TO PROVIDE credit to rural consumers, the government plans to leverage the strong network of some 15,000 Regional Rural Banks (RRBs) across the country by requiring them to expand their portfolio by adding new segments. The proposed mandate will require RRBs to go beyond their agricultural lending pillar to provide credit for education, housing and even small businesses in rural India.
This push for RRBs by the government comes at a time when the Department of Financial Services has flagged concerns about a slowdown in lending to education loans by public sector banks due to higher defaults and the struggle continuation of the micro-small and medium-sized enterprise sector which suffered the most following the Covid-19 pandemic and national and local confinements.
Government sources said the initiatives and targets will form part of the Improved Access and Service Excellence (EASE) reforms being undertaken by the Centre. The EASE reforms were launched in 2018 for public sector banks and are currently in their fifth phase.
“Rural banks, for example, would be asked to look beyond crop loans and also provide loans for tractors, small businesses in rural areas and loans for education and housing also in rural areas. rural. Rural banks are last in the list of banking options for people even in rural areas who prefer a public bank or even private banks and this needs to change. This will all be part of the EASE reforms,” an informed government source said.
The Center had asked the PSBs in late August to increase education loan disbursements amid complaints about delays in penalties and the rejection of loan applications. The Center is working on a proposal to increase the collateral limit for education loans from Rs 7.5 lakh to Rs 10 lakh to ensure that banks resume lending to the education sector, The Indian Express announced on October 13.
The rural asset
Giving RRBs a new mandate can serve two purposes: it will help them grow their business by leveraging their extensive rural network and local understanding, and also improve access to credit for rural consumers for purposes such as education, housing and micro-enterprises.
Asking RRBs to lend to education, housing and small businesses would also help facilitate the availability of credit for the sectors. Another source said the government wants the Association of Indian Banks (IBA) to guide rural banks. “The IBA currently does not have the expertise to guide rural banks and the association may consider setting up an RRB division at a later stage to guide them through the process,” another official said.
RRBs were established in 1975. In contrast, private banks, which were allowed after economic liberalization in 1991, have a market share of 40 percent of total banking activity.
Under the EASE program being discussed, RRBs will be guided to become more competitive and business-friendly – making them more customer-friendly is a priority. PSBs, under the EASE program, have a common reform agenda to improve profitability, asset quality, customer service and digital capabilities. The program has delivered results for PSBs and is in its fifth phase, where banks are working to digitize operations.
Every RRB in the country has a PSB as its sponsor bank which owns 40% – another 25% is owned by the state government, 20% by the Indian government and the rest is owned by the RRB. The EASE program for RRBs would also involve focusing on digitizing operations and connecting RRBs to each other. Initially, the plan might be to integrate the backbone systems of the RRBs – funded by the same PSBs – in a particular region. Greater integration of all RRBs may occur at a later stage, said one of the officials quoted above.
With the above initiative, the government’s plan is to continue to improve the profitability of RRBs. After two consecutive years of losses during the period of the Covid-19 pandemic, the RRBs reported a consolidated net profit of Rs 1,682 crore in FY21, with 30 of the 43 RRBs reporting net profits.
These EASE reforms would not be the first time the government has worked to reform RRBs. After a series of reforms in the 1990s, the government in 2005-06 embarked on a consolidation program which saw the number of RRBs drop from 196 in 2005 to 43 in FY21.