Commercialisation of social banking at the cost of poor

The Regional Rural Banks (RRBs), the Indian Grameen Banks, would have been the most suitable institutions to serve the poor; better than the so-called ‘best model’ in the world, ‘Grameen Bank’ of Bangladesh, but for the continued distortions, in the name of reforms, brought about by the government in phases since 1993. The RRBs amendment Bill 2014, passed by the Lok Sabha in December and waiting for the passage by the Rajya Sabha is going to be a coup de grace.

Born in 1975, through an ordinance, later made RRBs Act, 1976, these banks came up with the sole purpose of catering to the credit and other needs of small and marginal farmers, agricultural labourers, rural artisans, street venders, petty traders and all those below the poverty line in rural areas.

They have indeed lived up to these expectations. The spread of their network had been very rapid; as many as 196 RRBs with 14,500 branches were established, by 1990, in the unbanked far flung rural and tribal areas. About 123 million poor who had no collateral to borrow and therefore outside the formal credit system were given loans. This in itself was a great achievement although it was accompanied with some financial loss to the institutions.

As these banks were designed to supply cheap and easy credit exclusively to the rural poor, the framers of the RRBs’ scheme rightly forecast in the very beginning that they would incur some losses in the process which were to be treated as the necessary social cost for the social benefit of helping the poor.

But the accumulated losses of Rs 621 crore by 1991-92, of 152 out of 196 RRBs, had resulted in the policy amnesia. The loss sustained was blown out of proportion although it had worked out to just Rs 18 lakh per RRB per year; just peanuts compared to the service they had rendered to the millions.

The policy makers who became monomaniac with profitability were not bothered about all this but went ahead with the overhauling of the RRBs. The crucial beginning to commercialise these banks was made in 1993, when they were allowed to finance to the non target groups – the rich borrowers – removing the barrier of financing exclusively to the weaker section.

The priority sector norms were set just on a par with other commercial banks: limiting only 40 per cent of their lending to that sector and 10 per cent of the total to the poor. However, after some experience, the norm was raised to 60 per cent with the resultant share of the weaker sections slightly raised to 15 per cent of their total lending. That means the weaker sections’ share has finally settled down at 15 per cent against the original 100 per cent.

The other prominent measures which changed the RRBs character include, freedom given to them to fix their own interest rates, allowing them to liberally invest in shares and securities, and freedom in opening and closing the branches and later the inter se amalgamation of the RRBs.

Increase in profits

Distancing the RRBs from the rural poor did result in increasing their profits. As per the latest available data, all the RRBs made profits in 2013-14 against 152 out of 196 banks making losses before the reforms. The net profit earned in the year was Rs. 2,833 crore. The profit earned before taxes during previous five years (2008-09 to 2012-13) was Rs.12,589.33 crore. The government of India got Rs 9,318.27 crore towards tax income which was much bigger than its recapitalisation of Rs 1003.92 crore it had provided in terms of the Chakrabarty Committee.

But this huge profit was at the cost of commensurate loss to the poor as evidenced by several indicators. One: Instead of using the deposits mobilised in rural areas for the benefit of rural poor, the RRBs started investing money in shares and securities much beyond their statutory liquidity ratio (SLR) requirement; siphoning off the rural resources to urban centres. The investments in shares and securities as of March, 2014 was Rs 1,10,514 crore  against the outstanding deposit of Rs.2,39,504 crore which gives an Investment/Deposit ratio of 46.14 per cent.

Two: the small size concept of the RRBs to operate in one or two districts is given a go by. Following the Vyas Committee’s recommendation, 196 RRBs have been condensed to 57 as of March 2014, whereby some RRBs became bigger than some private banks.

Three: While the RRBs are supposed to operate in rural areas, they started moving to urban centers. As can be seen from the RBI’s latest data, there are 1,080 urban branches and 190 metropolitan branches among their 19,000 and odd branches of the RRBs.

Four: The small loans concept of the RRBs is fast disappearing. The RBI’s compilation shows some RRBs having sanctioned loans as big as Rs 100 crore each. The aggregate loans, of the size of above Rs 5 lakh per account – all of which could be to the non-poor – was Rs 15,937.6 crore by March 2013 .

Now, the RRBs Amendment Bill will facilitate their part privatisation and will lead to significant control by the private shareholders as it seeks to reduce the combined share of the central, state governments and sponsor banks to 51 per cent against their present 100 per cent shareholding in proportion of 50 per cent, 15 per cent and 35 per cent respectively.

All this means the part privatisation and total commercialisation of the RRBs, consequently leading to further policy change in the direction of more profits at the cost of rural poor. This is a serious matter and government should seriously rethink about it and stop this move and start thinking of reorienting the RRBs towards their establishment goals.