Evaluation of RRBs - Assessment by Various Committees

Evaluation of RRBs - Assessment by Various Committees



The government and NABARD periodically set up various study groups and committees to evaluate the performance of the RRBs and make recommendations to improve their performance. We shall present some of the important recommendations.

• The Dantwala Committee (1978) : It suggested that the RRB's juridiction should be confined to one district. RRBs should be required to provide full banking facilities in the areas of operation. RRBs should be playing only a supporting role to cooperative banks. 
• Agricultural Credit Review Committee (ACRC 1989) : The Committee took note fo the serious organizational problems of RRBs on account of the continuous decline in profitability, poor recoveries and problems relating to management and staff. The Committee noted that major factors which contributed to the erosion of RRBs' profitability were lending exclusively to the weaker sections, low interest rate and margins and high operating costs involved in handling of small loans. They did not have any scope of cross subsidization in the absence of loans that could yield higher returns. Wilful defaults, misuse of loans, lack of follow-up, wrong identification of borrowers, extension fo benami loans, staff agitations etc. also led to poor recoveries in RRBs, noted the Committee. The objective of serving the weaker sections effectively could be achieved only by self-sustaining credit institutions. RRBs structurally are not the institutions that could fulfill this role. The Committee noted that the logic and rationale which justified the setting up of RRBs did no longer exist. The weakness of the RRBs are endemic to the system and non-viability is built into it. The Committee also explored the possibilities of improving enlargement of the share capital, provision of bad debt reserve, providing larger access to more resilient customers and even giving them a subsidiary status to the commercial banks. But on closer examination, these alternatives were found to be unsatisfactory as, in the opinion of the Committee, the RRBs did not solve the problems of effective service to the rural poor.
• Committee on Financial System (Narasimham Committee, 1991) : One of the problems of RRBs is improving their viability without sacrificing the basic objective for which they were set up. To impart viability to the operations of RRBs, they should be permitted to engage in all type of banking business and should not be forced to restrict their operations to the target groups. To improve their viability further, a mechanism be worked out under which the RRBs should be able to place their surplus funds with NABARD or with a special agency that might be set up for the purpose which should pay interest on such balances by investing or deploying these funds to the best advantage on behalf of RRBs. The solution lies in evolving a rural banking structure which would combine effectively the advantage of the local character of the RRBs and the strength and the organizational and managerial skills of commercial banks. The need is to establish a viable banking structure which could effectively meet rural credit needs. The Committee recommended that each public sector bank should set up one or more rural banking subsidiaries to take upon its all rural branches. It was left on the RRBs and their sponsored banks as to whether the RRBs should retain their separate identity or they should be merged with such rural subsidiaries. 
• Committee on Restructuring of RRBs (Bhandari Committee 1994) : Apart from identifying 49 RRBs for comprehensive restructuring, the committee made wide ranging recommendations relating, inter alia, to the appointment of Chairman / CEO, delineation of roles and responsibilities of supervising agencies of RRBs, staff matters, improving returns on SLR nd non-SLR investments and improving funds management, augmentation of share capital, expansion of the scope of business avenues, deregulation of interest rates and rationalization of branch licensing policy.
• Committee on Revamping of RRBs (Basu Committee, 1996) : Apart from identifying 68 RRBs for-restructuring under Second Phase, Basu Committee made certain recommendations on operational matters as well. Most important among them are,

1. Introduction of Prudential Norms for RRBs with a suitable modifications.
2. Need to redefine the role of shareholders of RRBs more precisely.

• Committee on Banking Sector Reforms (Narasimham Committee, 1998) : Banking system should be in a position to build a credit culture and discipline by equipping itself to identify the eligible clients, based on the prescribed norms, in the government sponsored schemes so that full responsibility for all aspects of credit decisions remains with it. This would also help improve the client-bank relationship instead of the present system of virtually imposed clientele. The supervisory functions over rural financial institutions have been entrusted to NABARD. While this arrangement may continue for the present, over the longer term the Committee suggested that all regulatory and supervisory functions over rural credit institutions should vest with the Board for Financial Regulation and Supervision. RRBs must rationalize and amend their loan policies and procedures so as to function as a development banker for the rural poor. RRBs must work in close coordination with the cooperative banks and rural branches of commercial banks to fill the credit gap in rural areas without any clash of mutual interests. 
• The Estimates Committee of Parliament of the Ministry of Finance, in its 16th report submitted to the Lok Sabha in April 2003, made the following main observations / recommendations on which NABARD advised RRBs to initiate suitable corrective / followup action and review the actions in their Board meetings. 

1. Interest on agricultural advances should not be compounded.
2. CD ratio should be stepped up by concentrating more on lending than on investments. 
3. Proper and separate record of lendings to small and marginal farmers should be maintained.
4. Concrete steps have to be initiated to improve their recovery performance. 
5. RRBs which do not adhere to guidelines have to be dealt with severely.
6. Internal systems and procedures and control measures to enhance effectiveness in sanctioning loans and advances and a system of post disbursement should be evolved.
7. RRBs in consultation with their sponsor banks have to draw time bound perspective training plans to cover all their staff.
8. Number of cases related to fraud / misappropriation of funds, have to be identified and action taken. 

• Chalapathy Rao Committee Government of India, June 2002 : With emphasis now laid by government of India in the entire range of financial services to be provided by RRBs that is necessary for the development of rural economy as a whole, there is need for widening the scope of their activities. Some of the important recommendations are :

1. In the process of strengthening the RRBs to shoulder greater responsibilities in rral economy, emphasis is placed on change of ownership pattern of RRBs. The present ownership pattern i.e., 50:15:35 between central government, state government and sponsor bank, is too rigit. In order to enable RRBs to stand on their own feet, pattern of ownership needs to be more flexible to enable the healthy RRBs access to capital markets. For the purpose of deciding the ownership pattern RRBs may be categorized into categories A, B, C & D depending upon their profit making abilities. 
2. Area of operation of RRBs may be extended to cover all districts hither to uncovered by the services of RRBs. It must be ensured that every socio-economic zone must have a strong and viable RRB. 
3. Capital adequacy norms may be introduced for RRBs in a phased manner.
4. Regulatory frame work for RRBs must be on the lines of those for commercial banks with provisions for bank specific relaxation as may be necessary for a specific time period. RRBs may also be subjected to statutory norms of licensing and each RRB should be required to obtain license from RBI under the Banking Regulation Act, 1949.
5. Self-supervisory system shuold be introduced to improve adherence to statutory and regulatory requirements, and internal policy guide lines, operation on risk management and assets liability management systems, transparency disclosures and various internal control measures.
6. In order to strengthen the RRBs to cater to the needs of the rural economy for all kinds of financial services, diversification of their business has to be encouraged without losing focus on fulfilling financial needs of the rural poor. They may be encouraged to develop their own customer segment specific products for deposits, term-investments, loans.
7. In tune with the changing environment and rising customer preference for technology driven services in banks, even in rural areas some of the RRBs may required to introduce automated services like multi-service credit / debit cards, smart cards, automated letter machines, touch screen services etc., at least in selected major branches. 
8. RRBs may be restructured on a three tier basis, consisting of head office, a district office / branches, and rural branches. Head offices should be concerned only with corporate policy and strategy, management of resources, institutional development district offices should be preoccupied with field work and rural branches with lending and recovery.