Title – “Analysis of Regional Rural Banks and their Mergers”
Introduction
The government of India set up Regional Rural Banks (RRBs) on October 2, 1975.
The banks provide credit to the weaker sections of the rural areas, particularly the small
and marginal farmers, agricultural labourers, artisans and small entrepreneurs.
Initially, five RRBs were set up on October 2, 1975 which were sponsored
by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank
and United Bank of India. The total authorised capital was fixed at Rs. 1 crore which has
since been raised to Rs. 5 Crore. Till date in rural banking in India, there are 14,475 rural
banks branch in the country of which 12126 are located in remote rural areas. There is
a large variation in the number of districts covered and the branch network of the RRBs.
While 47 RRBs cover only one district each, 111 RRBs cover 2-3 districts, 29 RRBs 4-5
districts and 9 are operating in 6-9 districts. Similarly, 72 RRBs have up to 50 branches,
87 RRBs have 51-100 branches, 21 RRBs have 101-150 branches and 16 have more than
150 branches.
There are several concessions enjoyed by the RRBs by Reserve Bank of India such
as lower interest rates and refinancing facilities from NABARD like lower cash ratio,
lower statutory liquidity ratio, lower rate of interest on loans taken from sponsoring
banks, managerial and staff assistance from the sponsoring bank and reimbursement of
the expenses on staff training. The RRBs are under the control of NABARD. NABARD has
the responsibility of laying down the policies for the RRBs, to oversee their operations,
provide refinance facilities, to monitor their performance and to attend their problems.
Merger of RRBs
To improve the operational viability of RRBs and take advantage of the
economies of Scale (by reducing transaction cost, etc.), the route of
merger/amalgamation of RRBs may be considered taking into account the views of the
various stakeholders. The merged entities will have a larger area of operation and the
merger process will help in strengthening some of the weak RRBs. The following options
are available :
Merger between RRBs of the same sponsor bank in the same State.
Merger of RRBs sponsored by different banks in the same State.
The process will bring down the number of RRBs and make it more convenient for the
sponsor banks to manage the affairs of the RRB. Merger of RRBs with the sponsor bank
is not provided for in the RRBs Act 1976 and further, such mergers would go against the
spirit of setting up of RRBs as local entities and for providing credit primarily to weaker
sections.
Mergers between the RRBs are driven by strategies aimed at selling more
services: before the deal, the active (bidder) bank derives a high share of income from
services; it might want to offer its products to the customers of the passive (target) bank
which is less dynamic in providing them. Merger helps eliminate the vices of the district
co-operative banks, which creeps into the functioning of RRBs over the years, and make
management more professional, besides cutting down on operational costs.
The Vyas Committee had recommended merger of all RRBs in the same State.
Currently, RRBs of the same sponsor bank are merged at State-level. The Committee is
of the view that further merger of all RRBs at State-level is not required. It may also not
be desirable if there has to be a firm reinforcement of the rural orientation of these
institutions with a specific mandate on financial inclusion. The Committee, therefore,
recommends that the process of merger should not proceed beyond the level of
sponsor bank in each State.
Review of Literature
Biswa Swarup Misra’s [Research Officer in the Department of Economic Analysis
and Policy, Reserve Bank of India] (2006) exploratory analysis revealed that the problem
of the loss making RRBs is neither confined to some specific States nor to a group of
sponsor banks. In the absence of any strong systematic pattern so as to suggest that the
performance of RRBs is driven by the peculiarities of any particular sponsor Bank or a
specific State in which they operate, econometric estimation was employed so as to
decipher the factors that contribute to their financial health.
Nitin and Thorat (2004) provide a penetrating analysis as to how constraints in the
institutional dimension have seriously impaired the governance of the RRBs. They have
argued that perverse institutional arrangements that gave rise to incompatible incentive
structures for key stakeholders such as political leaders, policy makers, bank staff and
clients have acted as constraints on their performance. The lacklustre performance of
the RRBs during the last two decades, according to the authors can be largely attributed
to their lack of commercial orientation. An appropriate restructuring strategy would
require to identify the problems leading to the nonsatisfactory performance of the
RRBs.
The issue whether location matters for the performance has been addressed in some
detail by Malhotra (2002). Considering 22 different parameters that impact on the
functioning of RRBs for the year 2000, Malhotra asserts that geographical location of
RRBs is not the limiting factor for their performance.
Methodology
The study is will be done by collecting data from both primary and secondary sources.
Primary data is being collected from discussion with employees and past employees of
different banks .
Secondary is being collected from:
Articles
Newspapers
Magazines
Internet
Objectives
1.) To measure cost efficiency for RRBs in India.
2.) To study the impact of mergers on the cost efficiency of merged bank
3.) To study the effectiveness of merger between RRBs
4.) To study performance of RRBs
SCHOOL OF ECONOMICS
DAVV
SYNOPSIS OF MAJOR RESEARCH PROJECT
TITLE: “ANALYSIS OF REGIONAL RURAL BANKS AND THEIR
MERGERS”.
SUBMITTED TO: SUBMITTED BY:
PROF. AKANSHA SINGHI VIKRAM SINGH DHAKED
MBA (FS) 4TH SEM
ROLL NO.-9354
