The Hindu Business Line : Will RRB mergers lead to efficient rural lending?

After talking merger for well over a decade, the Centre on September 12 issued a notification allowing for merger which should make RRBs a bit more efficient.

THE process of merging Regional Rural Banks (RRBs) has started with 28 RRBs regrouping to form 9 RRBs.

An official at a leading nationalised bank admitted to three RRBs in Uttar Pradesh becoming a single entity with one board and one Chairman allowing for some focused rural lending.

Many public sector banks such as SBI, Union Bank, Central Bank of India, Canara Bank and Dena Bank are also trimming the number of RRBs.

After talking merger for well over a decade, the Central Government on September 12, issued a notification under the RRBs Act 1976, allowing for merger which should make RRBs a bit more efficient. In fact, an RBI Working Group on RRBs under Mr A.V. Sardesai, Executive Director, RBI, had pointed out "the RRBs Act 1976, does not specifically provide for the transfer of sponsorship from one sponsor bank to another. However, provisions have been made under Section 23A of the Act for the Central Government to effect amalgamation of RRBs. Accordingly, the Central Government may, after talks with the State Governments and the sponsor banks, amalgamate two or more RRBs into a single RRB in the public interest or in the interest of development of the area served by the RRBs or in the interest of RRBs themselves by notification in the Official Gazette."

Seemingly, the amalgamation of RRBs of the same sponsor bank in the same State has been kicked off. The equity stakes of the Centre, State Governments and sponsor banks will remain unchanged in the ratio of 50:15:35. The working group under Mr Sardesai had repeated the idea of merger-amalgamation and added: "To improve the operational viability of RRBs and take advantage of the economies of scale (by reducing transaction cost etc), the role of merger-amalgamation of RRBs may be considered taking into account the views of the various stakeholders. The merged entities will have a larger area of operation and the merger process will help in strengthening some of the weak RRBs.

The following options are available:

a) merger between RRBs of the same sponsor bank in the same State;

b) merger of RRBs sponsored by different banks in the same State.

The process will bring down the number of RRBs and make it more convenient for the sponsor banks to manage the affairs of the RRBs. Merger of RRBs with the sponsor bank is not provided for in the RRBs Act, 1976 and further such mergers would go against the spirit of setting up of RRBs as local entities and for providing credit primarily to weaker sections."

Starting with 6 RRBs with 17 branches covering 12 districts in December 1975, today there are 196 RRBs with 14,446 branches working in 518 districts across the country. The idea of RRBs was mooted in 1975 by a working group under Mr Narasimham (the author of financial sector reforms) as the entities will have local flavour. That may not have happened. Aggregate deposits of RRBs stood at Rs 56,350 crore in March 2004 while advances came to Rs 26,114 crore.

"The share of RRBs in total agriculture credit (given by banks, co-operatives and RRBs) has remained at around 9 per cent despite their strong rural outreach. ... During the year 2003-04, 163 RRBs earned profits of Rs 953 crore while 33 RRBs came up with losses of Rs 184 crore. 90 RRBs had accumulated losses as on March 31, 2004. Aggregate accumulated losses of RRBs amounted to Rs 2,725 crore in 2003-04. Of the 90 RRBs having accumulated losses, 53 RRBs had eroded their entire owned funds and also a part of their deposits (i.e., to the extent of Rs 1,660 crore of 11.75 per cent of the total deposits of these banks)," says the Working Group.

The percentage of gross NPAs has dropped from 27.8 per cent as of March 31, 1999 to 12.6 per cent for the year ended March 31, 2004.

The Working Group placed fresh capital infusion at Rs 3,050 crore to "wipe out accumulated losses, provide for NPAs and maintain 5 per cent CRAR in the existing scenario."

By pushing for mergers, the financial load on various stakeholders should stand reduced. An interesting idea of the Working Group to bring in new private sector banks as sponsors and push them into the countryside has not clicked.

But will mergers lead up to efficient rural lending in the absence of a change in the mind-set of the work force?

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