Economics: Regional Rural Banks

Regional Rural Banks are local level banking organizations operating in different States of India. They have been created with a view to serve primarily the rural areas of India with basic banking and financial services. However, RRBs may have branches set up for urban operations and their area of operation may include urban areas too.

The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State. RRBs also perform a variety of different functions. RRBs perform various functions in following heads:

1. Providing banking facilities to rural and semi-urban areas.
2. Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc.
3. Providing Para-Banking facilities like locker facilities, debit and credit cards. 

Regional Rural Banks were established under the provisions of an Ordinance passed in September 1975 and the RRB Act 1976 to provide sufficient banking and credit facility for agriculture and other rural sectors. These were set up on the recommendations of the M. Narasimham Working Group during the tenure of Indira Gandhi’s government with a view to include rural areas into economic mainstream since that time about 70% of the Indian population was of rural orientation.

The development process of the RRBs started on 2 October 1975, with the forming of the first RRB, the Prathama Bank with authorised capital of Rs. 5 crore at its starting.
Also on 2 October 1976 five regional rural banks were set up with a total authorised capital Rs. 100 crore ($10 Million) which later augmented to 500 crore ($50 million).

The Regional Rural Banks were owned by the Central Government, the State Government and the Sponsor Bank (there were five commercial banks, Punjab National Bank, State Bank of India, Syndicate Bank, United Bank of India and UCO Bank, which sponsored the regional rural banks) who held shares in the ratios as follows Central Government – 50%, State Government – 15% and Sponsor Banks – 35%.[2] Earlier, Reserve Bank of India had laid down ceilings on the rate of interest to be charged by these RRBs.

Regional Rural Banks (RRBs) were set up as government-sponsored, regional based rural lending institutions under the Regional Rural Banks Act, 1976. RRBs were configured as hybrid micro banking institutions, combining the local orientation and small scale lending culture of the cooperatives and the business culture of commercial banks. Their mission was to fulfill the credit needs of the relatively unserved sections in the rural areas -small and marginal farmers, agricultural labourers and socio-economically weaker sections. Shareholding pattern of RRBs among the three sponsoring entities is 50:35:15 among central government, sponsoring bank and state government respectively.

Amalgamation of RRBs were made in two phases and the number of RRBs were brought down during the first phase significantly. In the second phase of amalgamation and restructuring, which is ongoing from 2012, geographically extensive RRBs within a State under different sponsor banks are amalgamated to have just one RRB in medium-sized states and two or three RRBs in large states. Amalgamation of RRBs into sponsoring banks and their merger brought down the number from 196 in late 1990s to 56 by 2016.

Most of the reform measures enabled the RRBs to make a smart recovery without being a burden and at the same time keeping their original risky mission of extending lending to the rural people. But still their NPAs remains high at around 6% (gross) and in the future also their activities need additional capital in the context of advanced capital requirements and regulatory standards. Hence, to enable them to acquire more capital the government has enacted RRB Amendment Act (2015). This Act let them to mobilize additional capital by keeping a combined government holding of at least 51%.

RRBs Amendment Act 2015

The Regional Rural Banks (Amendment) Act, 2015, came into effect from 4th February 2016. The Act raises the amount of authorised capital to Rs 2,000 crore and states that it cannot be reduced below Rs One crore. The Act allows RRBs to raise capital from sources other than the existing shareholders -central and state governments, and sponsor banks.  Here, the combined shareholding of the central government and the sponsor bank cannot be less than 51%.

For the sponsoring banks, they can provide various initiating assistance to the RRBs beyond the initial five years (previously, the sponsoring bank’s responsibility will be over in five years). The Act states that the central government may by notification raise or reduce the limit of shareholding of the central government, state government or the sponsoring bank in the RRB. For this, the central government may consult the state government and the sponsor bank.

Cooperative Banking

Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world. Cooperative banking, includes retail banking carried out by credit unions, mutual savings banks, building societiesand cooperatives, as well as commercial banking services provided by mutual organizations (such as cooperative federations) to cooperative businesses.

What is history of Cooperative Banking in India?

The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.

These banks were traditionally centered around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. Cooperative societies are based on the principles of cooperation, – mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisaton as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.

The first known mutual aid society in India was probably the “Anyonya Sahakari Mandali” organised in the erstwhile princely State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-operative credit societies, in their formative phase came to be organised on a community basis to meet the consumption oriented credit needs of their members. Salary earners” societies inculcating habits of thrift and self help played a significant role in popularising the movement, especially amongst the middle class as well as organized labour. From its origins then to today, the thrust of UCBs, historically, has been to mobilise savings from the middle and low income urban groups and purvey credit to their members – many of which belonged to weaker sections.

The enactment of Cooperative Credit Societies Act, 1904, however, gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905), the No.1 Military Accounts Mutual Help Co-operative Credit Society in Poona (January 9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and Belgaum Pioneer (February 23, 1906) in the Belgaum district, the Kanakavli-Math Co-operative Credit Society and the Varavade Weavers” Urban Credit Society (March 13, 1906) in the South Ratnagiri (now Sindhudurg) district. The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906..

The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies. The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were eminently suited to cater to the needs of the lower and middle income strata of society and would inculcate the principles of banking amongst the middle classes. The committee also felt that the urban cooperative credit movement was more viable than agricultural credit societies. The recommendations of the Committee went a long way in establishing the urban cooperative credit movement in its own right.

In the present day context, it is of interest to recall that during the banking crisis of 1913-14, when no fewer than 57 joint stock banks collapsed, there was a there was a flight of deposits from joint stock banks to cooperative urban banks. As a matter of fact, the crisis had a contrary effect, and in most provinces, there was a movement to withdraw deposits from non-cooperatives and place them in cooperative institutions, the distinction between two classes of security being well appreciated and a preference being given to the latter owing partly to the local character and publicity of cooperative institutions but mainly, we think, to the connection of Government with Cooperative movement”

Extent of Urban Cooperative Banking in India

There are over 1,650 UCBs with close to 7,000 branches in the country. Yet they form a tiny part of the banking system accounting for less than 3% of the total banking assets and deposits and less than 3.5% of total advances.  They also follow the 80-20 rule. The top 20% of UCBs account for almost exactly 80% of its deposits.

In spite of being present in 25 states, much (almost 80%) of the action happens in the five states of Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu – with the lion’s share going to Maharashtra. The state accounts for over a third of all UCBs, almost half of all UCB branches, around 60% of total extension counters of UCBs and more than 85% of all its automated teller machines (ATMs).

Different Rural Cooperatives

India is mainly an agrarian society with more than half of its population still residing in the villages. Rural sector is the major contributor to the overall GDP of the nation and hence lack of development in villages means lack of development in India. Cooperative societies are playing significant role in this and share a major credit in the growth of rural sector which along with government and private sectors contribute to the overall economy of India. Cooperatives cover more than 97%of Indian villages, some run by its members and some by the government

Needs of rural people are served by different forms of private and government organizations including partnership firms, co-operatives, companies and charitable trust. Gujurat’s Dairy co-operative and Maharashtra’s sugar co-operative prove their contribution.

Formally co-operatives were introduced to India in 1904 when the Indian Co-operative Societies Act was promulgated. Initially these were just to provide credits to the farmers in the form of credit societies and gradually these start working in other fields such as banking, processing and marketing. The meager funds of farmers were pooled in to run cooperative and it was an attractive way to solve their financial problems. After independence role of cooperative societies grew to encompass socio-economic development and eradication of poverty in rural India. It became an integral part of five year plan. With this co-operative societies became a fundamental part of our economy.

Non-credit societies came in 1912. Importance of co-operative was also highlighted in the Royal Commission on Agriculture in 1928.  With the formation of the Reserve Bank of India (RBI) in 1935, developing more cooperative societies was given due importance.

The main aim of the cooperative was to get the poor and indebted farmers out of poverty and out from the clutches of money lenders. Within short span of time, role of cooperatives extended beyond agricultural credit. It started covering activities such as production, farming, marketing and processing. Cooperatives are now playing a very significant role in the socio-economic development of our country especially the rural India.

In 1951 there were 1,81,000 cooperatives of all kinds in India and this number increased to manifold within short span of time. During 2007-08 there were 1,50,000 primary credit cooperatives and some 2,60,000 non-credit primary societies of all types. In India there are four major types of cooperatives –

1. The Primary agricultural credit or service societies
2. Agricultural non-credit societies
3. Agricultural co-operative marketing societies
4. Co-operative farming societies

Though the expansion and reach of cooperatives is highly impressive, their way of working is not. Except for few co-operative societies most of these lack motivation. These are merely run by the government without motivation and enthusiasm of their members. Some of this even lack in the required funds. Other factors that lead to the slow progress of these societies are – mismanagement, manipulation, restricted coverage, lack of awareness, and political interference. But this does not mean the downfall of the massive projects. Despite all this, cooperatives are really helping poor in becoming self-reliant. Scope of cooperative societies in rural India can improve further with women participation.

Cooperatives provide credit to the farmers, the most needed thing in the farming. Apart from this cooperatives help farmers by providing top quality fertilizers, seeds, insecticides, pesticides etc at reasonable price. Farmers also get marketing, warehousing facility and transportation support from the cooperatives. Service cooperative societies help the poor and marginal farmers with tractors, threshers etc on rent. Rural cooperative societies are now entering into real estate, power, insurance, healthcare and communication sector. If these keep on working with an objective of development then days are not far when quality of rural life would be far better than urban India.

Key features of Cooperative banking in India

Co-operative Banks are organised and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of “one member, one vote”. function on “no profit, no loss” basis. Co-operative banks, as a principle, do not pursue the goal of profit maximisation.

A Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also.

The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures also.

Co-operative banks do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural.

They get financial and other help from the Reserve Bank of India NABARD, central government and state governments. They constitute the “most favoured” banking sector with risk of nationalisation. For commercial banks, the Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance.

Some co-operative bank are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co-operative bank are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act.

Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-scheduled banks are. However, their requirements are less than commercial banks.

Major problems of the functioning of the Cooperative Banks in India

1) Non-accountability:

The government gave too many benefits to cooperatives like reservation of items extra benefits like finance facilities so also it was also provided with other support this was a good thing to do, but then there was no further accountability which led to these cooperatives becoming more and more lethargic. Besides as there was no competition they became more and more costly they were not at all efficient and the worst part was that the government allowed them to function like this and pass on the burden of costs to consumers.

2) Vested interest of some people:

A lot of times people who are in position in control of cooperatives are actually people who have joined cooperatives for personal gains. One of the major problems this causes is conflicting of personal interests with the interest of the cooperatives now this affects the performance of the cooperatives in a negative way.

3) Lack of coordination:

Generally what happens in cooperatives is that different cooperatives at different level don’t coordinate this makes the work of cooperatives difficult. Coordination is the key to success of any organization. The best example for this is AMUL which works best because of coordination.

4) The Internal Free Rider Problem:

This problem arises when:

1. New members who provide very little capital enjoy the same benefits as long-standing or founding members who have major investments in the cooperative in fixed assets (plant, machinery, equipment) and working capital;
2. When the patronage of new members does not make the cooperative much more efficient or competitive by producing significant economies of scale. New members get a “free ride” on the investments and other efforts of existing members, thereby diluting the returns to existing members. In this situation, new members do not have much incentive to provide capital because it will not appreciate in value and existing members have little incentive to provide capital that will disproportionately benefit new members.

5) Quality more than Quantity:

This is another major problem faced by different cooperatives that go in for quantity; which causes a major problem because they think it is a quick way to earn money so this basically affects the productivity.

6) No Balanced Growth:

The cooperatives in northeast areas and in areas like West Bengal, Bihar, Orissa are not as well developed as the ones in Maharashtra and the ones in Gujarat. There is a lot of friction due to competition between different states, this friction affects the working of cooperatives.