One State-One RRB

• 10 May 2025

Source: BL 

Why in News? 

The 4^th phase of Regional Rural Bank (RRB) consolidation under the ‘One State-One RRB’ (OS-OR) plan has been rolled out in 10 states and one Union Territory, further shrinking the number of RRBs in India.  

• This move aims to boost operational viability and efficiency, but concerns persist around staffing, technology integration, and regional risks. 

What is the One State-One RRB Policy? 

• About: OS-OR Policy is a reform initiative by the Department of Financial Services aimed at consolidating multiple RRBs within a state into a single unified entity.  
  • The consolidation of RRBs began in 2005, following the recommendations of the Dr. Vyas Committee (2001), which was constituted by the Reserve Bank of India (RBI). 
• Phases of Consolidation: Implemented under Section 23A(1) of the Regional Rural Banks Act, 1976, which allows mergers in the public interest. 
  • Phase 1 (FY 2006 – FY 2010): RRBs sponsored by the same bank within a state were amalgamated. RRBs were reduced from 196 to 82. 
  • Phase 2 (FY 2013– FY 2015): RRBs across different sponsor banks within a state were amalgamated. RRBs were reduced from 82 to 56. 
  • Phase 3 (FY 2019– FY 2021): The 3rd phase focused on the OS-OR principle, reducing RRBs in larger states and consolidating them in smaller ones.  
    • As a result, the number of RRBs dropped from 196 in 2005 to 43 by March 2021, improving profitability, capital, asset quality, and business. 
  • Phase 4 (FY 2025 Onwards): Under OS-OR, the consolidation of RRBs has reduced the total number from 43 to 28.  
    • Each restructured RRB will have an authorized capital of Rs 2,000 crore, providing a stronger base for credit expansion and economic support in their respective states. 
• Impact: In FY 2023–24, RRBs recorded their highest-ever net profit of Rs 7,571 crore. The OS-OR model is expected to further support inclusive rural development and boost the rural economy. 

Regional Rural Bank

• About: RRBs were established in 1975, following the recommendations of the Narasimham Committee on Rural Credit (1975), and formalised under the RRB Act, 1976.  
  • Their aim is to strengthen the rural economy by providing credit and other banking services to small and marginal farmers, agricultural labourers, artisans, and small entrepreneurs in rural and semi-urban areas.  
  • The first RRB was Prathama Bank, headquartered in Moradabad, Uttar Pradesh. 
• Ownership: The ownership of RRBs is shared among the Government of India (50%), the concerned State Government (15%), and the sponsor bank (35%). 
• Regulation: RRBs are regulated by the Reserve Bank of India under the Banking Regulation Act, 1949, and supervised by NABARD.  
  • For taxation, they are treated as cooperative societies under the Income Tax Act, 1961. 
• Priority Sector Lending: The RBI has set an enhanced target for Regional Rural Banks (RRBs) to lend 75% of their Adjusted Net Bank Credit (ANBC) or 75% of ANBC or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher, to the Priority Sector Lending (PSL).  
  • This is in contrast to the 40% target applicable to commercial banks. RRBs can sell their priority loan portfolio through Priority Sector Lending Certificates (PSLC) to commercial banks.

What Challenges Persist Despite the Consolidation of RRBs? 

• Cost Optimization vs. Operational Constraints: Despite the consolidation, RRBs still face high operational costs. For instance, in 2023-24, the cost/income ratio was 77.4% and wages/operating expenses ratio was 72%, indicating inefficiency. 
  • Cost optimization is important, but it depends on whether each RRB can handle the combined branches and staff from the mergers. Some branch reductions are unavoidable, but adjusting the staff may face frictions. 
  • Despite tech advances, personal engagement with villagers is essential due to low financial inclusion and literacy, raising costs. Adopting new technologies, including cybersecurity, also demands significant investment. 
• Concentration Risk: In a scenario where a State’s agricultural sector fails, a single RRB would absorb the full impact of losses, which was not the case under the previous model where risks were spread across multiple RRBs. 
  • This concentration can exacerbate regional economic vulnerabilities, especially in the event of sectoral downturns. 
• Inter-Governmental and Regulatory Challenges: The three-way ownership structure (Central and State governments, sponsor banks) and two regulatory authorities (RBI and National Bank for Agriculture and Rural Development (NABARD)) create administrative complexities and slow decision-making processes, stifling the effectiveness of RRB operations. 
  • This multiplicity of owners and regulators complicates the governance structure, leading to inefficiencies in RRB management. 
• Economic Viability and Regional Considerations: The reduction in RRBs under OS-OR makes economic sense, but consolidation must consider each state's unique economy, demography, and geography, as a one-size-fits-all approach may not be effective.

Drishti Mains Question:

Examine the impact of the One State-One RRB policy on the operational efficiency and viability of RRBs. What challenges persist despite the consolidation?

UPSC Civil Services Examination Previous Year Question (PYQ) 

Prelims

Q. Which of the following grants/grant direct credit assistance to rural households? (2013)

1. Regional Rural Banks 
2. National Bank for Agriculture and Rural Development 
3. Land Development Banks 

Select the correct answer using the codes given below: 

(a) 1 and 2 only 
(b) 2 only 
(c) 1 and 3 only 
(d) 1, 2 and 3 

Ans: (c)