Unprofitable, growing bad assets: The tale of existential crisis at RRBs

They are mostly loss-making, with growing bad assets so the agricultural sector prefers commercial banks

Last month, the finance ministry issued draft guidelines setting the criteria for the listing of regional rural banks (RRBs) on the stock exchange. The guidelines included listing banks that have earned an operating profit of more than Rs 15 crore in three out of the past five financial years, a net worth of Rs 300 crore and a capital adequacy ratio above the required 9 per cent in the past three years.

Yet RRBs have largely been unprofitable for the government. The government has amalgamated various standalone RRBs at different points in time to cut overhead costs among other reasons. A decade ago, the total count of RRBs stood at 82. Since then, their number has reduced to 43. Consequently, there has been a steady decline in the number of profit-making RRBs from 75 in FY11 to 34 in FY22. Out of the RRBs in operation today, just 20 have made a profit of over Rs 15 crore in the past three years (<see chart 1>).

RRBs, which are jointly owned by the central government, state governments and sponsoring banks, were set up in 1975 with the intent of bringing financial services and products to agricultural workers and labourers. Although the government is trying to strengthen the RRBs with these new measures, a Business Standard analysis of the financial statements of all the RRBs found that the quality of their assets has been declining over the past decade.

Between FY11 and FY22, net NPAs have doubled from 2.05 per cent to 4.68 per cent. Net NPA is the actual loss suffered by the bank because of loans that have not been repaid by the borrowers (<see chart 2>).

The data also found that the agricultural sector borrows more from commercial banks than the RRBs. While the share of institutional credit by the commercial banks for agriculture and allied activities has increased from 65 per cent to 76 per cent between FY11 and FY22, the share of RRBs in the total credit has remained constant between 11 per cent and 13 per cent (<see chart 3>).

In FY22, institutional credit in the RRBs marginally declined to 11 per cent from 12 per cent in the previous year. In other words, the chances of RRBs gaining good valuations if they list on the stock exchanges are extremely narrow.