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Indian Financial System

Notes Besides IDBI, NABARD and SIDBI are supposed to provide marginal and financial assistance to
the RRBs in order to promote them. This is being provided under the RRB Act in order to
promote these institutions.
The RRBs have grown by leaps and bounds and from a mere six in 1975, there are 86 RRBs as of
2008-09.

Performance Evaluation of RRBs

The committee constituted by the RRBs in June 1977 to evaluate the performance of RRBs concluded
that the RRBs were important and useful tools in providing rural credit with minor modification.
The Working Group on Multi Agency Approach in Agriculture Finance appointed by the RBI in
1978 upheld the RRBs and suggested that the RRBs should not play a supplementary role in
providing credit for agriculture to the commercial banks.
The study found that RRBs can break even at ` 8 crore businesses through a network of 70
branches in about 6 years, provided they enjoy a margin of 5 per cent between borrowing and
lending.

The Committee to review Arrangements for Institutional Credit for Agriculture and Rural
Development which inter alia examined the role of RRBs in the rural development work suggested
the following:
1. RRBs should be promoted to provide rural development by opening more branches in
rural area.

2. Eligible business of commercial banks in rural branches may be transferred to the RRBs.
3. The losses in initial year to be covered by the equity and shareholders fund.
4. The sponsor banks should continue to provide support until 10 years.
5. Concessionary refinance by the RBI should be continued.

6. Control and regulation should be given to NABARD.

Regulatory Control of RRBs

The following regulatory controls are imposed on RRBs:
1. Cash reserve ratio of 3 per cent of their demand and time liabilities.
2. Quarterly/half yearly review of RRBs, especially weak ones by the sponsor banks.
3. Merger of RRBs coming under sponsor banks and operating in contiguous areas.

4. Off site surveillance.
5. Framing of appointment and promotion rules, 1998 for the staff of RRBs.
6. Introduction of Kisan Credit Cards for provision of credit to farmers.

Credit Delivery System of RRBs

Two ideas have influenced RRBs: (1) Grant of cheap credit, and (2) Lending to individuals
belonging to poor class. In terms of monitory issues, the RRBs have been a success. However,
they have failed in terms of purpose, since most of the lending has been done without any
meaningful activity being identified. Political motives of creating equality have overridden the

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