Catalyzed by the growth of the domestic economy, the banking sector in India has come of age. However, the recent slowdown and fears of a global recession have put the Indian economy and the banking sector on the lookout for new avenues of growth. Rural Banking, which has hitherto been a slow growth sector, could prove the next development engine for Indian banks.
The Regional Rural Bank (RRB), an innovative feature of Indian banking, emerged from India’s early aspirations for a stronger institutional arrangement to develop a savings culture in the rural eco-system, provide rural credit and agricultural finance, while enabling poverty elevation. RRBs are usually 50 per cent owned by the Central Government, 15 per cent by a State Government, and 35 per cent by a Sponsor Bank. These banks have been at the centre of controversy for the last few years.
The establishment of RRBs heralded a new era in Indian banking, with the initial expectation that these banks would contribute to bridging the gap between the rural poor and the urban rich. But over the years it has been found that rural credit has been associated with poor recovery and high cost of servicing. Despite multiple attempts by several outstanding economists towards analyzing this problem of rural credit, the problems are far from being resolved. They appear to be compounded in fact.
The total count of RRBs has come down to 82 from the previous figure of 196 as on March 2010. This reduction has resulted due to the amalgamation process of these banks which was introduced by the Reserve Bank Of India (RBI) in 2005, with an objective to strengthen and consolidate the RRBs. Further, the recommendations of the KC Chakraborty-led committee on the financial status of these banks, recommending a recapitalisation requirement of Rs. 2,200 crore for 40 of the 82 RRBs are under examination. Other measures initiated to expand the outreach of these RRBs include a target to open 2000 branches by March 2011, and the requirement to migrate to Core Banking Solution (CBS) by September 2011 (21 RRBs have already achieved 100% CBS status). The Sponsor Banks would provide the required support to the RRBs sponsored by them for this purpose.
The problems plaguing these banks are manifold. An illustrative list would include low recovery, high Non-Performing Assets (NPAs), low business level, low productivity per branch and per staff, high cost structure, poor financial management, and limited areas of
operation, besides a non-viable level of operation in branches located in resource-poor areas. Further, RRBs have also been lagging behind in the use of technology and growingly losing their business to other commercial banks.
While other rural financial services providers like Scheduled Commercial Banks and private banking entrants have robust processes for functions ranging from HR to product development, RRBs are largely insulated in operation and lag behind their commercial counterparts in efficiency and rationalization of processes as well as in governance mandates.
Despite being present for 26 years, the RRBs have been able to establish just over 12000 branches in rural areas. But other public sector commercial banks, although not specifically meant for rural areas, have more than 19000 branches in rural areas. Further, the lack of adequate infrastructure support, which translates into high project preparation costs and risk aversion among sponsor entities, and consequently the inability of most RRBs to retain qualified managers, affect the growth and the discharge of their operations.
At more than 40 per cent for most RRBs, the high ratio of operating expenditure to other expenditure, is another persistent problem that has affected the profitability of RRBs. Salaries and allowances to staff, and maintenance of offices constitute the largest chunk of this expenditure. Though automation of operations can lower the operating expenditure, even elementary mechanization remains a challenge for several of these banks. Basic automation, like the Advanced Ledger Posting Machine, for end-of-day reporting, is yet to reach a significant number of RRBs. Lack of automation also hampers reporting and MIS, which in turn results in poor visibility into business and operational parameters, critical for management-driven business decisions.
Few RRBs are up to the rigours of channel expansion and customer segmentation, mandatory to conduct business in today’s fast changing times. Most RRBs also lack a robust product innovation agenda to deliver relevant offerings, factoring in the need for customer convenience and flexibility, increasingly critical in today’s highly competitive and dynamic rural marketplace.
The failure of these banks has put a question mark on their functioning to an extent that the RRB restructuring has also been debated at length without a resolution of the problems of this sector. All the alternatives, viz., merger with the sponsor bank (Khusro Committee), merger into rural subsidiaries of commercial banks (Narasimham Committee), and the merger of all RRBs into a nation-wide National Rural Bank could not be implemented due to various reasons.
I feel there is a strong case for merging these RRBs with their respective sponsor banks. As pointed out by a report of the Agricultural Credit Review Committee (1987), submitted in August 1989, “Once the RRBs are merged with the commercial banks with their wide range of lending, the scope for internal cross-subsidisation also widens and the losses on account of having to service the weaker sections can be offset by earnings from the higher interest-yielding loan portfolio of the banks.” The merger will result in a covert but desirable transfer of income from the rich to the poor. The commercial banks whose staff is exposed predominantly to an urban culture can benefit immensely from the services of the staff of the RRBs who have exposure to the rural environment, and consequently are familiar with the local people, their peculiarities, and their problems.
Besides, and most importantly, technology can be an enabler. A robust technology solution can help RRBs break through the insular mould, share information, reuse data and business logic, deliver one view of the customer, and sustain fruitful relationships in the long term, thereby enabling them to confront several current market and business challenges.
The one-size-fits-all approach restricting the offerings of the RRBs to a skeletal spread of microfinance for Self Help Groups, and small loans and deposits is no longer feasible. They must cater to the rural market’s need for a comprehensive range of banking and insurance products arising from diverse customer segments ranging from the agri-based sector, the cottage and small scale industry, and artisans. Technology can be leveraged to build a knowledge repository by consolidating knowledge about products, customers, systems, processes, revenue and practices. This would provide the RRBs with an integrated, 360-degree view of themselves. Such consolidated knowledge would serve as intellectual capital which can be realized by proactively sharing it with all stakeholders – both within and outside the bank. It can also form the basis of information sharing between RRBs for mutual risk-mitigation from poor credit and eventual gains. Further, employees will be empowered with the knowledge necessary to sustain and grow business. They will also have the wide-ranging information to match customers with tailored financial products and services that fulfil their needs and enable mapping of processes to the business challenges.
Such an operational environment would make it easy for an RRB to standardize processes for all services, besides introducing the much needed intelligence into the RRB organization, and empowering it to chart a successful and sustainable future road-map, which in turn can strengthen profitability.
Specialized and innovative schemes to improve rural penetration, like no-frills credit cards, franchisee networks, supply chain financing for agriculture, and cross-selling of products, would complement the above. At the core of these initiatives lies sophisticated yet reasonably priced technology - playing a significant role both in effective operations and delivery.
The original mandate of promoting profitable banking with a rural focus will be an enduring phenomenon, only when the RRB is able to deliver customer-relevant products with optimal operational efficiency and ensure the functioning of a sustainable and viable business. With 80% of RRBs in rural India, this would serve the larger cause of financial inclusion as well.
Written By:
Purnima Kataria
PGDM II
International Management Institute
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