Regional rural banks (RRBs), which play a crucial role in credit disbursement in remote areas, will be eligible to list on the bourses and raise funds if they have net worth of at least Rs 300 crore over the previous three years and if they fulfil certain other criteria.
According to the draft guidelines issued by the finance ministry, such banks must also have a capital adequacy of 9% in each of the previous three years and recorded operating profit of at least Rs 15 crore for a minimum of three out of the preceding five years.
There should not be any accumulated loss and the RRB should have offered at least 10% return on equity in three out of the previous five years, according to the norms.
The guidelines come after finance minister Nirmala Sitharaman in July asked the department of financial services and sponsor banks to formulate a clear road map to further strengthen the RRBs in a time-bound manner and support the post pandemic economic recovery, given their crucial role in boosting credit flow in rural India. The Indian Banks Association (IBA) was asked to take the initiative to ensure technological advancements at RRBs, which is a key prerequisite to modernising them.
Under the latest guidelines, sponsor banks have been asked to identify the RRBs that are eligible for listing. The sponsors will also have to factor in relevant rules and regulations floated by both the stock markets and banking regulators–Securities and Exchange Board of India (Sebi) and Reserve Bank of India (RBI)–with regard to capital raising and disclosure requirements when they zero in on eligible RRBs.
Currently, the country has 43 RRBs that are backed by 12 state-run banks (sponsor banks). Usually, the central government holds 50% in RRBs, while the relevant sponsor banks and state governments hold 35% and 15%, respectively.
The RRBs have 283 million depositors and 26 million borrowers. As many as 30 of the 43 RRBs collectively earned a net profit of Rs 1,682 crore in FY21.
RRBs, historically, have witnessed higher gross non-performing assets ratio than commercial banks. As of March 2021, while the GNPA ratio of commercial banks hit 7.3% of their advances, that of RRBs turned out to be higher at 9.4%, showed the RBI data.
Since their inception in 1975, RRBs remained unprofitable for the first two decades. In 1994-95, the government started reforms which, coupled with capital infusion, helped them turn profitable. However, at the end of March 2005, about 42% of the RRBs still carried legacy losses.
The government then initiated a consolidation programme in 2005-06. After three phases of amalgamation (the latest one was in 2018-19), the number of RRBs (who had sponsors) dropped from 196 in 2005 to 43 at the end of March 2021, while the number of standalone RRBs that have never undergone any amalgamation stood at nine.