The recent financial results of gramin banks in India have silenced the soothsayers, who have been predicting the dismal failures of these grass root-level credit agencies. About two decades ago they were a bunch of loss-incurring rural credit outfits, viewed with scorn by the urban-bred bankers . In 1990-91, out of 196 gramin banks, 152 banks were incurring losses. Their accumulated losses were Rs.369.36 crore. A few of them could never earn profit during the long periods of their existence. In some of them annual wage bill was higher than the total income. Improvements in their financial results started emerging after the partial de-regulation of interest rates and relaxations in lending to non-target groups. In 2005, just before the consolidation process started, the number of loss incurring gramin banks came down to 30 and the number of them having accumulated losses was 82.

Thanks to the steps initiated since 2005 in amalgamating them at the state level, there has been considerable improvement in their bottomlines. With their number coming down as a result from 196 to 86, they have become stronger and more visible, because of the extended operational areas. A few of them have large branch networks – Uttar Bihar Gramin Bank having 868 branches in Bihar and Baroda Uttar Pradesh Gramin Bank having 671 branches in Uttar Pradesh. Another big bank in Bihar is Madhya Bihar Gramin Bank-407 branches. West Bengal also has a big bank; Bangiya Gramin Vikash Bank operating with 463 branches. Interestingly, some of the gramin banks, which were named after prominent historical places like Magadha, Mithila, Nalanda, Pataliputra and Vaishali, have lost their identity in the process of merger.

Better corporate governance

One of the tangible impact of mergers is the reduction in the number of gramin banks from 196 to 86. Its implication from the angle of supervision and guidance to the gramin banks from the parent banks is the reduction in the managerial burden. Two of the bigger banks, State Bank of India and Central Bank of India, had fairly large number of sponsored gramin banks. Now their numbers have reduced significantly. State Bank of India had 30 gramin banks to guide and support; now their number has come down to 17. Central Bank of India had 23 gramin banks under its sponsorship; now it has to take care of only 8 gramin banks.

Other public sector banks like Punjab National Bank and Bank of Baroda had 19 gramin banks each under their parental care. Today, they have to bestow their attention only on six and five gramin banks respectively. As both of them have greater international presence, they can now concentrate on expanding their cross-border business. The details of the reduction in the number of gramin banks under the guidance of each sponsoring in 1987 (when the last gramin bank was born) and in 2009 (after the mergers) are given in Table.

More the number of sponsored gramin banks, higher were the intangible investments the parent banks had to make for nurturing them. Besides sparing the services of their executives to manage the gramin banks, board-level participation by their executives was adding to the pressure of work for the parent banks. Though the emoluments of the deputed staff are reimbursed, the time spent on consultation and guidance cannot be priced and recovered.

State governments, as minority shareholders, have been sleeping-partners in many cases. There was no continuity in their board-level participation, specially from the district level officials. With less number of gramin banks in many states now, it should be possible for the state governments to play an active role in the governance of these banks. The reduction in the number of gramin banks in some states is substantial. In Uttar Pradesh, for example, as against 40 gramin banks in the past, now there are only 12. In Madhya Pradesh, the number has come down from 24 to 8.

Improved bottomlines

The most important outcome of the process of mergers is the reduction in the number of loss making gramin banks. Out of 86 banks, only six have reported losses during the financial year 2008-09. The volume of loss was only Rs.36 crore while the profit earned by 80 profit making banks was Rs.1405 crore. The net profit of the gramin banking sector is Rs.1369 crore as on March 2009.

The net profits of a few of the gramin banks are higher than those of some of the private sector banks of the old generation. Andhra Pragathi Gramin Bank, based in Kadapa, handles a volume of business of Rs.6210 crore with 356 branches and has a net profit of Rs.76 crore during 2008-09. The Thrissur-based Dhanalakshmi Bank Ltd has a total business of Rs.8212 crore, while its net profit is Rs.57 crore only. Another older bank born in 1920, Catholic Syrian Bank Ltd, has 360 branches in Kerala and other southern states, handles business of the magnitude of Rs.10,107 crore. Its bottomline is not higher than Rs. 37 crore. There are two other smaller private sector banks earning a net profit less than Rs.50 crore. Nainital Bank Ltd in Uttarakhand has a business volume of Rs.3276 crore; net profit, Rs.36 crore. Ratnakar Bank Ltd, in Maharashtra earns Rs.30 crore with a business level of Rs.1687 crore during 2008-09.

Among the other gramin banks, which have shown remarkable increase in their earnings are: Andhra Pradesh Grameena Vikas Bank- branches 525 and net profit Rs.69 crore; Lucknow Kshetriya Gramin Bank operating in Uttar Pradesh with 248 service points, earns a net profit of Rs.30.27 crore. A small gramin bank in Chhattisgarh- Surguja Kshetriya Gramin Bank with 85 computerised branches, managing a total business of Rs.897 crore earns a net profit of Rs.21.65 crore and has no accumulated losses. In its annual report of 2008-09, it provides the data pertaining to the financial results of each branch including the NPA figures. A notable feature is that only two branches have incurred losses, while the per branch profit figures vary from a level as low as Rs.0.32 lakh to as high as Rs.1.19 lakh.

Towards modernisation…

After 34 years, these gramin banks have come of age. The rustic belles have adopted sophisticated banking transactions, computerised branch operations, bringing many branches under CBS. Some of them have installed bio-metric based ATMs. The process of their amalgamation at the state-levels has enabled them to expand their operational areas, improving thereby their viability.

Surprisingly, some of the gramin banks have made their appearance in metropolitan centres. Sixteen of them have their head offices located in metropolitan centres and state capitals. In these centres they have 73 branches, out of the total number of 15,384 branches. Prominent among them is Aryavart Gramin Bank having 12 branches in Lucknow.

Another symbolic change in their credit pattern is the emergence of a couple of large advances. They have predominantly small borrowing accounts, of less than Rs.25,000 per account, which are 1.62 crore in number. According to the 2008-09 data, they have five accounts in the credit group of Rs.10 crore to Rs. 25 crore, where the total amount outstanding is Rs.34 crore.

New era of expansion...

In the early days, their annual reports were no better than shabbily prepared cyclo-styled sheets. As the number of shareholders was and even now continues to be only three, these reports were only meant for records. Today, they have glossy annual reports, colourfully printed with photos of the chairman handing over tractors to farmers in remote villages!

These gramin banks were unknown outside their states. Their branches were confined to a few districts in a selected state. The staff recruitments were very rare, as there was an embargo on addition to their staff strength. Their career prospects were not clearly defined till recently. Now a gramin bank from the north publishes an advertisement for staff recruitment in the southern editions of a national daily! Websites of head-hunters and placement companies are flush with details of the vacancies available in different gramin banks. A new era of expansion begins for them now.

Mistakes of the past…

The absence of a long term plan for the promotion of gramin banks was the root cause for the poor performance of these banks in the past. They were in fact thrust upon the banking system in great hurry by the Government of India in 1975. A committee was appointed under the chairmanship of M Narasimham on 1 July 1975 to explore the possibility of setting up new rural banks. The Report of the committee was submitted within a month, by 31 July 1975. By 2 October 1975, on Gandhi Jayanthi day, three public sector banks were authorised to sponsor gramin banks by an ordinance. One of them is Prathama Bank, sponsored by Syndicate Bank in Moradabad. The Regional Rural Banks Act 1976 was passed only next year.

Conceived and delivered in a hurry...

The Government of India, not satisfied with the progress made by public sector banks in expanding their rural base immediately after bank nationalisation, behaved like a very impatient mother-in-law, who wanted her daughters-in-law (nationalised banks) to deliver genetically superior babies to improve their rural credit delivery mechanism. This is how the new credit agency designed to operate exclusively in the rural areas came into being. The Reserve Bank of India (the uncle at Mint Street) was not much impressed and there is a reason for this: "there is no evidence of the government having consulted the Reserve Bank before creating the RRBs," it is recorded in the history of the Reserve Bank of India. The state governments (aunts) were not enthusiastic about rearing the new born babies. A wet nurse was found in NABARD for taking post-natal care. The sponsoring banks reared these institutions, some with parental care and a few with lack of interest. Performance of the rural banks in their infancy was varying in accordance with the nature and extent of the support extended by the parent banks.

The number of gramin banks started growing up haphazardly between 1975 and 1987, as many states started taking initiative in establishing them, though belatedly in some cases. During the first ten years, the number reached 183, a large number of them were in Uttar Pradesh - 39 gramin banks and in Madhya Pradesh - 23 gramin banks. It took a long number of years for these banks to attain viability. By 1987 the total number of gramin banks went up to 196, operating in 363 districts all over the country. Thereafter they have passed through difficult periods, when their continuation in business itself was in doubt.

Started as a low cost delivery agency...

One of the distinct features of gramin banks was its propagation as a low cost rural credit delivery agency. This was designed by having a lower salary structure for their staff compared to that of the commercial banks. Directed to extend credit facilities to only the target groups at lower interest rates, they could not afford to offer higher salaries. The agitation for wage parity by the unionised staff resulted in the revision of the pay scale on parity with the commercial banks. Unable to bear the huge wage bills all too suddenly without enhancing their earning capacity, all the gramin banks were pushed into red. Much later, when relaxations in target lending were introduced and interest rate structure was partly de-regulated, they could improve their bottomlines. The smarter among them adopted the investment route rather than the lending route to strengthen their toplines.

Financial Sector Reforms shifted the whole focus from mass banking to profitable banking. Directed credit and interest regulations started losing their place in the set of priorities of the bankers and their owners. The authors of financial sector reforms were on the verge of writing the obituary of gramin banks. Procrastination on the part of major stakeholder gave them a new lease of life.

The discounted alternative modes…

Looking back at the unplanned growth of gramin banks in India, it can be inferred that these banks were never given the importance and the support they deserved as the strategic players in delivering rural credit. The core competence of commercial banks was not rural banking. It was thrust upon them and they tried to run the show in accordance with the dictates of the regulator.

Even during the infancy of gramin banks, a few of the nationalised banks sponsoring gramin banks have felt the need for hiving of their rural banking business to their gramin banks. In 1979, hardly three years after the enactment of the Regional Rural Banks Act 1976, three banks thought it fit to suggest to the Reserve Bank that they were willing to transfer the business of their rural branches to the gramin banks sponsored by them on a selective basis. It is recorded in the history of Reserve Bank of India that this suggestion did not find favour with the regulator.

Road map for rural banking absent

Prof. M L Dantwala, one of the directors of the Central Board of the Reserve Bank of India, had strongly argued for the total replacement of rural branches of commercial banks by RRBs. He pleaded: "my submission is that the policymakers should take a firm decision on the type of rural banking structure it wishes to establish; or more specifically, decide as to which of the patterns - the RRB with its low cost, low profit or the rural branch network of commercial banks - is better-suited to the rural ethos and the requirements of rural borrowers. The two patterns can be suitably linked or, to use the more familiar jargon, coordinated, but the two cannot coexist or to put it more clearly, expand simultaneously on parallel lines."

Even today, the policymakers and the regulators do not have a long term perspective of the future shape of rural banking in India. Ad hocism continues to rule the policy directives in all spheres of planning. The process of merger of gramin banks initiated by the Government of India since 2005 has become a fait accompli, reducing their number. The Reserve Bank of India continues to prod commercial banks to expand their rural branches. When the new private sector banks were licensed in the 1990s, they were exempted from opening rural branches. Subsequently, they were also roped in to expand the rural branch network. A definite road map for rural banking remains conspicuously absent.

Future landscape…

Small does not appear to remain beautiful in the current banking scenario in India. The number of small commercial banks in the private sector has been declining annually during the last few years. The new generation banks in the private sector have adopted the M&A route for their growth. There is the talk going on for some time about the consolidation of the banking sector hinting at the merger of public sector banks. The idea is to create a few stronger and globally competitive banks. The merger of gramin banks accomplished recently has been instrumental in creating bigger gramin banks by reducing their number. Some of them have emerged as bigger than five of the old generation banks in the private sector. There is scope for scaling up their operations.

Make gramin banks the single rural credit agency

I have been pleading for the consolidation of the rural banking structure by the commercial banks hiving off their rural branches into the gramin banks sponsored by them. Gramin banks should be the single rural credit agency operating in the rural areas besides the cooperative banks. The nationalised banks can take up the process of expanding the size of their gramin banks by merging their rural branches with them at the state level. Though rural branches make profits now, unlike in the past, they do not generate enough profits to sustain the interest of the profit-conscious bank managements. It may be noted that the share of rural branches in the total deposits of the banking system has been marginally declining during the last five years. It has come down from 12.2 per cent in 2005 to 9.3 per cent in 2009. During the same period, the fall in the share of rural branches in the total amount of credit deployed is from 9.2 per cent to 7.3 per cent. As 40 per cent of the branches are operating in rural areas, inferentially their contribution to the net profit would be lower than that of the metropolitan branches. Therefore hiving off the rural branches may not make a dent on their overall profitability.

Make them minisupermarkets selling all financial products

Rural banking has a crucial role to play in the Indian economy, whatever may be the shape of overall financial sector. In the changing context, the rural branches of gramin banks should not remain as retail credit outlets, selling only a few banking services as in the past. They should be equipped to undertake all types of banking business, which the commercial bank branches do. The over-riding emphasis on small loans and directions for lending to target groups have to be toned down, if not totally avoided. They should emerge as mini super markets selling all financial products.

It is reported that the Reserve Bank of India is considering the revival of the promotion of Local Area Banks, with a view to hastening the process of financial inclusion. Initiated in 1996, Local Area Banks were a non-starter. They made more noise before their appearance than afterwards. Six of them were established in Punjab, Rajasthan, Andhra Pradesh and Maharashtra. Two of them bowed out within a couple of years. Very low capital base and restricted area of operation were two of their major constraints. If the new banks of this species are asked to operate only in the grossly under-banked districts, they may not survive for long with their meagre capital. Micro finance institutions are spreading out very fast only in those districts which are better banked. In some of the backward districts, specially in the north-eastern states, even the grass-root level agencies like gramin banks could not make much headway. Why to dump the local area banks into these areas?