One size doesn't fit all

According to a news report, the union finance ministry wants the sponsoring banks for regional rural banks to merge the latter with themselves.

It is not clear how this is the best solution to the problem that RRBs pose. A little over half of the 196 RRBs run at a loss. This means that almost half are doing reasonably well for themselves.

Some of these are of course only marginally profitable, with a few in eastern UP surviving by becoming narrow banks (accepting deposits and making safe investments) after burning their fingers in lending.

But even after excluding the marginal ones, there is a significant minority of RRBs doing quite well. If that be so, then there is no logic in imposing a uniform solution. One size does not fit all.

The RRBs pose two entirely different sets of challenges. One involves those that have made huge losses. In this regard, there are clear regional patterns.

Nearly all RRBs in the south, except for some in the drought-prone areas of Andhra Pradesh, and in Punjab are doing well. Conversely, most RRBs in the north-east, Bihar, eastern UP, Orissa and Madhya Pradesh are doing badly. Maharashtra and West Bengal present a mixed picture.

What is more, RRBs of sponsoring banks which are well run tend to do well. A good number of RRBs sponsored by State Bank of India are faring poorly, but that is partly because, as with the choice of lead banks, the SBI has traditionally been landed with responsibility for the most backward areas. This scenario recommends a first line of action: if an RRB isn't broken, don't try to fix it.

Thereafter, two further issues emerge. One is how to take care of future requirements of the successful RRBs. The government can easily go in for disinvestment.

Successful RRBs are popular in their respective areas and it should not be difficult to market an RRB issue in its home area. The sponsoring bank can help out with things like computerisation and training, while interfering less and less with day-to- day running.

As for the unsuccessful RRBs, they are nearly all operating in backward areas which have a severe governance deficit of their own and whose sponsoring bank may not have taken an active interest in better governance in the RRB itself.

It is not clear how the situation will improve if the sponsoring bank takes over an RRB unless the law and order situation and the culture of loan repayment in the area concerned improve and the sponsoring bank starts paying greater heed to governance issues within the RRB.

The RRBs have acquired a new significance today with greater importance being given to micro credit and grassroots lending. With the rural cooperative credit structure impaired, successful RRBs should be encouraged to do more of what they have been doing.

Their identity and management structure should be strengthened, not lost in a larger entity. The "goners" need to be closed down.