Govt may bring regional rural banks under a holding company in Budget

The government is working on a policy to bring regional rural banks (RRBs) under a holding company to better govern these lenders and help them raise equity from the market. The intention to further reform the regional rural banking space may feature in the Union Budget.

Currently, there are 43 RRBs in the country. The step would help centralise their functioning, improve efficiency and ensure they are run professionally. Also, there would be a common strategy for the 21,871 branches of these banks, said a senior government official.

An internal committee has been formed by the government with members from National Bank for Agriculture and Rural Development (NABARD) and the Reserve Bank of India (RBI). If the panel recommendations are accepted by the government, an announcement may be made in the Budget, said another official in the know.

Bringing RRBs under one umbrella entity or a holding company could be yet another reform in the regional rural banking space after the government consolidated such lenders to make them viable.

RRBs were formed under an Act to provide credit to small farmers, agricultural labourers and businesses in rural areas. The ownership structure of such banks is different from other government-owned banks; 50 per cent is held by the central government, 35 per cent by sponsor banks and 15 per cent by state governments.

These lenders are supervised by NABARD and their annual plans and financials monitored by both the RBI and NABARD. About a third of RRBs have a capital adequacy ratio of less than 9 per cent, and the government has infused Rs 670 crore to recapitalise these banks. The collective losses of RRBs have widened to Rs 2,206 crore in fiscal 2019-20 (FY20) from a net loss of Rs 652 crore in FY19.

Earlier reform

In 2005, the government had initiated the consolidation exercise to improve financial inclusion and better credit flow to rural areas. The number of RRBs has been reduced from 196 in 2005 to 43. The exercise was done in three phases. In the first phase (in 2005), RRBs of same sponsor banks were merged. The second phase (2012) saw RRBs being merged across sponsor banks within a state, while the third phase, in 2019-20, involved consolidation on the principle of One State One RRB.

The consolidation was carried out on the suggestions of the V S Vyas committee, formed by the RBI, which had also proposed forming one holding company that will have equity from sponsor banks and NABARD. The holding company would return the share capital and additional share capital deposits contributed by the central and state governments at a price based on the book value, the committee had recommended.

A similar structure for the holding company could be explored now, said the official quoted above. The proposed change may require amendments to The Regional Rural Banks Act, 1976, the official said.