By – P S M Rao
Focus on profitability has taken them away from the original goals and left them trailing other banks
Bangla Gramin Bank, the brainchild of Muhammad Yunus, is treated as a success story in providing credit to the poor.
The bank has, jointly with its founder, a Nobel Prize to boast of and there has been a rapid spread of its replicas across the globe to reap similar benefit.
India’s own Gramin Banks, the regional rural banks (RRBs), are a success story, too, for a different reason. These banks have shown tremendous improvement in their financial performance as a result of several revamping measures the government has implemented, in doses, from 1993.
The RRBs, called by different names in different states, such as Grameena Banks, Gramin Banks, Grama Banks, Gramya Banks, Elaquai Dehati Banks, Gaonlia Banks, etc were started in 1975, i.e. during the Emergency days, with the aim of providing credit to small and marginal farmers, agricultural labourers, rural artisans, street vendors and all those living below the poverty line as the preamble of the Regional Rural Banks Act, 1976 proclaimed in unequivocal terms.
The need for the new genre of banks was felt as then existing institutions – commercial banks and cooperatives -were found to be suffering from some weaknesses vis-à-vis rural credit, particularly for the weaker sections.
Based on the recommendations of a working group, hurriedly set up under the chairmanship of M Narasimham (who was then working as the additional secretary banking and became popular during the early 1990s with his recommendations on financial sector reforms), the experiment of these new banks, tiny scheduled commercial banks in the central sector with one or two districts as their area of operation, was started in 1975. Their share capital was apportioned by the central government, the respective state government and another commercial bank, called the sponsor bank, in the ratio of 50:15:35.
Social cost for social benefit
As these banks were designed to exclusively cater to the credit needs of the poor in the rural and far-flung areas, it was presumed that they would incur some losses. The framers of the RRB policy spelt this out in the very beginning, not as if they were discovered subsequently. These losses were supposed to be treated as the necessary social cost for the social benefit of covering the rural poor.
In fact, the RRBs lived up to this expectation; as many as 196 RRBs were established by 1990 with more than 14,500 branches across the length and breadth of the country, taking banking services to the unbanked rural, tribal and other interior areas. About 123 million persons, belonging to the weaker sections, benefited from these banks.
But the performance evaluation was made in terms of the viability of the RRBs. The accumulated losses of Rs 621 crore by 1991-92 and 152 out of 196 RRBs being in losses was a big cause of concern that provoked the corrective measures. If the performance were viewed keeping the establishment goals in view, this loss, which worked out to Rs 18 lakh per RRB per year, would be peanuts compared with the service they rendered to the poor.
But the policymakers who became monomaniac wanted the profitability to be increased at any cost – even at the cost of distancing the RRBs from the rural poor – and set out with revamp measures.
As a first measure, the barrier of financing exclusively to the weaker section was removed. In other words, the non-target group, or the rich, became their new target group.
The second main objective, cheap credit, was given a go-by in tandem; the rates of interest charged on the loans at RRBs have become higher than any other commercial bank.
The third objective of mobilising rural savings and channelling them for the development of the same area and to access funds from urban markets for the benefit of rural people also suffered a setback as a result of excessive profitability concern, as indicated by a low credit-deposit (CD) ratio. The CD ratio of RRBs has fallen from around 100% in the beginning to around 50% today.
Instead of attracting funds from the urban centres, the RRBs are taking the rural resources to urban centres as evidenced by their high investment-deposit (ID) ratio, ranging between 55% and 60% during the last three years. The RRBs invested in securities of Rs 45,666.14 crore against their deposit base of Rs 83,143.55 crore in 2007.
The fourth major objective was to take banking services to the door steps of the rural poor. The RRBs’ spread has been heartening and rapid – 196 RRBs opening 14,500-odd branches all over rural India, accounting for 20% of the total bank branches. But, the reform measures did not allow the RRBs to continue with their rural and regional character. As of March 2008, of the 14,458 branches, only 11,353 were in the rural areas, 2,561 in semi-urban areas and 584 in urban areas. Stranger still, as many as 60 branches of RRBs are in metropolitan areas even as many as 1,014 rural branches were closed or shifted between 1998 and 2007 on the plea of non-viability.
The regional character also suffered a setback following the consolidation exercise that started in September 2005. The number of RRBs has reduced from 196 back then to 88 by May 2008 and the principle of each RRB functioning in a homogeneous agro-climatic area is given a go-by. There is a distance of 1,000 km or more between some of the amalgamated RRBs and the districts covered are not contiguous as the rule for amalgamation was ‘one RRB for one sponsor bank in one State’.
So, all the original characters of the RRBs have undergone a transformation; rather, they have become more commercial than the pure commercial banks.
The RRBs have no doubt turned from eternal loss makers into profit-making entities following the revamping measures. The net profit generated in the RRBs in 2007-08 was Rs 625.11 crore. Though higher than the previous year’s Rs 617.13 crore, it was lower than the profit earned in the year before of Rs 748.11 crore.
This raises doubts on the sustainability of even the commercial character of these banks, which have sacrificed their social responsibility. At times, the external factors such as loan waivers and rescheduling of instalments on account of drought and the resultant reduction in non-performing assets favorably influence their financial results.
In fact, the accumulated loss in the system during 2007-08 of Rs 2,759.49 crore was higher than the previous year’s Rs 2,636.85 crore.
Also to be viewed from the commercial angle is the fact that their business volume is disproportionately low compared with their share in branch network. While RRB branches account for 19.58% of the total bank branches, their deposit of Rs 83,143.55 crore accounts for only 2.6% of the total bank deposits in India and advances of Rs 48,492.59 crore constitute a still lower share of 2.01%.
Similarly, the rural branches of the RRBs account for 36.94% of the total rural branches of all the banks put together. But, their share in institutional agricultural advances is not more than 10%.
While it is clear that the turnaround strategy of RRBs has clearly turned them away from their original goals, their profits, induced through sacrificing the rural weaker sections’ credit and other measure, do not seem to be sustainable. Also, the business levels of the banks are nowhere comparable to their size in terms of number of offices.
The situation calls for a relook at the policies and introspection. Why should the RRBs exist as separate entities? Should it be for commercial purpose or for equity goals? Are these goals attainable through the strategy applied? Can their new dispensation help them yield better results than the other commercial banks given that the failure of commercial banks was the raison d’etre for the birth of RRBs? These are some of the questions for which the RRBs’ reforms cannot provide answers.