The Pros and Cons of Privatizing Rural Regional Banks in India
India's rural financial sector, dominated by Rural Regional Banks (RRBs), has faced numerous challenges, including non-performing assets (NPAs) and chronic losses. The question of whether these banks should be privatized has sparked considerable debate within the country's regulatory and policy-making circles. This article examines the current state of RRBs, the hurdles to privatization, and the broader implications of such a move on the Indian banking sector.
Current State of Rural Regional Banks (RRBs)
In the past, RRBs were established under the Rural Regional Banks Act. These banks serve as an essential link between rural communities and formal banking systems, offering a wide range of financial services specifically tailored to the needs of rural populations. However, the shareholding pattern of RRBs is complex, involving the central government, state governments, and sponsoring banks. While no provisions exist for public shareholders, the current structure of ownership means that even if the government allows 20% disinvestment, the ownership cannot be changed. This necessitates amending the initial RRB Act to facilitate privatization.
Government's Intentions and Future Outlook
Recently, the Indian government has made it clear that they intend to demerge from non-strategic businesses. Finance Minister Sajjan Jindal has indicated that all Public Sector Units (PSUs) except for a few will be privatized. This implies that RRBs, which are currently partially owned by the government, have a real chance of being privatized in the next 2-3 years. However, the chances of privatization are limited for sponsored banks that may themselves be merged or privatized.
Challenges to Privatization
Several hurdles stand in the way of privatizing RRBs. Firstly, the banks are fraught with large NPAs and chronic losses, making them unattractive to potential private investors. According to the Narasimham Committee recommendations, the Indian banking sector needs a significant overhaul, with the introduction of 3-4 international banks, 10 national banks, and numerous smaller banks. This restructuring has led to several private payments banks being licensed in recent years, aimed at enhancing financial inclusion.
Furthermore, the government may not be willing to sell off institutions with extensive rural coverage, which plays a crucial role in implementing anti-poverty measures. The recent disinvestment in HP Corporation and ONGC's purchase of shares indicate that the government may prioritize keeping certain banking institutions, especially those with broad rural outreach, within public control.
Alternatives and Future Outlook for RRBs
Given the challenges, one possible route forward is the merger of RRBs with their sponsoring banks. The committee on RRBs has recommended such mergers, seeing them as a way to form larger, more robust banking entities. Sponsoring banks may also merge RRBs with themselves to create bigger, stronger national banks, aligning with the government's focus on creating a more consolidated banking sector.
In conclusion, while privatization of RRBs seems unlikely in the short term, the vested interest of the government in maintaining control over banks with extensive rural coverage suggests that these institutions are likely to remain part of the public sector banking structure in the foreseeable future.