Regional Rural Banks

Regional Rural Banks (RRBs) are local level banking organizations operating in different states of India. They were created with a view to serve primarily the rural areas with basic banking and financial services.

Background

• Currently, there are 43 RRBs sponsored by 12 Scheduled Commercial Banks with around 22,000 branches across the country.
• The Regional Rural Bank Amendment Act, 2015 allowed these banks to access the capital market.
• However, in absence of detailed guidelines by the Government, no RRB has so far used the capital market for raising money.

Various functions:

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 came into existence in 1975 with the formation of a Prathama Grameen Bank. The rural banks have the legislative backing of the Regional Rural Banks Act 1976. This act allowed the government to set up banks from time to time wherever it considered necessary.

Regional Rural Banks were conceived as low cost institutions having a rural ethos, local feel and pro poor focus. Every bank was to be sponsored by a “Public Sector Bank”, however, they were planned as the self-sustaining credit institution which were able to refinance their internal resources in themselves and were exempted from the statutory preemptions.

SCBs were managed professionally but didn’t have rural penetration. PACS and cooperative banks worked in rural areas but didn’t work professionally and lacked standard accounting practice.

Therefore, RRBs were envisaged as hybrid banks, having the good features of both Cooperative banks and SCBs. The sponsor bank would provide HRM (Human resource management), accounting practices and training.

The RRBs are owned by three entities with their respective shares as follows:

• Central Government → 50%
• State government → 15%
• Sponsor bank → 35%

RRB’s allowed to Raise Capital

The Finance Ministry has recently issued draft guidelines to enable Regional Rural Banks (RRBs) to raise money from capital market through the Initial public offer (IPOs). The guidelines will provide liquidity and visibility to the Regional Rural Banks (RRBs)

• Eligible RRBs: RRBs wishing to raise capital through an IPO must have had a net worth of at least Rs 300 crore during the previous three years. Additionally, they must have capital adequacy beyond the legal requirement of 9%.
• Change in Shareholding: Department of Financial Service may consult the concerned State Government if the level of shareholding in the RRB of such state Government needs to be reduced to below 15%.
• Eligible investors: The shares may be issued to large banks and insurance companies like LIC. Other private insurance companies, pension funds and mutual funds may also be allowed to invest.

Co-operative banks

Features

• Co-operative banks are organized and managed on the principle of cooperation, self-help, and mutual help. They function with the rule of one member, one vote and no profit, no loss basis.
• Co-operative banks as a principle do not pursue the goal of profit maximization.
• Cooperative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities.
• Cooperative banks provide limited banking products and are functionally specialist in agriculture related products.
• They offer short term as well as long term loans. However cooperative banks now provide housing loans also.

Details 

They are established by state laws and registered under the cooperative societies Act. Since 1966, cooperative banks have to take license from RBI and are regulated by it. NABARD is the apex body for the cooperative sector in India.

NABARD is responsible for regulating and supervising the functions of Co-operative banks and RRBs. NABARD works towards providing a strong and efficient rural credit delivery system, capable of taking care of the expanding and diverse credit needs of agriculture and rural development.

RBI’s role is primarily restricted to the provision of finance to the NABARD through its con­tributions to the two national rural credit funds, already transferred to the NABARD, and additional loans and advances to the latter. Besides, the RBI still offers loans and advances to SCBs.

Cooperative banks are government sponsored, government supported and government subsidized financial agencies in India. In Cooperative Banks, the Board of Directors (management) are selected among the shareholders of the bank. But in normal Banks Board of Directors are “Independent” and representatives of shareholders, not exactly the shareholders. Because of this professionalism is missing from the cooperative banks and we are seeing cases of frauds.

They get financial and other help from the Reserve Bank of India, NABARD, Centre government and State governments. RBI provides financial resources in the form or contribution to the initial capital (through state government), working capital, refinance. They offer short term and long term loans. They have to maintain CRR and SLR just like scheduled commercial banks.

Cooperative banks are classified as:

1. Rural cooperative banks

(i)Short term structures

1. Primary Agricultural Credit Societies
2. District or central cooperative banks
3. State cooperative banks

(ii) Long term Structures

1. State Cooperative Agricultural and rural development banks (SCARDB) (at state level)
2. Primary Cooperative Agricultural and Rural development banks (PCARDB)(district/block level)

2. Urban Cooperative Banks

Rural credit cooperative banks

Rural credit cooperative banks are the oldest and the most extensive form of rural institutional financing in India. The rural cooperative credit system in India is primarily mandated to ensure flow of credit to the agriculture sector.

It comprises short-term and long-term co-operative credit structures 

1. Short term credit cooperatives

They provide short term rural credit and are based on a three tier structure as follows:

(i)Primary Agricultural Credit Societies (PACS):

Basic unit and smallest co-operative credit institutions that works on the grassroots level. These societies are generally started by 10 or more persons who contribute a nominal amount. The working capital of the PACS is derived mainly from borrowings from Central Co-operative Banks (CCBs) and the small proportion from owned funds and deposits from members. In general, only the members of a PACS are entitled to borrow from it.

Main Functions of PACS

• Provide short-term and medium-term credit for agriculture and allied activities.
• Distribute inputs such as seeds and fertilisers.
• Provide various agricultural implements on rent to the farmers.
• Provide marketing facilities for the sale of agricultural produce.
• Provide loans for non-agricultural purposes such as purchase of consumer durables, housing loans, education loans and professional loans.

2. Long term credit cooperatives

They meet long term credit requirements of farmers and are organized at two levels:

• Primary Cooperative Agriculture and Rural Development Bank (PCARDB): These banks operate at the village level as an independent unit
• State Cooperative Agriculture and Rural Development Bank (SCARDB) : These banks operate at the state level and have a network of branches in different villages.

Land Development Banks ( LDBS)

• They provide long term loans to the agriculturalists for the permanent improvement of land and provide for the repayment of loans in easy annual or semiannual installments spread over a number of years.
• The Land Development Banks (LDBs) are essentially co-operative institutions.
• All the LDBs are registered under the Co-operative Societies Act.
• In a strict sense, however, they are semi co-operatives.
• In fact, they are limited liability associations of agricultural borrowers, as their members have limited liability.

Rural cooperative banks are regulated by RBI and supervised by NABARD.

Urban Cooperative Banks

UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries of one state.

Regulation of UCBs:

• It is split between RBI and Centre/State Governments, while that of smaller co-operative banks is divided between National Bank for Agriculture and Rural Development (NABARD) and State governments.
• They come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.
• Urban and Multi State Cooperative Banks are under the direct supervision of RBI. Recent steps taken for UCBs

Banking Regulation (Amendment) Act, 2020

• The recent amendment to the BR Act has conferred greater regulatory powers upon the RBI. It brought management / governance, audit, reconstructions / amalgamation, winding up, etc. of co-operative banks under RBI’s purview to enable improvement in the quality of their management and the standards of their cooperative governance.
• Earlier, the banking related functions of a UCB were regulated by RBI under the provisions of Banking Regulation Act and powers with regard to incorporation, management, audit and winding up were governed by the co-operative societies acts concerned.

Supervisory action Framework (SAF)

• It seeks to ensure expeditious resolution of financial stress faced by some of the UCBs.
• The move comes in the backdrop of the alleged irregularities in the Punjab and Maharashtra Cooperative (PMC) Bank causing distress to over 9 lakh depositors.
• The SAF is similar to the Prompt Corrective Action (PCA) framework which is imposed on commercial banks.

Umbrella Organization (UO)

The RBI accorded regulatory approval for setting up of an Umbrella Organisation (UO) for UCB sector. UO can act as a self-regulatory body for small UCBs, will have a paidup capital of Rs.300 crore and should provide cross liquidity and capital support to the UCBs when needed.

Other important steps:

• Entering into Memorandum of Understanding (MoU) with state and central governments to facilitate coordination of regulatory policies, formation of task force for UCBs, a comprehensive set of capacity building initiatives, measures to bring in efficiency through adoption of technology, etc.
• Prescribing educational qualifications and ‘fit and proper’ criteria for managing directors (MDs) and whole-time directors (WTDs) of primary urban banks and barring MPs and MLAs from these posts.

Voluntary Transition into SFBs 

A scheme to enable eligible UCBs to voluntarily transition into SFBs was issued on the basis of recommendation of the High-Powered Committee on UCBs (2015) o Interest Subvention Scheme for MSMEs – For inclusion of UCBs as Eligible Lending Institution under the Interest Subvention Scheme for MSMEs 2018 on par with commercial banks.

Constitution of Board of Management (BoM)

RBI provided guidelines on constitution of BoM in UCBs with deposits of ₹100 crore and above to improve quality of governance.

Customer Protection

Limiting liability of customers of Co-operative Banks in unauthorized electronic banking transactions thereby bringing parity with commercial banks.