What is ‘One state, One Regional Rural Bank' & why it may be a step in the right direction

The Print

14-05-2025

Established in 1975, RRBs cater to the rural and agrarian economy to support weaker sections of society. According to DFS, 92 percent of the more than 22,000 branches of RRBs operate in rural and semi-urban areas across more than 700 districts.
New Delhi: The Department of Financial Services (DFS) last month notified the fourth round of amalgamation of the Regional Rural Banks (RRBs) to improve their viability and financial performance. As a result, 43 RRBs have been consolidated into 28 entities, one each for 26 states and two Union Territories (Jammu & Kashmir and Puducherry), starting 1 May 2025. This is the fourth phase of the amalgamation of RRBs in the last two decades.
Eight of the 26 states with RRBs have two each, which will merge into one entity per state. For instance, Gujarat's two RRBs—Baroda Gujarat Gramin Bank and Saurashtra Gramin Bank—will now be known as Gujarat Gramin Bank.
The DFS, which comes under the Ministry of Finance, announced on social media platform X on 1 May that the amalgamation will result in an increased capital base of unified RRBs, spurring credit growth and diversification in line with state-specific goals.
Amalgamation will result in increased capital base of unified RRBs, spurring credit growth and diversification in line with respective state specific goals. #RRBs #OneStateOneRRB@FinMinIndia @nsitharamanoffc @PIB_India @DDNewslive
— DFS (@DFS_India) May 1, 2025
26 RRBs across 11 States/UT are amalgamated into stand-alone RRB in State/UT, reducing the number of RRBS from 43 to 28, to further improve viability and financial performance of RRBs #RRB #OneStateOneRRB @FinMinIndia @nsitharamanoffc @PIB_India @DDNewslive
— DFS (@DFS_India) May 1, 2025
Financial sector experts told ThePrint the amalgamation of RRBs was a 'reformist' move that will help improve their governance and efficiency.
A former RRB chairman, who did not wish to be named, told ThePrint that the amalgamation 'will allow RRBs to work with the state government for the implementation of schemes, more investment will be available to improve IT infrastructure and, lastly, senior management could likely be given reins of the banks as they are bigger in size now'.
Earlier, multiple RRBs in a state were confined to a specified area or district, restricting their statewide access. Also, being smaller, investments in IT infrastructure were limited.
Amalgamation is expected to address these shortcomings, thereby making RRBs more efficient, accountable and financially prudent.
Ownership of RRBs is divided across the central government, sponsor banks (large public sector banks) and the state government, with a share of 50 percent, 35 percent and 15 percent, respectively.
Another former RRB chairman, who did not wish to be named, supported the consolidation, though adding that it would take time to see the desired results. 'One State-One RRB is a step in the right direction, but 10 years of proper governance and supervision are required to improve the overall working culture and financial position of RRBs,' he said.
After the amalgamation, combined ownership of the central and state-sponsored banks cannot fall below 51 percent, according to the RRB (Amendment) Act of 2015.
The Act also allows RRBs to raise capital from financial institutions and capital markets. However, if ownership of the state government falls below 15 percent, the central government needs to consult the state government.
The proposal for amalgamation of RRBs was first recommended by the Expert
Committee on Rural Credit in its report in 2004. The Vyas committee was set up in 2001 to study the credit flow to agricultural activities from the Indian banking system.
Amalgamation of RRBs began during the UPA era. Under the first phase that started in 2006, 196 banks were consolidated into 82 entities.
In this phase, from 2006-07 to 2009-10, the number of RRBs came down to 82 from 196.
In the second phase, from 2012-13 to 2014-15, they were further reduced to 56, before coming down to 43, in the third phase from 2018-19 to 2020-21.
National Bank for Agriculture and Rural Development (NABARD) is the supervising authority for RRBs, responsible for strengthening, developing and inspecting the banks.
ThePrint reached NABARD for comment by e-mail and texts, but had not received a response by the time of publication. The report will be updated if and when a response is received.
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Profitability of RRBs
According to the annual report of DFS for 2024, the performance of RRBs has improved since 2020. While the number of loss-making RRBs declined from 19 in 2019-20 to just three in 2023-24, their consolidated net profit for 2023-24 stood at Rs 7,556 crore.
In 2019-20, the consolidated net loss for all RRBs combined was Rs 2,208 crore.
The gross non-performing assets (GNPA) ratio too declined from a high of 10.4 percent in 2019-20 to 6.1 percent in 2023-24.
But experts say RRB financial numbers might not be accurate due to a lack of robust governance and audit mechanisms. 'NABARD has the supervising authority of RRBs, which does not have a strong governance model, unlike the RBI that oversees commercial banks,' another former RRB chairman told ThePrint on condition of anonymity.
Since its inception, RRBs have been recapitalised by more than Rs 19,000 crore. But of this, nearly Rs 10,890 crore was received in 2021-22 (Rs 8,168 crore) and 2022-23 (Rs 2,722 crore) only. The central government's share in this recapitalisation was aligned with their ownership—50 percent.
In 2018, the Supreme Court order made it mandatory for RRB employees to get a pension, running up the operating cost for the banks.
The recapitalisation aims to address rising pension liabilities, support credit expansion and business diversification, as well as reduce non-performing assets (NPA). However, concerns persist about the gross non-performing assets (GNPA) of RRBs which, though improving, still remain higher than the broader banking industry.
According to the Economic Survey, GNPA ratio of scheduled commercial banks was 2.8 percent at the end of March 2024, whereas for RRBs it was 6.1 percent. 'About 90 percent of RRB loans are related to the agriculture business. Most of them are ever-greened, a practice of disbursing new loans to prevent old loans that have not been serviced from turning bad,' Tamal Bandyopadhyay, author and columnist at Business Standard, told ThePrint. 'Over a period of time, this can cause concerns over RRBs' profitability, as in the absence of cash flow, profits of many of them appear to be on paper,' he added.
RRB loans are dominated by the agriculture sector, which accounted for nearly 70 percent of the loan book on 31 March 2023, according to a DFS report. Most often, agricultural loans are low-interest loans compared to car, home or personal loans.
'Accounting norms do not often apply to RRBs. If the interest is not paid in 90 days, then instead of marking it as an NPA, the amount gets rolled over with interest added,' said a former RRB chairman quoted earlier. Most of the customer base of RRBs, he said, is from the weaker sections of society. 'In case of a calamity like drought or floods, a farmer does not have the ability to repay the loan and RRBs do not have any mechanism to recover.'
Although RRBs are now getting IT upgrades, they are still behind private and public commercial banks.
Losing ground to private banks
RRBs are losing ground to private banks, many of which are increasingly foraying into rural areas through their representatives. Multiple RRBs are even competing with their own sponsored banks in some states. 'Public and private banks are entering rural markets through their representatives, cost-effective and technology-driven channels, thereby making it much harder for RRBs to retain customers,' Bandopadhyay said.
'The best solution would be for the government to merge the RRBs with their sponsor banks, which are in a better position to train RRB employees for better rural banking. The RRBs can become a subsidiary of PSU banks in rural areas,' he added.
RRBs face other structural problems such as the need to recruit employees locally from small towns and villages, where candidates often lack the necessary skills or knowledge of financial services. Also, in many smaller districts, local officers and politicians exert influence over the functioning of RRB branches. 'RRBs need proper HR policies and guidelines to govern employees at the local branch level,' says a former RRB chairman.
Employee union demands autonomy
The All India Regional Rural Bank Employee Association welcomed the amalgamation move in an 11 April letter to DFS Secretary Nagaraju Maddirala, which ThePrint has seen. This, it said, has been its long-standing demand. It did, however, also raise concerns about the autonomy of the RRBs, which it said were being run at the behest of their sponsored banks.
'Sponsor banks are treating the RRBs as one of its subordinate departments and are interfering in every activity on a daily basis, subverting the independent functioning of deputed Chairmen/General Managers of these banks,' the letter stated.
The employee association has demanded that the chairman of the amalgamated RRBs must be appointed from the open market and should not be the purview of a sponsored bank.
The letter said that the K.C. Chakrabarty committee, which was set up in 2009 to assess the financial position of RRBs and suggest measures regarding recapitalisation, had also suggested the chairman be selected from the open market. 'Having an independent chairman for RRBs would help in improving the performance, but it is easier said than done,' said a former RRB chairman quoted earlier.
A senior employee association representative told ThePrint the amalgamation of banks could result in problems over one or two years because of diverse work cultures, systems and procedures. 'But in the long run, the amalgamation would help RRBs to grow.'
Udit Bubna is an intern who graduated from ThePrint School of Journalism.
(Edited by Sugita Katyal)
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