Rural Financial Institutions (RFIs) play a crucial role in financial inclusion by expanding credit accessibility, supporting agricultural financing, and empowering rural entrepreneurs through a multi-agency system, including Regional Rural Banks (RRBs), Rural Cooperative Banks, and Micro Finance Institutions.
The recapitalisation and reform initiatives undertaken by the government and NABARD have significantly improved the performance of RRBs, leading to higher profitability, better asset quality, and an all-time high credit-to-deposit ratio in FY24.
Role Of Rural Financial Institutions (RFIs)
- Importance of RFIs: RFIs play a crucial role in fostering inclusive growth by enhancing financial inclusion, ensuring credit availability, supporting agricultural finance, and empowering rural entrepreneurs.
- Components of RFIs: These institutions consist of various financial entities, including Regional Rural Banks (RRBs), Rural Cooperative Banks (RCBs), Scheduled Commercial Banks (SCBs), Small Finance Banks, Non-Banking Financial Companies (NBFCs), Micro Finance Institutions (MFIs), and local area banks.
- Operational Network: RFIs operate through an extensive network of banking outlets, such as physical branches and banking correspondents, to facilitate financial services in rural regions.
Regulation And Supervision By NABARD
- Regulatory Oversight: The National Bank for Agriculture and Rural Development (NABARD) supervises the operations and financial health of RRBs and RCBs.
- Focus Areas: NABARD evaluates various aspects, including business expansion, asset and liability composition, profitability metrics, and deposit-loan structures, to ensure the stability of rural banking institutions.
Establishment And Growth Of RRBs
- Formation: RRBs were set up in 1975 under the Regional Rural Banks Act, 1976.
- Expansion Over Time: Initially launched with five banks, the number of RRBs grew significantly, reaching 133 by 2006. However, after mergers and restructuring efforts aimed at improving efficiency, the count was reduced to 43 by 2023.
- Operational Reach: RRBs expanded from covering 523 districts in 2006 to 696 districts by 2023. Their branch network grew from 14,494 branches in 2006 to 21,856 branches in 2023.
- Current Status: As of March 31, 2024, RRBs operate across 26 states and 3 Union Territories, with 43 banks sponsored by 12 SCBs. The network comprises 22,069 branches, catering to 31.3 crore deposit accounts and 3 crore loan accounts.
Recapitalisation And Performance Of RRBs
- Financial Assistance: The government sanctioned ₹10,890 crore for recapitalisation of RRBs during FY22 and FY23.
- Sustainable Viability Plan: This initiative introduced operational and governance reforms to improve credit expansion, diversify business activities, reduce non-performing assets (NPAs), optimise costs, promote technology adoption, and strengthen corporate governance.
- Performance Improvements: The viability plan and recapitalisation efforts significantly boosted RRBs’ performance. In FY24, RRBs achieved record financial results.
- Profitability Growth: The consolidated net profit of RRBs surged from ₹4,974 crore in FY23 to ₹7,571 crore in FY24.
- Capital Adequacy: The capital-to-risk weighted assets ratio (CRAR) improved from 13.4% in March 2023 to 14.2% in March 2024. The number of RRBs with a CRAR below 9% declined from 9 to 4 during this period.
- Profit-Making RRBs: The number of profitable RRBs increased from 37 in FY23 to 40 in FY24, while loss-making RRBs decreased from 6 to 3.
Improvement In Asset Quality And Credit Expansion
- Declining NPAs: The Gross Non-Performing Assets (GNPA) ratio reduced from 7.3% in FY23 to 6.1% in FY24, marking the lowest level in the past decade. Net NPAs also dropped from 3.2% to 2.4% in the same period.
- Credit-to-Deposit Ratio: Increased from 67.5% in March 2023 to 71.2% in March 2024, the highest in 33 years, signifying improved credit deployment.
- Compliance with RBI Guidelines: In FY24, all RRBs successfully met the regulatory targets and sub-targets set under the RBI’s Priority Sector Lending (PSL) guidelines.