Drastic step or careless move?

IN YET another attempt to save regional rural banks from collapse, the government intends to take private parties on board. In the recently concluded budget session of Parliament, the finance ministry tabled a Bill that allows regional rural banks (RRB), also known as gramin banks, to raise capital from private sources. Analysts are skeptical. They say private shareholding may ensure financial stability but would distract RRBs from their objective of strengthening rural economy.

RRBs were set up in 1975 to ensure banking and institutional credit facility to those engaged in the agriculture sector and cottage industries. It is jointly owned by the Centre, the state government and some designated commercial banks, called sponsor banks, who fund its capital base in the proportion of 50 per cent, 15 per cent and 35 per cent, respectively. But RRB could never become a profitable venture. In fact, most RRBs were saddled with bad loan within five years of inception.

The Regional Rural Banks Amendment Bill, 2013, aims to infuse vigour into RRBs by increasing their capital base from `5 crore to `500 crore. But the capital would no longer be entirely borne by the Centre, concerned state government and sponsor bank. Their shareholdings would be limited to 51 per cent and the rest would be raised from private investors, according to the bill draft (see ‘Proposed amendments’).

If this provision sails through Parliament, it will push RRBs towards privatisation, alleges Sayeed Khan, general secretary of All India Regional Rural Bank Employee Association. Khan questions the need for private investment at a time when the government has already taken measures to revive the banks, though after 25 long years.

Why the delay
Since the inception of RRBS, the government has appointed at least 10 expert committees to analyse their financials and suggest measures to revive them (see ‘Ignored for long’ on p10). Most committees recommended merger of the loss-making RRBs either with neighbouring viable RRBs or with their sponsor banks. Some also recommended their liquidation. But the government did not act until 2005.

That year, the government began consolidating loss-making RRBs with the profit-making ones to make them economically viable. By April 2013 there were just 62 RRBs from 196 in 2004 (see tables on p10). In the next couple of years, following the recommendation of the panel headed by K C Chakrabarty, deputy governor of the Reserve Bank of India, the government increased the capital inflow of 40 loss-making RRBs. Chakrabarty panel had recommended that the Centre, the state governments and sponsor banks should release `2,200 crore to bail out these banks. The impact of this capital infusion has begun showing on the ground.

The latest RBI report shows there have been improvements in credit flow to rural areas. In 2010, the loans disbursed for agriculture, including crop loans, agriculture and allied activities, was `46,282 crore. The loan amount increased to `55,067 crore in 2011. The disbursement of non- agriculture loans increased from `36,537 crore to `45,231 during the period.

Going by the performance, is there still need for private investment?