Challenges of Regional Rural Bank (RRB)

Why in News?

Regional Rural Banks losing ground to private banks amid tech challenges.

What are regional rural banks?

• Inception – It was established in 1975, the first RRB was Prathama Bank, in Moradabad, Uttar Pradesh.
• Objective – It aims to provide banking and credit facilities for agriculture and rural sectors, combining the features of cooperatives with the professionalism of commercial banks.
• Ownership – RRBs are sponsored by
  • Central Government – 50% of stakes
  • State Government – 15% of stakes
  • Commercial Bank – 35% of stakes
• All public sector banks, except Punjab & Sind Bank, sponsor one or more RRBs.
• J&K Bank is the only private sector bank that sponsors an RRB.
• Services offered – They provide various banking services in rural and semi-urban areas like

• Banking norms -       The interest rate on the loan are very low compared to commercial banks, making it easier for rural people to access credit.
• They have higher priority sector lending responsibility to lend a minimum of 60% of all its capital to agriculture sector and other priority sectors such as
  • Small or medium sized manufacturing or service businesses or housing in rural area.

Why there is a large digital deficit in RRBs?

• As farmers become more digitalised, they look for internet banking.
• RRBs are serving the third generation of farmers, and the new generation demands digital banking and other advanced services.

• Lack of basic infrastructure – Some branches even have a single room doubling as a washroom and the cash rooms are poorly maintained, with faded walls and an unpleasant odour.
• Subpar operation – There are issues of mismanagement and a lack of professionalism have impeded progress.
  • In western Uttar Pradesh, many RRB branches lack security guards despite holding cash reserves of around Rs 10 lakh.
  • Staffed by just a manager and a cashier, these branches often operate in subpar conditions.
• Outdated tools – RRB is struggling to provide ATM cards and cheque books immediately to the new customers whereas in private banks, customers receive all the basic tools within hours.
• Financial issues - A significant burden of non-performing assets (NPAs) has persisted, leading banks to focus their efforts on reducing these problematic loans.

Non-Performing Assets (NPAs) are the assets which ceases to generate income for the bank.

• Limited Connectivity- Poor internet connectivity in rural areas can hinder the deployment and effectiveness of digital banking solutions.
• Traditional Focus- RRBs have traditionally focused on providing basic banking services and may not have prioritized digital banking as a core function.
• Competition from their sponsor – The increasing presence of private sector banks has made the situation more challenging.
• RRB’s Sponsor banks itself have emerged as their primary competition. 

What are the steps taken to improve the status of RRB’s?

• Recapitalization – Government have infused Rs 10,890 crore into RRBs during FY22 and FY23.
• Technological Upgrades – Efforts are underway to enhance RRBs' digital capabilities, supported by the Finance Minister's emphasis on technological improvements.
  • In 2023, Government emphasized the need for RRBs to upgrade their digital capabilities and increase penetration under the Pradhan Mantri Mudra Yojana.

A 2022 National Bank for Agriculture and Rural Development (NABARD) report highlighted that RRBs need to enhance their loan recovery processes through technology, policy improvements, and best Practices.

What lies ahead?

• Modernize IT Systems- Upgrade to advanced core banking systems to enhance efficiency and provide digital banking services.
• Equip branches with tools like ATMs, cash deposit machines, and cheque imaging systems to streamline customer transactions.
• Develop user-friendly digital interfaces for online and mobile banking to enhance the customer experience.
• Improve connectivity- Invest in better internet infrastructure and connectivity, especially in remote and rural areas.
• Upgrade data management systems – For better handling of customer information and financial data.
• Policy Updates- Align policies with modern banking practices to facilitate smoother digital transformation.
• Capacity development- Provide comprehensive training programs for staff on new digital tools and technologies.
• Enhance physical security- Measures like security guards and surveillance systems to protect cash and digital assets.

References

1. Business Standard | Regional Rural Banks