Problems of Regional Rural Banks

Problems of Regional Rural Banks


Friends, in our last two lessons we've discussed about the Objectives and Functions of Regional Rural Banks. Today we shall discuss about the problems of Regional Rural Banks. As you know, RRBs have been established to attain very specific objectives. They were expected to replace private money lenders in the rural areas. There have been several shortcomings of the RRBs and problems they have faced.

• Expansion of RRBs was uneven in the country: As already observed in some states like U.P, Bihar, Madhya Pradesh and Andhra Pradesh had a higher proportion of RRBs operating. About 55 percent of all the branches of RRBs are situated in these states. 
• Accumulated Losses : RRB recovery rate was very poor. Most RRBs had mounting over dues. They had losses accumulated due to bad debts. Total number of accumulated losses as on 31st March 2014 are Rs. 1012 crore (However, this amount was Rs. 2752.25 in 2003 and 1532 in 2011).
• Many RRBs were not viable : They are financially weak, and their volume of business is small. Their average lending rate is about 11 percent. Higher cost of administration is partly due to their low volume of business. Viability status of RRBs is not uniform. A viability based review of RRBs shows that loss incurring RRBs are concentrated in four states namely Bihar, Orissa, Madhya Pradesh and Rajasthan. The Government should take some effective remedial steps to make Rural Banks viable.
• RRBs suffer from problems like limited area of operation narrow banking preference, low level of recovery in certain regions, difficulty in effecting recoveries under government sponsored programmes, HRD related issues etc.
• Non-Performing Assets are another major area of concern. 10 RRBs had gross NPA percentage of less than 2%, whereas 32 RRBs had it above 5%. At the all India level percentage of NPAs is 14.44. However, there are wide variations between regions. It was as high as 79.02% in Arunachal Pradesh and as low as 4.36% in Tamil Nadu.
• Quality of Lending was poor : Small borrowers had difficulty in understanding and fulfilling the procedural formalities that were many. Follow up supervision and monitoring the usage loans were inadequate. This also contributed to the problem of over dues. Frequent floods and drought conditions aggravate the problem.
• Various types of Interest Rates prevailing by multiple credit institutions operating simultaniously created problems
• Shared ownership : Capital of the RRBs was contributed by the Central, State Governments as well as the sponsoring banks. Shared ownership has resulted in multiple controls over the RRBs. RRBs were not properly managed. The boards of RRBs did not take much interest in the affairs of the banks. Nominations of the directors to the boards was often made on political considerations.