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Nabard objects to proposal on business houses taking over RRBs by Dinesh Unnikrishnan

Even before the Reserve Bank of India (RBI) finalizes the guidelines for handing out new bank licences, its draft proposal has evoked unease in the National Bank for Agriculture and Rural Development (Nabard), which oversees the country’s 82 regional rural banks (RRBs).

Nabard has taken exception to the banking regulator’s proposal to allow industrial houses to take over RRBs and convert them into full-fledged banks, saying such a move could dilute the banks’ primary objective of funding the farm sector.

“RRBs are playing a major role in rural finance. They have been recently recapitalized and are functioning well in their respective domains. To sustain this movement, retaining them in their current form will be desirable,” Nabard chairman U.C. Sarangi said on Friday.

In its discussion paper, released in August, RBI said allowing business houses to take over RRBs would offer multiple advantages.

They would give the business houses an opportunity to prove their ability to promote and sustain banks and help revitalize RRBs in underbanked regions, RBI said.

Analysts have their reservations as well. Industrial houses taking over RRBs will not be a viable proposal because RRB operations are limited to small areas, says Abhishek Kothari, a research analyst at Way2Wealth Brokers Pvt. Ltd. Besides, such a move could hamper credit flows to the agriculture sector, Kothari said.

“It is not at all feasible for business houses to acquire RRBs because of their nature of functioning and areas of operation,” Kothari said. “Also, once they are acquired and converted into commercial banks, they will come under the conservative regulatory structure of the Reserve Bank. There is also a chance that their primary operational objective will be affected.”

Finance minister Pranab Mukherjee, in his February budget speech, first said RBI was considering giving new bank licences to private sector entities if they meet the eligibility criteria set by the regulator.

That was followed by the RBI discussion paper inviting public comments detailing the “pros and cons” of various possible regulations for the new banks.

The paper outlined possible scenarios on capital requirements, ownership and foreign holdings.

“The decision or otherwise to allow industrial and business houses to promote banks would be a much more measured and balanced one due to the experience gained,” RBI said.

After receiving comments from various market participants, the Indian central bank is in the process finalizing the licensing norms.

The proposal to allow industrial and business houses to take over RRBs could affect the primary objective of RRBs—extending finance to agriculture and allied sectors, Sarangi said.

“I do not know to what extent RRBs will be able to lay the same importance in their primary operations as they do now once they are taken over by business houses,” Sarangi said.

He added that RRBs will also be left without the supervisory support being given by Nabard and technical assistance being extended by their sponsor-banks once private entities take them over.

Several business houses, including LIC Housing Finance Ltd, Religare Enterprises Ltd, Shriram Transport Finance Co. Ltd, L&T Finance Ltd, Bajaj FinServ Ltd, Birla Capital and Financial Services Ltd, Tata Capital Ltd and Reliance Capital Ltd have evinced interest in setting up banks.

Presently, 82 RRBs are operating in the country under various sponsor banks; 79 of them are in profit.

RRBs were established in 1975 with the objective of developing the rural economy. They were meant to create a supplementary channel to the cooperative credit structure and to ensure sufficient institutional credit for the rural and agriculture sector.

RRBs are jointly owned by the Central government, the state government and the sponsor banks, which share the issued capital of RRBs in the proportion of 50%, 15% and 35%, respectively.