBs in 1975 as a new set of regionally oriented rural banks which would combine the local feel and familiarity of rural problems characteristic of co-operatives with the professionalism and large resource base of commercial banks. Subsequently, RRBs were set up through the promulgation of the RRBs Act, 1976.1 With joint share holding2 by central government, the relevant state government and the sponsoring commercial bank, the inception of RRBs was a unique effort to integrate commercial banking within the broad policy thrust towards social banking, keeping in view the local peculiarities. RRBs were supposed to evolve as specialized rural financial institutions for developing the rural economy by providing credit to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.