31-10-2012, 05:38 PM
Financial Performance of RRBs: A Study of Pre and Post Amalgamation Period
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Abstract
RRBs in India emerged as a potentially powerful instrument for achieving rural development through providing resources for agriculture, industry, trade, commerce and other productive agencies operating in rural sectors. But poor level of rural savings, inadequate infrastructure, low deposits have pushed up the cost of operations and many RRBs have to incur financial losses. Therefore in 2005, the regulatory bodies announced amalgamation of some RRBs and the practice is still continued. The amalgamation of RRBs assumed to have strong implications on the productivity and profitability of Indian RRBs. In this reference the present study attempts to analyse the impact of this amalgamation on the average financial performance of RRBs on the basis of five parameters viz., traditional lending-borrowing functions, social commitment, profitability, diversification and operational cost. These parameters have been studied through nine variables viz., average CD ratio, ID ratio, CID ratio, PL ratio, ROA, OP ratio, Interest ratio, non-interest ratio and intermediation cost ratio. The study analysis the significance of difference in these variables occurred during 12 years from 1999-2011.
Keywords: Amalgamation, diversification, operational cost, profitability, RRBs, social commitment, and traditional functions.
1. Introduction
Rural development in India is sine-qua-non of overall development. Scarcity of capital, dearth of investment opportunities, disguised unemployment, vicious circle of poverty are some generic issues calling for immediate steps to bring radical changes in the traditional scenario of rural economy of India. The initiation of rural development programmes like Community Development Programme, Self-help Programme, Panchayati raj
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Programme, National Rural Employment Programme, Integrated Rural Development Programme etc., depict the growing concern of government of India to address the issue. But the evidence states that inspite of effective planning and successful launch of several rural development programmes the rural sector of the economy was in dire necessity of such a financing unit which could extend resources for different affairs proposed to be executed in rural sector. In this series a need was also being felt to establish a credit agency that could combine the resource orientation of commercial banks and rural orientation of co-operatives. As a result of this, in 1975, five Regional Rural Banks (RRBs) came into existence through promulgation of Regional Rural Banks Ordinance. Later on the ordinance was replaced by the Regional Rural Banks Act 1976. RRBs in India emerged as a potentially powerful instrument for achieving rural development through providing resources for agriculture, industry, trade, commerce and other productive agencies operating in rural sectors. Since its establishment there has been a great expansion in terms of number of RRBs and its branches. But poor level of rural savings, inadequate infrastructure, low deposits have pushed up the cost of operations and many RRBs have to incur financial losses. The financial unsoundness of these RRBs motivated regulators to initiate steps to reconstruct the RRBs. In 2005, the regulatory bodies announced amalgamation of around 63 RRBs and the practice is still continued. The amalgamation of RRBs assumed to have strong implications on the productivity and profitability of Indian RRBs. In this reference the present study attempts to analyse the impact of this amalgamation on the financial performance of RRBs.
2. Reconstruction of RRBs
The issue related to reconstruction of regional rural bank obtained its ascendancy in early 80s. But since that period it has always been a debatable issue for the regulators and stakeholders. Initially in early 1981, the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD) recommended that the loss incurred by a RRB should be made good annually by the shareholders in the proportion of their shareholdings. However the same was not accepted and only the claim for provision of financial support from shareholders was approved. Later on in 1984, Kelkar Committee recommended that in order to ensure economic viability of RRBs, the small and uneconomic RRBs should be merged with financially sound banks. Five years down the line in 1989, Agricultural Credit Review Committee popularly known as Khusro Committee has pointed out that the weaknesses of RRBs are endemic to the system and non-viability is built into the system. Therefore the committee proposed the merger of the same. In 1994, Bhandari Committee identified 49 RRBs which required a comprehensive restructuring. The option of liquidation again was mooted by the Committee on Revamping of RRBs, 1996 (Basu Committee). In 1997, Thingalaya Committee suggested that weaker RRBs must by identify and should be liquidated. It has also recommended the merger of these RRBs with neighbouring RRBs. Thereafter different other committees like Expert Committee on Rural Credit, 2001 (Vyas Committee I), Chalapathy Rao Committee 2003, Purwar Committee 2004 have also found the reconstruction of RRBs as an only viable option to ensure the survival of weaker RRBs. In 2005 Sardesai Committee has also suggested the route of merger/amalgamation of RRBs so as to improve the operational viability of RRBs and take advantage of the economies of scale. In view of the above facts, RRBs were exposed to the decision of mergers and amalgamation in 2005. The number of banks before and after the amalgamation may be summarised by the table1.
3. Need of the Study
There is an availability of vast literature on financial performance of scheduled commercial banks. But there is an extreme dearth of significant studies in the arena of RRBs. In this reference the present study attempts to contribute little but significant contribution to the literature. The implications of this paper are expected to be of great use to the policy makers for designing further strategy for RRBs.
4. Objectives of the Study
The present study aims at the following objectives:
To analyse the effect of amalgamation on the average financial performance of RRBs.
To study the impact of amalgamation over traditional functions (lending and borrowing) of RRBs.
To study the impact of amalgamation over profitability of banks.
To study the impact of amalgamation over diversification strategy of banks.
To study the impact of amalgamation over operational efficiency of banks.