In the meantime, the regional rural banks have extended their network throughout the country to a considerable extent. Initially, there were 196 regional rural banks operating in 28 states with nearly 14,700 branches. Till June 1996, these RRBs have been lending annually nearly Rs 1500 crore to the rural people and more than 90 per cent of the loan has been advanced to weaker sections.

As on September, 1990, the RRBs had advanced jointly to the tune of Rs 3,560 crore in the form of short-term crop loans, term loans for agricultural activities, for rural artisans, cottage and village industries, retail trade, self-employment projects and consumption loans etc.

Among all the states, Uttar Pradesh is the state where larger number of RRB branches has already been opened. Recently, after amalgamation, the number of RRBs has been reduced to 92.

During the last 30 years, RRBs have been participating actively in various programmes designed for providing credit assistance to identified beneficiaries included under the new 20 Point Programme, IRDP and other programmes designed for scheduled castes and tribes. RRBs are also advancing loans to weaker sections and physically handicapped persons under differential rate of industrial (DIR) schemes.

At the end of June 2014, there were 92 amalgamated RRBs, covering 518 districts of the country with a network of 18,291 branches. Out of all these branches of RRBs, 4,042 are the rural branches as on June 30, 2014 which constitute about 21.4 per cent of the total branches of RRBs.

The loans and advances stood at Rs 7,852.7 crore as at the end of September 1996. Again, Rs 15,423 crore were mobilised as deposits by RRBs at the end of September 1996. Consequent upon the permission of the Reserve Bank of India to determine their own lending rate with effect from 26 August 1996, most of the RRBs have been charging interest rates on their loans varying between 13.5 to 19.5 per cent per annum.

In recent years, under the softer interest regime, interest rates on loans advanced by RRBs have also declined considerably. Again, total amount of credit advanced to the agriculture by the RRBs increased considerably from Rs 6,069.79 crore in 2002-03 to Rs 43,968 crore in 2010-11.

As on March 31, 2002 total outstanding deposits of RRBs stood at Rs 44,327.81 crore and total outstanding advances stood at Rs 18,586.97 crore. Out of the 196 RRBs, 170 RRBs are making profit in recent years after introducing measures under banking reforms. Chalapathi Rao Committee on Regional Rural Banks has also recommended privatisation of profit making RRBs in a phased manner.

In order to make Financial Inclusion Plan of the government effective and to expand the penetration of banking network in unbanked and under-banked rural areas, regional rural banks (RRBs) also worked out its branch expansion plan for 2011-12 and 2012-13 with 10 per cent increase over the previous year.

Accordingly, RRBs could open 913 branches in 2011-12 against its target of opening 1247 branches. This figure compares favorably with that of opening of 521 branches in 2010-11 and 299 branches in 2009-10. For 2012-13, a target of opening 1845 new branches has also been set.

Regional Rural Banks have made commendable progress in advancing various types of loan to the weaker and under privileged section of the rural society. As per our recent RBI report, “The RRBs have fared well in achieving the objective of providing access to weaker sections of the society to institutional credit but the recovery position on the whole is not satisfactory.”

The working of RRBs was evaluated by the Narasimham Committee on the Financial System. Although RRBs were set up in order to provide a low cost alternative to the operation of commercial bank branches, particularly in the rural areas but the functioning of RRBs was not up to the mark.

The Committee mentioned three basic problems of RRBs:

(a) RRBs have a low earning capacity due to so many restrictions placed on the business undertaken by these banks;

(b) With the recent award of a tribunal the wages and salary scales of RRBs would be similar to that of commercial banks and thus the very idea of low cost alternative to the operation of commercial bank has been nullified; and

(c) The very area of operations of RRBs is also being utilised by the sponsoring banks by running their own rural branches leading to certain anomalies like duplication of services and expenditures on control and administration.

Thus the Narasimham Committee is of the opinion that the viability of RRBs should be improved without sacrificing the basic objective. The Government should also try to evolve a rural banking structure and base of RRBs with adequate financial strength and management and organisational skills of the commercial banks.

But there are some inherent factors which are very much responsible for this non-viable nature of RRBs. These include:

(i) RRBs can set up its branches mostly in unbalanced and under-banked areas;

(ii) The lending operations of RRBs are very much confined to target group composed of small borrowers of rural and semi-urban areas; and

(iii) The rate of interest charged by RRBs on their loan are comparatively lower.

The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAF1CARD) has also indicated the same above mentioned reasons responsible for growing non-viability of RRBs