House economists at the State Bank of India (SBI) have called for a slew of reforms to incentivise regional rural banks, including granting them on-tap licence for conversion into Small Finance Banks (SFBs).
In September 2018, the Reserve Bank of India (RBI) allowed urban cooperatives and microfinance lenders to convert themselves into SFBs.
Leading Regional Rural Banks (RRBs) are much bigger than most of the SFBs even today, according to a note by Soumya Kanti Ghosh, the group chief economic adviser at SBI.
Stating that it is a fallacy to use outcome-based interventions as a yardstick for rule-based regulatory intervention in RRBs, Ghosh said that allowing RRBs to convert themselves into SFBs will create a level playing field across RRBs, UCBs and SFBs given the fast-paced changes taking place in the banking space.
UCBs are Urban Cooperative Banks.
The largest RRB is Baroda UP Bank with a Rs 72,015 crore-balance sheet and is much bigger than the largest SFB — AU Small Finance Bank — which has business (deposits and advances) size of only Rs 70,588 crore as of March 2021.
The second largest RRB is Karnataka Gramin Bank with Rs 54,856 crore of business while the second largest SFB Equitas has only Rs 33,240 crore.
At the third slot is Aryavart Bank (Rs 48,649 crore) while the business of the third largest SFB Ujjivan SFB is at Rs 27,630 crore, according to the report.
From a modest beginning of six RRBs with 17 branches covering 12 districts in December 1975, their number increased to 196 RRBs in 1987 but remained at the same level till 2005.
In FY95, the government initiated large scale reforms that coupled with capital infusion, helped them turn profitable. However, in FY05, 42 per cent of the RRBs still carried legacy losses.
To improve their operational viability and to take advantage of economies of scale, the government initiated a further consolidation programme in FY06 and as a result, the number of RRBs declined from 196 in 2005 to 43 in FY21.
After two consecutive years of losses in fiscals 2019 and 2020, RRBs, as a whole, reported a consolidated net profit of Rs 1,682 crore in FY21. Even as 30 of the 43 RRBs posted net profit, 17 carried accumulated losses of Rs 8,264 crore in FY21.
In December 2019, UCBs with asset size of Rs 500 crore were brought under the framework of Central Repository of Information on large Credits (CRILC). RRBs had assets of Rs 3,34,171 crore as on March 2021 but are strangely not covered under the fold of CRILC. To strengthen offsite supervision, early recognition of financial distress in large accounts, RRBs may be brought under the fold of CRILC, the note said.
Most of the newly opened accounts at RRBs are for direct benefit transfer payments with minimal business potential but it results in huge costs of cash and eats up human resources. Adequate remuneration for RRBs may be allowed for government sponsored business. Additionally, pension payment should be allowed through RRBs, as per the note.