The All India Bank Officers’ Confederation (AIBOC) and the All India Bank Employees Association (AIBEA), representing over 600,000 bank employees, have written to the Finance Ministry demanding the merger of Regional Rural Banks (RRBs) with their respective sponsor banks to enhance overall efficiency and viability of the banking sector.
In their letter to the Hon’ble Finance Minister, AIBOC and AIBEA highlighted the historical context and the current challenges faced by RRBs. Established under the RRB Act of 1976, these banks were designed as regionally based, rural-oriented institutions with capital contributions from the Government of India, state governments, and sponsor banks. Their primary objective was to provide credit to small and marginal farmers, agricultural laborers, and socio-economically weaker sections, thus fostering the development of agriculture, trade, commerce, small-scale industries, and other productive activities in rural areas.
Currently, there are 43 RRBs sponsored by 12 scheduled commercial banks, operating approximately 22,000 branches and serving around 30 crore deposit accounts and 3 crore loan accounts across 702 districts. These banks are predominantly located in rural and semi-urban areas, with 92% of branches in these regions. Public sector banks, except Punjab & Sind Bank, sponsor one or more RRBs, with J & K Bank being the only private sector bank to do so.
One of the significant issues outlined is the adherence to outdated BASEL I norms for capital adequacy, which is insufficient in the face of emerging risk management challenges. The global banking system has shifted towards BASEL III norms, necessitating further core capital infusion. In the financial year 2021-22, the Government of India decided to infuse Rs. 10,890 crores into RRBs, with contributions shared by the central government (50%), sponsor banks (35%), and state governments (15%). Despite this, the capital infusion remains inadequate for 16 RRBs with negative or below-mandatory Capital to Risk (Weighted) Assets Ratio (CRAR) of 9%. The projected increase in credit flow to the rural sector exacerbates the viability issues, which, according to AIBOC and AIBEA, can only be mitigated by merging RRBs with their sponsor banks. This merger would allow access to capital markets, reducing dependency on budgetary support and benefiting fiscal management.
Operational efficiency is another critical concern due to the dual control of RRBs by NABARD and sponsor banks. Senior executives from sponsor banks, accustomed to working under RBI and DFS regulatory frameworks, face challenges operating under a different regulatory regime. Merging RRBs with sponsor banks would end this duality of control, aligning operational and regulatory practices and enhancing efficiency.
Technological upgradation is underway in all 43 RRBs to match the platforms of sponsor banks. A merger would facilitate a seamless technological transition. Additionally, RRBs and commercial banks currently compete in the same markets, targeting similar customer groups and offering identical services. However, RRBs are constrained and often cannot provide all modern banking products. Merging RRBs with sponsor banks would eliminate this competition, ensure uniform product delivery, and support rural economic growth and priority sector lending, essential for robust national economic development.
The merger would also address skill gaps and staff shortages by updating RRB employees’ skills to modern banking practices. The integration of human resources would be seamless due to similar salary structures and the exposure RRB employees have had to sponsor banks’ work culture over the years.
A proactive merger would enhance supervision, governance, and accountability, ensuring greater sustainability of the banking sector. The comprehensive transformation resulting from this merger would combine the financial strength of sponsor banks with the rural outreach of RRBs, arresting the decline in CASA deposits and improving credit delivery systems for the rural population.
Given these multifaceted benefits, AIBOC and AIBEA have demanded the complete merger of all 43 RRBs with their respective sponsor banks to transform the rural economy and enhance the overall efficiency and viability of the banking sector.
