1.0 Genesis

1.1 By April 1969, commercial banks had marked their presence in 617 towns out of 2700 towns. But their spread in villages was almost negligible as hardly 5000 villages out of a total of 6 lac villages had a banking presence. Even the grass-root cooperative societies viz Primary Agricultural Credit Societies covered only 32 percent of rural families.  It was in this backdrop that large commercial banks were nationalised with a view to bringing banking to the masses. In order to provide a boost to banking penetration in the rural areas, the Banking Commission, in its report in 1972, suggested setting up ‘Rural Banks’ in areas having a weak cooperative credit structure. Meanwhile, there were growing industrial relations problems in nationalised banks for improving remuneration structure and the reluctance of employees of these banks to serve in rural areas, notwithstanding business potential. The government of India constituted a Working Group (July 1975) under the chairmanship of M Narasimham, the then Additional Secretary, Ministry of Finance, Government of India, to examine in depth the setting up of ‘Rural Banks’.

1.2 The Working Group proposed the establishment of Rural Banks on a regional basis as a new set of regionally oriented rural banks, which would combine the local feel and familiarity of rural problems characteristic of cooperatives with the professionalism and large resource base of commercial banks. Based on the recommendation of the Working Group, the Regional Rural Banks (RRBs) Ordinance was promulgated on 26 September 1975 for the establishment of RRBs to provide credit for agriculture and other productive activities in the rural areas, particularly to disadvantaged sections of the society. Five RRBs were established in India on October 2 (Gandhi Jayanti), 1975. All these RRBs were sponsored by the State Bank of India and other public sector commercial banks. The Ordinance was subsequently replaced by the Regional Rural Banks Act, 1976.

2.0 Journey So far

    2.1 Early years (1975 to 1986) 
    In the initial years, all efforts were made to establish these banks in areas where there was an absence of adequate banking facilities. From a modest beginning of 6 RRBs with 17 branches covering 12 districts in December 1975, RRBs witnessed an expansion phase in their activities during the first decade of their existence. By the end of 1985, a total of 188 RRBs with 12606 branches were operating in the country. These banks had a total business of approximately INR 2700 crores (deposits- INR 1286 crore, loan outstanding - INR 1408 crore) and a CD ratio of 109 percent. The deposit growth of these banks also exceeded 35 percent during 1984-85. Eight more RRBs were established in 1986, taking the total number of RRBs to 196 by the end of the year 1986.

     2.2 Declining Phase (1986 to 1995)

The rapid expansion of RRBs also brought to the fore issues relating to their performance. The recovery performance of RRBs started deteriorating, and the overdue position of RRB showed an increasing trend with total overdue at 51 percent of total demand by the end of 1986. The concerns relating to the viability of RRBs were echoed as early as 1989 as Agricultural Credit Review Committee (Khusro Committee) pointed out that ‘the objective of effectively serving the weaker sections could be achieved only by self-sustaining credit institutions. RRBs structurally are not the institutions that could fulfil this role. The weaknesses of the RRBs are endemic to the system, and non-viability is built into it’. The National Industrial Tribunal Award, 1990, which provided for parity of pay scales of RRBs with the Sponsor Bank, also diluted the low-cost structure of these banks and affected their financial viability. During 1994-95, while 32 RRBs earned profits of INR 29 crore, the remaining 164 RRBs incurred a loss of more than INR 400 crores. These operational problems led to change in their business strategy, and these banks started shifting focus from advances to investment for deployment of their funds.


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