Internet Banking Transaction Rights should be purely made ex-ante and not ex-post for the RRBs:
From a modest beginning of 6 RRBs with 17 branches covering 12 districts in December 1975, the number increased to 196 RRBs in 1987 and remained at the same level till 2005. In FY1995, the government initiated large-scale reforms that coupled with capital infusion, helped them turn profitable. However, in FY2005, 42% of the RRBs still carried legacy losses. In order to improve their operational viability and to take advantage of economies of scale, the government initiated a further consolidation program in FY2006. As a result, the number of RRBs declined from 196 in 2005 to 43 in FY2021, sponsored by 12 Scheduled Commercial Banks with 21,856 branches catering to 283 million depositors and 26 mn borrowers in 26 states and 3 UTs. Amalgamation drives in RRBs have helped boost their profitability and improved their asset quality while strengthening their capital base.
Regulation: Outcome vs. Rule
According to a research report authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser and contributed by Mihir Narayan Prasad Mishra, CGM (A&S), Rajeev Kumar Verma, AGM (RRB), MsNeelakshi Singh, AGM (RRB), all State Bank of India, RRBs’ financial vulnerability remains a significant area of concern due to multiple issues confronting them. The RRBs are subjected to a hybrid regulation: a combination of using specific outcomes to mandate rule-based regulations. We believe it might thus be better to clearly separate the outcome-based regulation from rule-based regulation. RRBs are surprisingly granted Internet Banking Rights purely based on maintaining minimum statutory CRAR at > 10% (out of 43 RRBs, 20 have CRAR of less than 10%) and NPA at <7% (25 RRBs have GNPA more than 7%).
RRBs are allowed to register for CGFMU ex-post purely based on maintaining minimum statutory CRAR at > 9% (out of 43 RRBs, 16 have CRAR of less than 9%) and NPA at <10% (only 33 RRBs have GNPA less than 10%). It will be useful if outcome-based regulation is separated from rule-based regulation and business opportunities are purely made ex-ante and not ex-post for the RRBs. This will enable RRBs to strive for better business penetration and diversify its portfolio. The authors believe that there is a need to have uniformity in regulations across RRBs, cooperative banks and even PSBs.
Competing SFB, Fintech, MFI
A series of interventions like pensions have made the cost structure much higher, making it imperative for RRBs to use and leverage technology to compete with SFBs, fintechs and MFIs. RRBs might be incentivised to graduate into SFBs. India’s largest RRB in terms of size of business – Baroda U.P. Bank (Rs720 bn) is bigger than the largest SFB (AU SFB), which has business size of Rs706 bn as of March 2021.
The PCR has shown a continuous improvement over the previous 3 years and was 51% as on 31 March 2021. RBI permitted the RRBs to amortise their pension liability over a period of 5 years, beginning FY19 to be provided for fully by FY23. This has impacted the profitability of the RRBs significantly during these years.
The report suggests that 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.
Healthy Balance Sheet Growth
Catalysed by capital infusion and bolstered by robust growth in borrowings (24.8%) and deposits (9.7%) on the liabilities side, the balance sheet (B/S) of RRBs witnessed a healthy growth of 10.8% during FY21 and stood at Rs6.52 trillion. After 2 consecutive years of losses in FY19 & FY20, RRBs, as a whole, reported a consolidated net profit of Rs16.82 bn during FY21. Even as 30 of the 43 RRBs posted net profit, 17 RRBs carried accumulated losses of Rs82.64 bn as at end-March 2021. Consolidated GNPA of RRBs has declined during FY21 (from 10.4% to 9.4%). Net NPA has declined in both absolute and percentage terms during FY21 (from 5.8% to 4.8%).
A/C Opening Through E-KYCRRBs showed a positive growth in number of BCs during the last 5-year period. Of the total 1 million BCs, RRBs have a share of 10%. The time has come to rationalize the BC commission charges (in some cases need to increase, while in some cases need to reduce). Focus should be on promoting SB account opening through eKYC, with improved remuneration. Reforms related to BCs may be rationalized for better financial inclusion. Aadhar enabled biometrics should overwrite traditional biometrics, the authors recommend.
Also, switching of CSP transactions from kiosks to micro-ATMs will not only increase mobility but will reduce operational cost also. One of the major reforms required at the BC level is the full migration to eKYC account opening, with Aadhaar enabled biometrics completely replacing the local biometric which is still used by a number of BC’s and is prone to frauds.
Business and Investment rules of RRBs, set 2.5 decade back, need to be aligned in accordance with best practices. The exposure norms of up to 5% of incremental deposit for investment in mutual funds under non SLR-securities may be relaxed beyond 5%. The applicable limit even for cooperative bank is at 10%. RRBs have assets of Rs3.34 trillion as on 31 March 2021. With a view to strengthening offsite supervision, early recognition of financial distress in large accounts, RRBs may be brought under the fold of CRILC. For facilitating synergies and cross subsidization, RRBs may be allowed to subscribe to perpetual debt instruments (PDIs) issued by other RRBs. ‘We recommend a rationalization in interchange fee as is the custom across PSBs & PVBs as there is currently no level playing field in infrastructure provided by all banks,” say the authors.
Create level playing field Adequate remuneration for RRBs may be allowed for government sponsored business (PM Kisan, DBT, etc.) Additionally, pension payment should be allowed through RRBs. Also RRBs should be allowed to operate PPF, Sukanya Samriddhi accounts and other government businesses to give a boost to their non-interest income, the report recommends.
IPO policy for RRBs may be notified for raising capital from market. EASE (Enhanced Access and Service Excellence) type of reform agenda may be initiated for RRBs to improve their performance and ensure financial stability, improved HR practices, and commercially prudent business practices, the report recommends. Categorization of RRBs, staffing norms all need to be relooked amidst changing conditions.
RRB’s financial fragility has suddenly increased due to the introduction of pension regulations at par with other nationalized banks in 2018. The refinance (short & long term) from NABARD has increased from Rs279 bn in FY20 to Rs450 bn in FY21, an increase of 61.2% As a result of these high-cost funds, the financial performance of a few RRBs are getting impacted adversely. The report says that refinance to RRBs may be rationalized at reasonable rates and prepayment should be allowed in case of old loans, wherein the refinance rate is higher, without penalty.
Recovery, Allied Share
Of the total demand amount of Rs2.2 trillion as of June 2020, RRBs have been able to collect only Rs1.7 trillion. Hence the overall recovery rate for bad assets is 77% (for some RRBs this is less than 65%, while for a few this is more than 90% also). The authors would like to see robust collection mechanism in place to increase the recovery rate of RRBs. RRBs agriculture outstanding is Rs2.3 trillion as of March 2021, of which 99.3% of lending went to farm credit only. This indicates RRBs inability or reluctance 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.
Develop IT Infra
RRBs need to refurbish their IT infrastructure through CRM, call centres and passbook printing infrastructure. The IT footprint in RRBs is generally poor and is limited to only basic services, which needs additional support. RRBs may be funded to implement and leverage IT to compete with SFBs. While all the RRBs have CBS, RTGS/NEFT facilities, only 37 have mobile banking licence. Only 19 RRBs have internet banking facility.
Application for CRM
RRBs need to have a separate application dedicated to customer relationship management (CRM). CRM is an effective policy tool to provide a detailed insight into customer needs based on analysis of customer preferences. The primary goal of CRM systems is to integrate and automate sales, marketing and customer support. Setting up a customer service call centre can help RRBs not only in terms of resolving customer issues but also in promoting other products and services. Adoption of Rupay debit card Aadhaar enabled Payment System (AePS) should be increased. Customer Service Point (CSPs ) should be provided with the infrastructure required for printing of passbooks by the respective sponsor banks. This will lower the burden on the RRBs as passbook printing takes a lot of time and resources of the RRBs that could be utilised better, says the report.