RRBs need uniform regulations

Regional Rural Banks (RRBs) need to be brought under uniform regulations along with co-operative banks and even public sector banks, according to a report by the economists at State Bank of India. It also said that several regulations for RRBs need to keep abreast with changing times and need to be updated.

“We believe it might be better to clearly separate the outcome-based regulation from rule-based regulation” report titled “The fallacy of using outcome based intervention as a yardstick for rule based regulatory intervention in Regional Rural Banks – Key Issues & Recommendations” said.

The RRBs are at present subjected to a hybrid regulation: a combination of using specific outcomes to mandate rule-based regulations. This may have queered the pitch for RRBs in terms of performance indicators. ” We believe it might thus be better to clearly separate the outcome-based regulation from rule-based regulation” the report said. In a rule based regulatory framework, the regulator sets rules that needs to be adhered to by regulated entities. The rules in themselves aim to “force” a specific outcome.

In an outcome based regulatory framework, there is a clear move away from adherence to prescriptive rules to high level outcomes that need to be achieved. An outcome-based regulation eliminates one size fits all approach to regulation and enables entities to have a more focused approach.

The report called for the need for alignment of business and investment rules of RRBs set two and a half decade back with best practices and in sync with Cooperative Banks and even PSBs.

The RRBs also need to partner effectively with state governments to strive for the continued improvement in credit culture and thereby need to adapt to the fast-changing economic landscape and reorient their business model accordingly.

RRBs agriculture outstanding is Rs 2.3 lakh crore as of Mar’21, of which 99.3% of lending went to farm credit only. ” This indicates RRBs have been reluctant to lend beyond the farm credit. The share of agriculture infrastructure lending is only 0.3% of total agriculture lending. RRBs should thus focus more on allied activities in order to diversify their lending portfolio. RRBs should explore tie-up with the government owned agri/ allied, agri activities like dairy etc) and agribased fintech Companies besides exploring SHG/JLG linkages, where NPA in the portfolio is low” the report said.