Public banks averse to buying out rural banks

Public Sector Banks (PSBs) are reluctant to acquire the central government's 50 per cent stake in regional rural banks (RRBs). The banks feel that doing so would have a negative impact on their market valuation.

The reluctance to pick up the Centre's stake stems from the fact that about 60 out of the 196 RRBs have accumulated losses aggregating about Rs 2,000 crore.

Though the central government wants to offload its 50 per cent ownership in each of the RRBs in favour of the sponsor PSBs, the state-owned banks are averse to the idea.

Instead, the PSBs have suggested that the National Bank for Agriculture and Rural Development (Nabard) should takeover the Centre's stake and have operational as well as regulatory/ supervisory control over the RRBs.

"PSBs, which currently have operational control over RRBs, are now listed. Their priority now is commercial banking, not social banking. In this context, the Centre will do well to transfer its stake in the RRBs to Nabard and vest it with adequate powers to control them," sources clued in to the developments said.

Another option that was examined at recent deliberations between the PSBs and the Nabard is that the latter should float an apex institution ""- the National Rural Bank of India ""- to take charge of these banks.

The PSBs have offered to depute their personnel to run the RRBs once the Nabard takes complete charge.

PSBs have 35 per cent equity holding in RRBs, which were floated in 1975 to serve poor peasants, rural artisans and landless labourers with cheap credit and basic banking services. As sponsor banks, PSBs exercise operational control over RRBs.

The central government and the state governments own 50 per cent and 15 per cent stakes, respectively, in the RRBs.

The RRBs have become uncompetitive as their credit products have become less competitive, there have been no improvement in quality of their client base; and stiff competition from commercial banks.

As of March 2003, the RRBs run by Central Bank of India, State Bank of India, United Bank of India, and UCO Bank had run-up accumulated losses aggregating Rs 1,959.49 crore.

The accumulated losses piled up by RRBs run by other PSBs are comparatively much less.

A break-up of the accumulated losses of the four PSBs shows that: 18 out of 23 RRBs run by the Central Bank of India had posted accumulated losses aggregating Rs 611.12 crore; 21 out of 30 RRBs run by the SBI had posted accumulated losses aggregating Rs 584.97 crore; all 11 RRBs run by the United Bank of India had posted accumulated losses aggregating Rs 414.90 crore; and eight out of 11 RRBs run by the UCO Bank had posted accumulated losses aggregating Rs 348.50 crore.