Regional Rural Banks

• Context (ET | TH | LM): The Ministry of Finance has approved the amalgamation of 15 RRBs under the ‘One State-One RRB’ policy, effective May 1, 2025.

About Regional Rural Banks (RRBs)

• Establishment: Regional Rural Banks (RRBs) were created under the RRB Act, 1976, based on recommendations of the Narasimham Committee on rural credit.
• First RRB: Prathama Grameen Bank, established on 2 October 1975.
• Nature: RRBs are Scheduled Commercial Banks operating in specific regions to serve rural needs.
• Sponsor Banks: Each RRB is sponsored by a major public sector bank that provides capital, technology, and managerial support.
  • Post-Merger under One State, One RRB Policy, sponsors will guide operational integration and support business strategy for the new entities.

• Ownership Structure: 50% Central Government; 35% Sponsor Bank; 15% State Government.
  • Despite capital reforms, the govt retains a 50% shareholding under the One State, One RRB Policy.
• Sources of Funds: RRBs are funded through owned funds, public deposits, and borrowings from NABARD, sponsor banks, SIDBI, National Housing Bank, and other approved institutions.
  • RRB Act 2015 Amendment: RRBs can raise capital from sources beyond govt & sponsor banks.
• Priority Sector Lending: As per RBI norms revised in 2016, RRBs must allocate 75% of their total lending to priority sectors within sub-targets.
• Regulation: Regulated by Reserve Bank of India (RBI) and supervised by NABARD.
• Management Structure: Governed by a Board of Directors comprising one Chairman, up to 3 Central Govt nominees, up to 2 State Govt nominees, and up to 3 nominees from sponsor bank.

• Past Consolidation Phases:
  • Initial Number: 196 RRBs.
  • Post-Consolidation (2020-21): Reduced to 43 RRBs.
  • Present Reform: Set to reduce to 28 under this policy.

Functions

• Offer basic banking in rural and semi-urban areas.
• Disburse wages under MGNREGA and handle pension payments.
• Provide digital and para-banking services like UPI, debit cards, lockers, mobile/internet banking.

• Developmental Role: RRBs aim to promote agriculture, trade, commerce, industry and other productive activities in rural areas.

Benefits of the One State-One RRB Policy

• Policy Objective: Improve operational efficiency, reduce inter-RRB competition & rationalise costs.
• Streamlined Operations: Larger, consolidated RRBs are expected to optimise resources, reduce duplication and increase service outreach. (GNPA Ratio for FY24 was 6.1%, the lowest in a decade).
• Credit Delivery: Amalgamated banks will have improved lending capacity, especially in rural areas.
• Digital Inclusion: Unified RRBs can roll out digital services uniformly, enhancing financial inclusion.
• Capital Efficiency: Larger institutions manage capital better & absorb financial shocks more effectively.
• Less Administrative Burden: Unified RRBs simplify supervision & regulation for sponsor banks & RBI.
• Better Governance: Single-state RRBs ensure focused governance aligned with regional priorities.