List of Annexures

The Task Force report is the product of many collaborative efforts. The Task Force met and discussed on various aspects of empowerment of Boards of RRBs for operational efficiency. The Task Force wishes to place on record, its gratitude to Dr. Y.V. Reddy, Governor, Reserve Bank of India for entrusting this task of national importance as also for providing necessary guidance. Smt. Usha Thorat, Deputy Governor, Reserve Bank of India had taken initiative to call a consultation meet of commercial banks and gave valuable inputs for the Task Force. We thank her as well as all the senior personnel of RPCD of Reserve Bank of India. The Task Force generated and considered a vast amount of materials in its deliberations and meeting with stakeholders and others. We would also like to mention the cooperation received from NABARD officials of Uttar Pradesh RO, Lucknow, Bihar RO, Patna and Assam RO, Guwahati, and the Chairman and staff of Baroda Eastern UP Gramin Bank, Assam Gramin Vikas Bank, and Uttar Bihar Kshetreya Gramin Bank, who not only coordinated the field visits at their end, but also provided significant inputs.

2. The Task Force Secretariat has played a crucial role in collecting information, analysing data and preparing background notes. The Task Force has a special word of commendation for the Secretariat set up for it by NABARD. The Task Force would like to mention Shri Lajja Ram, CGM, Shri P Satish, CGM, Shri B.B.Mohanty, CGM, Shri U.N. Srivastava, CGM, Shri D P Mishra, GM, Shri M.V. Ashok, GM, Shri K.S. Pillai, DGM, Shri N.C. Saha, DGM, Shri N.P. Mohapatra, AGM, Shri P.K.Kapoor, AGM, Shri S.J. Parkar, Manager and Shri Sunil Kumar, Asst.Gen.Manager, NABARD, Head Office, Mumbai who brought to bear on the logistical and operational aspects as also in collating and analyzing inputs received from various quarters. The contributions of Smt. Vandana Venugopalan, Smt. Bharti M. Jagasia, Smt. Geeta Yadav, and Shri V.P. Khapekar, for their secretarial assistance are acknowledged. We also acknowledge the contribution made by Monitoring Section of IDD comprising of Dr.U.S.Saha, DGM, Shri V.Mani, Manager and Shri A.K.Bohite . The Task Force would like to thank the Training Establishments of NABARD and particularly Sri G R Chintala, Faculty Member, BIRD, Lucknow for their valuable inputs. The Task Force also wishes to thank many learned experts from Govt. of India, Reserve Bank of India, NABARD, State Governments, Sponsor Banks, RRBs, RRB Staff / Officer Associations and others for their significant contributions.

3. I am grateful to all the members of the Task Force for their active participation in the deliberations in the meetings and their valuable contributions and suggestions. I thank Dr.R. Balakrishnan, ED, NABARD and Member-Secretary of the Task Force for his wholehearted involvement in finalising the report, within a short span of time.

3. In order to strengthen Regional Rural Banks (RRBs) and make them viable rural financial institutions, various measures have been taken from time to time. With a view to enhancing the operational efficiency of RRBs, Reserve Bank of India, vide its letter no. RPCD.CO.No.RRB. 2584 /03.05.33 (F)/2006-07 dated 11 September 2006, set up a Task Force to deliberate on areas where more autonomy could be given to the Boards of RRBs. The constitution of the 'Task Force on Empowering RRB Boards for Operational Efficiency' is as under:

Dr. K.G. Karmakar, Managing Director, NABARD

1. Shri G.C. Chaturvedi, IAS, Joint Secretary, Ministry of Finance, Government of India
2. Shri A.K. Das, Special Secretary, Government of West Bengal
3. Dr.K.V. Rajan, Regional Director, Reserve Bank of India, Bhopal
4. Shri K. Bhattacharya, General Manager, Rural Planning & Credit Department, Reserve Bank of India, Mumbai.
5. Shri Anup Banerjee, Dy. Managing Director, State Bank of India, HO, Mumbai
6. Shri V.K. Nagar, General Manager, Punjab National Bank, HO, New Delhi
7. Shri T.V. Bhat, General Manager, Syndicate Bank, HO, Manipal
8. Shri N.S. Bose, Chairman South Malabar Gramin Bank, Malappuram, Kerala

Member Secretary

Dr. R. Balakrishnan, Executive Director, NABARD, Mumbai

4. The Terms of Reference of the Task Force are as under:

a) To review the present position, including policies and practices, in RRBs in the following areas:

Human resources management and development
Resource mobilisation and deployment of funds
Business environment and strategies
Legislative framework, including rules and regulations governing RRBs

b) To suggest measures for empowering the Boards of RRBs for operational efficiency, particularly in matters relating to

Evolving and implementing appropriate strategies/polices for assessment of manpower requirement as also recruitment, deployment, upgradation of skills and promotion of staff/officers, including schemes for performance oriented incentives/disincentives.

Exploring alternate investment avenues as also introduction of new products/ activities.

Evolving appropriate strategies for facing business challenges in rural areas, including developing a complete range of financial services for rural clientele.

Considering any consequential changes that may be required in legislation, rules and regulations governing RRBs.

c) To elucidate how autonomy of the Boards of RRBs can be ensured while safeguarding the oversight of the Empowered Committees for RRBs.

d) To consider any other issues relating to the above areas.

4.1. The Reserve Bank of India in their letter dated 11 September 2006 also indicated that the following points might be taken into consideration by the Task Force.

(i) Potential adverse impact of the withdrawal of interest on eligible CRR balance by RBI on the revenues of RRBs and their demand for restoration of interest on eligible CRR balances.

(ii) Review of the categorisation of branches, staffing norms and promotion policy in view of the general Increase in the business turnover of RRBs.

(iii) The need for lifting of embargo on recruitment to overcome the problem associated with the acute staff shortage and their adverse age profiles and the training requirements of existing staff.

(iv) Problems faced by the amalgamated RRBs due to lack of uniformity in IT packages inherited from the pre-amalgamated Banks and the need for standardisation of software packages.

It was further clarified that these four points are not advisory in nature but are suggestions for scrutiny by the Task Force.

5. Approach and Guiding Principles

In the second meeting of the Task Force held on 26 October 2006, it was decided to conduct an impressionistic study to have a feel of the problems confronting some of the amalgamated RRBs. Three teams comprising of Task Force members visited three amalgamated banks having Head Quarters at Guwahati, Muzaffarpur and Rae Bareli. Besides, on 8 November 2006, Chairman of the Task Force had a meeting with a team of RBI officials led by Smt. Usha Thorat, DG, RBI and senior executives of SBI, BOB, CBI, UBI, etc. where discussions were held on some of the important issues relevant to the Task Force.

In the third meeting of the Task Force held on 11 December 2006, the draft report was placed before the members for discussion and it was clarified by the representatives of RBI that the legislative changes referred to the Terms of Reference needed to be examined in the context of bringing about operational efficiency and these do not cover the areas of ownership or shareholding pattern and as such the report may be amended accordingly.

(Performance overview, Rural financial scenario, RRBs and rural credit, RRBs and ongoing financial sector reforms, redefined role of RRBs in financial inclusion)

Chapter 2 - Stakeholders and empowering the Board of Directors

(Present role-play by Various Agencies, Amalgamation of RRBs, Current Status, Need for change after the amalgamation, Proposed change in view of the enlarged responsibility, Empowered Committee and RRBs.)

Chapter 3 - Financial Resources Management

(Financial Resources, Need for diversification, Responsibilities of the Board, External Support for Resource Management, Present Avenues of Resource Mobilisation, Possible sources of resources of RRBs and deployment thereof, New Avenues of Investment, Constraints and issues, How RRBs can manage investment on stand alone basis-support system, Enlarging the scope of the Board.)

Chapter 4 - Business Policy and Products

(Product and Services-Innovations, Experience of RRBs, Experience of Other Countries, RRBs to become One Stop Banking and financial service provider)

Chapter 5 - Organisational Structure & Human Resources Management

(Revised Structure of Amalgamated RRBs, Business Turnover and Categorisation of Branches, Three Tier system, Decentralisation and Delegation, Revisiting Agrawal Committee Recommendations, Man power Planning, Recruitment, Transfer and Placements, Promotion Opportunities, upgradation of skills, Incentive for Performance, Autonomy of the Board, Redeployment of Staff Members)

Chapter 6 - Internal Checks and Controls

(Revised Norms, Need for Board Supervision)

Chapter 7 - Modernisation of the Operating System

(Problems at operational level, Need to address through Standardization, Computerisation, IT platform)

Chapter 8 - Rural Banking in the North Eastern Region.
(Endorsement of Recommendation of the Committee on Financial Sector plan for North Eastern Region, empowerment of the Board of RRBs, Attention to educated unemployed, recruitment and training)

We record our sincere thanks to Govt. of India, Reserve Bank of India, RRBs across the country, various State Governments, RRB Associations and numerous individuals and organisations which participated in the consultation meetings and those who gave their views in written memoranda.

In conclusion, all members of the Task Force and the professional staff that helped us, are of the unanimous view that this has been one of the most satisfying assignments ever handled. This is so because the Task Force was assigned the task of unleashing the growth potential and energies of the RRBs, thereby enabling greater financial inclusion of the rural poor and have-nots.

CHAPTER 1

Turn Around Phase

1.15 The Government of India embarked upon banking sector reforms in 1991. As a part of the reform process, measures for strengthening various credit delivery systems were initiated. For RRBs, which were financially in very bad shape, various options like formation of National Rural Bank of India, merger of RRBs with their sponsor banks, etc. were examined. Considering the important role played by RRBs in dispensation of credit in rural areas, especially to the weaker sections of society, the continuance of the RRBs was found to be relevant. The Government of India, in consultation with RBI and NABARD decided to recapitalise the weak RRBs to improve their financial health. Following the above decision of GOI, Bhandari Committee and Basu Committee looked into the issues in depth and came out with rehabilitation packages consisting of both financial and non-financial components. Under the financial package, a sum of Rs.2188 crore was provided by the stakeholders of RRBs in the proportion of their equity holding during the period 1994-2000 for cleansing the balance sheet of 187 RRBs.

1.16 Under the non-financial package, the following steps were taken to make the RRBs financially viable on a sustainable basis:

RRBs, which hitherto were financing only target groups, were allowed to finance non-target groups.
RRBs were permitted to subscribe to the tier II bonds of sponsor banks or other institutions upto 10% of their owned funds.
RRBs were permitted to open / maintain non-resident rupee accounts.
RRBs were allowed to finance housing and education loan.
Introduction of DAP/ MOU and monitoring of implementation.
HR Development through massive training inputs by NABARD.
Conduct of ODI as a tool for corporate turn around.
Exposure visit to good institutions in the country and abroad.
Rationalization of Investment Pattern.
Innovative financing through SHGs – Acting as SHPIs.
RRBs shifted from narrow banking to credit disbursements.
Doubling of Agricultural Credit.

1.17. The revitalisation package worked very positively in turning around most of the RRBs as will be revealed from the comparative position of key statistics as on 31 March 1995 and 31March 2005. The position further improved during 2005-06 and about half the number of the RRBs as on 31 March 2006 attained sustainable viability while more than 1/3rd of the rest have attained current viability. RRBs, as a system have attained a landmark business level of Rs.112274 Crore and earned a net profit of Rs.709 crore. The gross loan was Rs.39764 crore. There has been spectacular achievement in loan recovery performance, NPA management, and branch and staff productivity.

Achieving the Mandate-Financial Inclusion

1.18 RRBs were set up with the intention of taking banking services to the villages to cover such categories of rural masses, which hitherto were considered unbankable by other RFIs specially the commercial banks. Annexure 1.2 depicts the performance of all RFIs in delivery of credit at the grass-roots level. It will be observed therefrom that although there has been substantial growth in lending of RRBs, their share is not commensurate with their vast network and manpower. RRBs have the potential to achieve a 25% share of the GLC as against less 10% as on 31 March 2005. In agricultural credit, the share of RRBs stand at 10% under crop loans while under medium/long term loans, the same is just 5%. However, there is a silver lining that the growth in lending in agriculture under the programme of doubling of credit, the average growth rate which was just 8% in 2000-01 increased substantially to 63.6% in 2004-05.

1.19 Annexure 1.3 contains the comparative position of number of Loan accounts and loans outstanding in respect of Public Sector Banks (PSBs) and RRBs for the period from March 2002 to March 2005. It is observed that the performance of RRBs has been highly satisfactory in so far as taking the banking services to the rural poor is concerned. RRBs have 121 lakh loan accounts out of about 1300 lakh rural households. The per account loan, as on 31 March 2005 was Rs. 21469 as against Rs. 97207 of the PSBs as on that date. This confirms that the RRBs, as mandated, have mostly covered the people of small means belonging to the target groups.

1.20 At present, RRBs cover 525 districts in the country. As per data available, 80 districts in the country are yet to be covered by RRBs. There is a need to ensure that all districts in every State/Union Territory are covered by RRBs. At present, there is no coverage of RRBs in districts such as Sikkim (4 districts), Goa (2 districts), Andaman and Nicobar islands (2 districts), Daman & Diu(2 districts), Lakshadeep, Delhi, and Chandigarh (1 each) as well as Pondicherry (4) . Similarly , 18 districts in Tamil Nadu , 10 districts in Arunachal Pradesh, 5 districts in Kerala 3 districts in Meghalaya, and 6 districts in Nagaland are yet to be covered by RRBs . The feasibility of covering the uncovered districts may be explored.

1.21 Recently, Reserve Bank of India has urged all banks to review their practices to promote financial inclusion. They have been advised to open no-frill accounts with minimum balances. New credit delivery models like business correspondents, business facilitators, postal services, etc as well as new technologies are being experimented with so as to reach the unreached customers. There is considerable imbalance in credit deployment by the banking system among many States of the country vis-à-vis the deposits generated therefrom. A comparison between deposits and credit of scheduled commercial banks with NSDP in different States is revealing :

The ratio of bank credit to NSDP among advanced States like Maharashtra, Karnataka, Tamilnadu, Kerala, Punjab, etc., was more favourable than that of States like Bihar, Madhya Pradesh, Uttar Pradesh, Jharkhand, NER States, etc. This indicates a sub-optimal deployment of credit in the backward States by the banking system. As far as RRBs are concerned, they need to shed their earlier image of 'narrow' banks and consider providing a range of products for all financial needs and focus on financial inclusion through progressive use of technologies and low cost alternative delivery channels like business correspondents and business facilitators.

1.22 The Credit Deposit ratio in different regions was as under:

The CD ratio has declined in the East but has increased in North East. Otherwise, the relative position among the different regions continued to remain almost the same over the last ten years. However, it is observed that the CD ratio was comparatively lower in North-East, East and Central Region States as compared to Southern and Western Region States; thereby indicating relatively low deployment of the resources generated by the banking system in the North-East, East and Central Region States. The RRBs in these areas have a role to promote financial inclusion in these regions.

1.23 The State-wise per capita credit flow data is also worthy of review. The position for 2004 - 2005, was as under:

State wise Per Capita Credit Flow (Amt. In Rs.)

It is observed that there is considerable scope for improving per capita credit flow by RRBs in States like Madhya Pradesh, Uttar Pradesh, Uttranchal, Bihar, Jharkhand, Rajasthan, Orissa and Assam.

CHAPTER 2

2.01 The real stakeholders of the rural banks are the rural population who use the services of the rural banks including those who can potentially avail of their financial services. The RRBs play a crucial role in financial inclusion. Rural banks are required to provide comprehensive financial services to the rural people. The financial services are not to be interpreted only as credit but include flexible savings products, safe remittance facilities within India and abroad, receipts from and payments to governments and utility service providers, insurance products, guarantees, debit/credit cards, investment channels and information on farm inputs, technology, markets, etc. These aspects are discussed in detail in Chapter 4 of the report. In the literal sense, the stakeholders are those who have subscribed to the share capital of the rural banks. This chapter takes a close look at the roles of the existing stakeholders. In terms of Section 6 of the RRB Act, 1976 the Central Government, the sponsor banks and the State Governments have subscribed to the share capital of the banks in the ratio of 50:35:15. The Act has spelt out the roles of the different owners.

2.02 Role of the Central Government

The powers of the Central Government as specified in the Act are listed in Annexure 2.1. It is seen that the Central Government has absolute powers, right from incorporation of an RRB, subscribing to its capital, appointing two directors on the board, notifying various rules and regulation for board meetings, appointments and promotions, staff regulation, determining remuneration and service conditions of the staff and officers, appointing auditors and fixation of their remuneration, giving direction to RRBs on policy matters involving public interest, amalgamation of RRBs and notification thereof and placing the working results / activities of the RRBs in both Houses of Parliament. In exercising such powers, the Central Government seeks the expertise and services of NABARD, which also maintains the database on RRBs.

2.03 Reserve Bank of India is the Central Bank of the country. It performs a wide range of promotional functions to support national economic policy objectives. It is the Regulator and Supervisor of the financial system. It prescribes broad parameters for banking operations within which the country’s banking and financial system functions, so as to ensure stability. As per the provisions of the RRB Act, 1976, RBI represents the GOI on the boards of RRBs. Recently RBI has constituted Empowered Committees for RRBs on a State-wise basis the role of which has been examined in detail separately in this chapter.

2.04 As per Section 2(g) of the RRB Act, 1976, the Sponsor Bank is identified as a bank. Sponsor Banks besides sponsoring the RRBs, also subscribe to 35% of the equity. As per Section 3(3) of the Act, the sponsor banks have to aid RRBs by providing management and financial assistance. Sponsor Banks also appoint Chairmen from among their own officers or otherwise, nominate two directors to the Board of the RRBs and depute such number of officers and employees as may be necessary for smooth functioning of RRBs. The Sponsor Banks provide refinance support to RRBs and help in maintaining liquidity. The various functions of the Sponsor Banks in relation to the RRBs are listed in Annexure 2.2.

2.05 Though the State Governments have only a smaller holding of 15%, they have a greater stake in the banks as these banks play a significant role in implementing various credit-linked development schemes. The State Governments nominate two directors each to the Boards of RRBs functioning in the States. The State Government is expected to assist RRBs in their smooth functioning and facilitate the recovery of loans.

2.06 Though not a shareholder, NABARD is also a stakeholder in these banks. NABARD assists the Central Government in relation to all its functions pertaining to RRBs. It provides policy inputs and has representation on the Board of Directors on behalf of GOI. NABARD provides concessional refinance support to augment the resource base of RRBs for lending to the desired sectors as also to enhance liquidity. NABARD has been playing a significant role in human resource development of the RRBs by imparting training to RRB officers, conducting organisation development initiatives (ODIs) and exposure visits within the country and abroad. NABARD extends help to the RRBs in all matters relating to its operational problems, business development, micro-finance, policy thrust, etc. NABARD has also been entrusted with the statutory supervision of the RRBs by way of conduct of offsite surveillance and onsite inspections. The role functions of NABARD are listed in Annexure 2.3

2.07 The Advisory Committee on Flow of Credit to Agriculture and related activities, 2004, under the chairmanship of Prof. V S Vyas, recommended the amalgamation of RRBs into State level institutions as it felt that the process of amalgamation would lead to significant reduction in cost of administration and economies of scale. With increasing competition in the rural financial markets, particularly from the private sector commercial banks and sponsor banks, the income of RRBs, which are essentially localised units, is likely to decline, threatening the sustainability of RRBs. By contrast, amalgamation would lead to enhanced coverage of geographical areas and the improved outreach of such amalgamated entities would enable them to ramp up growth by diversifying business portfolios. Amalgamation would further result in efficient and optimum utilisation of the financial and non-financial resources due to a combination of synergy and transaction costs sharing potentials. Amalgamation would lead to rationalisation of staff and their need based allocation and redeployment. Besides, the inter district transferability potential can improve the prevailing 'not so exemplary' work culture. Based on these recommendations, Govt. of India allowed RRBs sponsored by the same bank within the same State to be amalgamated in a phased exercise. So far 137 of the 196 RRBs sponsored by different banks have been amalgamated into 43 new entities (a few more proposals are under consideration). Together with 59 standalone / unamalgamated banks, the total number of RRBs now stand at 102. By the time the State-wise sponsor bank-wise consolidation of RRBs is complete, the number of RRBs could reduce to 96.

2.08 Further, State-wise consolidation of banks has the potential to unleash considerable synergies in terms of manpower redeployment and fund resources maneuverability, initiation to new product launches, especially those driven by technologies like internet banking, remittance transaction, debit/credit cards and anywhere banking services, transaction cost savings, etc. in the long term. The larger area of operations consequential to consolidation also provides considerable leverage in profit and viability prospects of RRBs due to their ability for cross-transfer of business risks across different regions of operational areas and sectors. The branch-wise distribution of banks at the present level of consolidation (i.e. 102 RRBs), after the completion of the on-going State-wise/sponsor bank-wise consolidation is given in Table below

Table 2.1
Potential impact of consolidation in the Branch network of banks

The table shows that consolidation can lead to creation of a number of modest and medium sized banks, which will no longer remain tiny banks with little means. Similarly, a simple realignment of financial performance data for of the year 2005-06 in tune with post-consolidation scenario as visualised above reveals a considerably improved viability status for the consolidated RRBs.

Table 2.2

The analysis establishes considerable merit in the proposal for further consolidation of banks as recommended by various Expert Committees that previously studied the subject of viable RRB operation and supported by an overwhelming majority of other important stakeholders like senior functionaries of banks, employees and their unions, etc., with whom the Task Force had occasion to interface. The RBI's recent policy prescription for the financial sector reforms also laid considerable emphasis on banking consolidation and self-reliance. The Internal Working Group of RBI on RRBs under the chairmanship of Shri A.V. Sardesai also recommended State-wise consolidation of RRBs. While supporting such State level consolidation process, the Task Force considers that pushing the consolidation agenda beyond State levels may not be worth pursuing as the same could compromise the regional characteristics that are fundamental to RRBs and may lead to creation of banking structures parallel to Commercial Banks, which may not address the banking needs of the rural people.

2.09 Changes in Role of Sponsor Banks.

The sponsor banks which hold 35% of the equity including Rs.766 crore as part of the recapitalisation package, controls the management role fully including deputing the Chairmen, General Managers and other senior officers. This was the need of the hour in 1976 when RRBs had no staff and no management experience. This system needs a relook at this juncture. The Boards of the RRBs will have to take upon themselves much of the responsibilities, which are hitherto with the sponsor banks.

In the above context the Task Force has examined an important issue as regards changes in the role the of sponsor banks. The need for sponsor bank was essential at the time of setting up of RRBs and also to run the same till such time, the RRBs themselves were in a position to operate on stand-alone basis without operational support. Besides, RRBs being very small units, with limited area of operations, manpower, business levels as compared to commercial banks for conduct of business / undertaking any development, there was little economy of scale, necessitating the need for support / hand holding from sponsor banks.

In the changed scenario after amalgamation, there is a need to review the relationship of sponsor bank vis-à-vis RRB. Sponsor banks are sometimes perceived as competing in the same business and product market space with RRBs. The relationship between sponsor banks and RRBs needs to be changed into a synergistic one, beneficial to both banks. As already announced by Finance Minister, Sponsor Banks are squarely responsible for the performance of the RRBs sponsored by them. Therefore, the Task Force recommends that an MoU be executed between the sponsor bank and the Govt of India as regards the performance of RRBs under various key parameters such as incremental growth in business, outreach, profitability, improvement in CD ratio, reduction in NPAs, etc. In turn, sponsor banks may, as usual, sign MoUs with their sponsored RRBs.

2.10 As the number of RRBs would be quite substantial, there is likelihood that these banks being State specific may develop extremely disparate cultures in the long run. This may not be in keeping with the all India perspective expected of RRBs. Further, the RRB system needs a common vision and strategy to be able to make an impact on the lives of the rural population it seeks to serve. Synergy among all the RRBs will enhance their value to rural customers.

As stated earlier, the real stakeholders of these banks are the present and future clientele. Credit planning should give way to credit marketing and relationship banking. Any banking relationship is based on trust and faith between customers and the bank. The client should be confident of availing financial services particularly credit as per need and repayment capacity. The RRBs should monitor and ensure that the client would use credit in a productive way and honour the terms of the loan contract. As averred, there is indeed a fortune at the bottom of the pyramid and rural poverty could be eradicated with the help of rural banks. The RRBs have to appreciate the fact that poor people are also productive and consumption credit for them is not a misuse of resources, but necessary for survival, at times. The RRBs have to rededicate themselves to these real stakeholders.

2.11 The Task Force undertook a detailed examination of the distribution pattern of Board agenda items across the States and found that nearly 45-50% of agenda items relate to administration and other issues and hardly 12-15% items in a year related to policy issues, as may be seen from the Table below.

Table 2.3

The Board of Directors of RRBs rarely discuss policy issues as these are supposed to be done by RBI/GoI/NABARD. The Board of Directors of RRBs, need to concentrate on business development and policies relevant for the RRBs.

2.12 In terms of Section 8 of the RRB Act 1976, "the general superintendence, direction and management of the affairs and business of RRBs vests in a Board of Directors who may exercise all the powers and discharge all the functions which may be exercised or discharged by the RRBs". In exercising these functions, the Board shall act on business principles and shall have due regard to public interest.

2.13 The above provision in the Act has empowered the Board and given full rights and responsibilities in all matters relating to RRBs. After analysing the decisions taken in Board meetings of RRBs for 2005-06, the Task Force has observed that inspite of the powers conferred on the Board, the decisions are not finalised at that level. The Board often prefers to refer issues to the sponsor bank or NABARD, as the case may be, or defers the issues for the future. Such a practice has evolved in spite of the fact that five professional bankers represent the Board of RRB and adequate power is vested in the Board to take appropriate decisions. The resultant effect of such indecisiveness inevitably delays the decision making process, thereby causing inefficiency, disputes, HR problems, etc., which in turn affect the growth and progress of the RRBs.

2.14 The top policy making body of any progressive institution should reflect a fair cross section of the public interest and that of other important stakeholders whose well being is closely linked with the fortunes of that institution. The flavour of times and dictates of public policy demand representation to women in top policy making bodies. A non-institutional minority shareholder or a long-term depositor of a bank is another important stakeholder interested in the fair performance of that bank. Similarly, human resources in organisations are no more to be considered liabilities and many organisations with a modern outlook have started accounting them as assets in the annual financial statements. While considering the struggling past of RRBs, notwithstanding the hiccups of occasional agitations and legal battles with Banks' management, sometimes, even on trivial issues, the Task Force cannot but acknowledge the contributions made by the field personnel in ramping up business volumes. The employees of RRBs are important stakeholders who could hugely influence the fortunes of the institutions.

2.15 Section 9(1) of the RRBs Act, 1976 provides that the Board of Directors of the RRB shall consist of the Chairman and 8 other directors to be nominated as follows:

(a) Two directors, who are not officers of the Central Government, State Government, Reserve Bank, National Bank, Sponsor Bank or any other bank, to be nominated by the Central Government;

(b) One director, who is an officer of the Reserve Bank, to be nominated by that Bank;

(c) One director, who is an officer of the National Bank, to be nominated by that Bank; two directors, who are officers of the Sponsor Bank, to be nominated by that Bank; and

(d) Two directors, who are officers of the concerned State Government, to be nominated by that Government.

2.16 It is also provided in Section 9 (2) that the Central Government may increase the number of members of the Board; so however, that the number of directors does not exceed fifteen in the aggregate and also prescribes the manner in which the additional number may be filled up. At present, the size of the Board of Directors of RRBs is uniform at 9 members for all RRBs without reference to the size and area of operations of the banks.

2.17 The composition of the Board should however reflect the shareholders in the new set up and the need for specialisation. The following minimum composition of the Board is suggested:

(i) One official each from RBI, NABARD and the State Govt. and two from the sponsor bank

(ii) Three directors from amongst expert in rural economics, rural development, information technology, chartered accountancy, cottage and village industries, small and micro enterprises, or persons having experience in the working of Cooperative Banks, regional rural banks or commercial banks or any other matter the special knowledge or professional experience which is considered by the GoI, in consultation with RBI / NB as useful to the RRB, to be nominated by that Authority (GoI), with the proviso that at least one of such experts will be a woman .

(iii) The existing RRB Act provides for making need based increase in the number of Directors of Board upto 15. The Task Force recognises that such contingencies could arise in exceptional situations for individual RRBs and therefore favours the retention of that clause in the RRB Act, unaltered. However, this provision may now be invoked, keeping in view the amalgamation/merger of RRBs. There are now RRBs with 8 branches (Nagaland RRB) rising upto 680 branches (Uttar Bihar KGB, Muzaffarpur, Bihar).

2.19 Section 11 of the RRB Act 1976 provides for the sponsor bank to appoint Chairmen of RRBs from among its officers who possess the fit and proper criteria prescribed thereof in consultation with NABARD other than in exceptional situations that warrant adherence to other prescriptions laid down by the Act. However, the emerging environment and circumstances of RRBs are not what it used to be in the past and calls for an image change as entities independent of the sponsor banks. The Committee on Financial Sector Plan for North Eastern Region under Mrs. Usha Thorat, Deputy Governor, RBI which examined the issue of positioning of Chairman in RRBs observed that the problem faced by RRBs include lack of dynamism/ motivation of CEO, staff constraints in some RRBs, inadequate interest taken by Sponsor Banks, etc. and suggested that wherever required, RRBs may be allowed to recruit CEOs from market on contract basis with remuneration linked to achievement of specified targets in terms of financial inclusion and business levels. A Parliament Committee recommended that NABARD be entrusted with the responsibility for selection and appointment of Chairman of all RRBs by preparing an All India Panel. The Task Force recommends that the Chairman of all RRBs be selected on merit and on competitive basis and appointed by the sponsor bank from amongst a panel of qualifying officers of, based on criteria to be prescribed for the purpose, from time to time. The CEO's panel needs to be prepared by the sponsor bank in consultation with NABARD, based on the fit and proper criteria generally prescribed by RBI for commercial banks. To encourage the deputation of talented officers as Chairmen of RRBs, the Task Force feels that the RRB Chairman be given due weightage by the parent institution for promotion of the officer to the next higher grade as and when he is eligible for promotion. The pay/allowances and incentives should be attractive so as to encourage performance. Further, though the RRBs Act, 1976 does not prescribe any minimum period for appointment of a Chairman on the Board of RRB (though maximum period is stipulated), the Task Force recommends that sponsor bank/NABARD may take care that the minimum period for which a Chairman should hold office is not less than 2 years and upto a maximum period of 5 years.

2.20 As of now, the term of nominee directors is two years and a nominee director continues to be in position till his successor is nominated. It is recommended that the term of nominee directors may be as long as prescribed by the institutions nominating them but in any case not exceeding two terms of two years at a point of time and no director may be nominated for more than two terms of two years each. The term of nominee directors may also be for a minimum period of two years though they may be eligible for re-nomination for another term of two years.

Risk Management Committee to take care of Asset-Liability Management, credit risks, decisions on interest risks and review of interest structure, as also for effective recovery policies including compromise and settlement procedures. The Risk Management Committee may not wholly consist of Directors. The Committee may be constituted with the Chairman, one of the Board members having knowledge on the subject and 2/3 senior officials of the Bank.

Management Committee: The Management Committee will comprise of the Chairman and 3-4 senior executives of the RRBs and shall deal with loan sanctions, innovative banking products, operational instructions, general administration, computerisation, career progression, etc. and related issues.

Investment, HR and IT Committee: This Committee is not envisaged as a Committee of the Board but shall comprise of senior personnel of the RRB. They could co-opt external experts in HR, IT and Investments, for specific issues, as and when required for efficient operations.

Audit Committee of the Board for supervising the internal supervision systems, audit of policies framed by the Board and its implementation, ensuring integrity of statutory information supplied to regulator institutions, decisions relating to framing of annual balance sheets and profit and loss accounts as also accounting policies related thereto, audit of annual accounts and its compliance as also compliance of various inspections undertaken by supervising authorities. The Audit Committee may co-opt a practising Chartered Accountant as member.

2.22 The Board of Directors are required to concentrate essentially on corporate and business policy functions viz., framing strategic objectives, setting corporate values, guiding the formulation of corporate strategy, business planning, annual budgeting and setting performance objectives at different levels; policy formulation with reference to general functioning of the bank as also specific policies with reference to business development, business risks, investment and human resource management, etc; lay down lines of responsibility, accountability and delegation of powers at different levels and introduce reporting and monitoring systems therefor; monitoring the effectiveness of the general governance practices at different levels; monitoring corporate performance and the financial health of the bank as also overseeing major items of capital expenditure; monitoring and managing potential conflicts of interest of management, Board members and stakeholders; guiding the human resource development policies in the bank as also selection, career progression and development of staff towards the key objectives. This may be done within the prescribed ceiling based on earlier experience as also efficiency and business requirements ensuring the integrity of the accounting and financial reporting system, causing audit of the accounts on annual basis and its communication to all concerned and overseeing the process of disclosures and the communication of information/ data to various authorities. However, an area of concern is that the Board functions are not being organized in a professional and business like manner. Most RRBs have not followed an annual schedule of agenda for the meetings. Policy issues, business growth, new products and services, challenges before the RRBs specially competition from other agencies, ALM, frauds, internal checks and control, etc. are either sidelined or seldom discussed. A disproportionate amount of the time and discussions are devoted to administrative issues. What is of paramount importance is that the Boards of RRB should delegate powers at various levels and the Board then acts as a watchdog through reviews, to monitor whether delegations put in place have been exercised properly on the principle of operational freedom with accountability.

2.23 With a view to empower the Boards of RRBs, it is essential that the Board is informed on a periodical basis on various pre-selected parameters to enable it to discharge the responsibility of overseeing the performance of the bank as a whole and that the RRBs function in accordance with the guidelines issued by RBI/NABARD/ GOI/State Governments. Keeping this in view the Task Force feels that broad guidelines can be laid down to ensure that the agenda in respect of reviews placed before the Board follow a set pattern annually which would indicate a calendar for items of agenda to be put up to the Board. A model calendar has been drawn up for the RRBs as indicated in Annexure 2.4.

2.24 The priorities of the Board would comprise the following aspects:

Establishing corporate goals and objectives
Creating an environment of shared objectives and priorities across the bank
Business planning and Implementation
Annual budgeting and setting performance standards
Marketing and customer relationships
Resource mobilization and management
Loan policy
Product innovation for total financial services
Credit plus services: training and extension-technical and commercial
Micro-finance innovations (self help groups, JLGs, farmer clubs and micro enterprises)
Investment policy and options
Financial inclusion
Credit, operational and market risk management
Liquidity and asset liability management
Human Resource Management: recruitment, training and placement
Industrial relations and motivation
Delegation of powers and monitoring
Accounts, audit and internal controls
MIS and monitoring systems
Review of interest margins and profitability
Technology applications
Investor relationships

Over the year the Board agenda should cover the above aspects of RRB operations with suitable periodicity. While some of the concerns are dealt with in other sections of the report, some elaboration on the Board functions and responsibilities would be in order.

2.25 Various policy and operational circulars are issued by higher agencies like RBI, NABARD & Sponsor Banks to RRBs uniformly on an all India basis. As such the Board of RRBs are not in a position to function independently in the interests of the RRB or in the interest of the Public in the area of operations of the RRBs. The Task Force is of the view that having regard to the independence of the Board of the RRB and to ensure that Board attains autonomy in discharge of its duties, such higher institutions need not issue routine directions to the Management of the RRBs on operational matters. Broad policy should be advised, based on which RRB Boards decide the operationalisation parameters, keeping in view the interests of RRBs and interests of Public in the area of operations. The Boards of RRBs are to be made more independent by providing them with a broader policy framework within which the RRBs should be enabled to develop their viable operational plans and policies. Most of the Directors on the Boards of RRBs should be free from any business or other relationship with the RRB that could interfere with their independent judgment. On the other hand, the functioning of the Board should be subjected to strict scrutiny by the Regulatory/Supervisory Authorities to ensure a healthy system of checks and balances at the corporate level.

2.26 The mission of the RRB system is well articulated in the preamble to the RRB Act, 1976. RRBs may provide for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities particularly to the small farmers, agricultural labourers, artisans and small entrepreneurs etc. The Board has to translate this broad mission into specific goals, objectives and activities keeping in view the requirements and the potential of the area of its operations. Potential is not measured in material terms, but in the minds of the people. The Board should have a feel of the bank’s client base and tune the organisation to meet client/stakeholder aspirations keeping in view the RRB's interests.

2.27 It is not enough if the Board sets appropriate goals and objectives. They have to be widely shared and made part of the culture and activities of the organisation. Motivation through example and two-way communication becomes very important. Informal communication is as important as the formal one. The top management should not only be in constant touch with the intermediate and cutting edge levels at branches but also with the clients. The Board should review the efficacy of this approach. The client should feel comfortable approaching the RRBs. The bank’s products and relationships should reflect this concern. The generic products should be presented in a way that appeal to the rural customers. For instance the erstwhile Siwan RRB in Bihar made a success of its loan product for foreign education. The poor people had no hesitation to approach Prathama Bank in Moradabad of UP. The members of SHGs and farmer clubs felt that they were part of the bank itself. The Board should ensure that the objectives get translated as products and practices that encourage the rural population to deal with the bank.

2.28 The Board has to set quantitative indicators in the form of an annual business plan subdivided into quarters. The indicators could cover all aspects of the development action plan. The reviews should focus on the reasons that contributed to the achievement or non-achievement and the remedial action. The Board will monitor the attainment of quarterly targets.

2.29 The average credit deposit ratio of the RRBs is 55.68% as of 31 March 2006. This points to the fact that the funds are not the constraint for credit expansion. The investment portfolio is in excess of SLR requirements. Effectively, the rural savings are transferred to the urban areas. The need of the hour is not credit planning but credit marketing in rural areas by RRBs. Marketing starts with building durable relationships. Financial inclusion is an essential part of the strategy. Subsidy schemes of the Government should become entry points for new relationships rather than one off transactions. The performance of the RRBs in credit, NPA management and profitability crucially depends on this approach.

2.30 By its very composition, the Board is dominated by the sponsor bank nominees. It is true that once the Chairman takes up position in the RRB, he identifies himself with the bank. However, often his seniors from the sponsor bank are nominated on the Board, which effectively takes away his freedom to decide on important issues. While It has been widely acknowledged that the representatives of other stakeholders played a constructive role in business expansion, the role of the State Government nominees was limited by absence or narrow concern about the participation of the bank in various subsidy schemes. Similarly, the non-official directors had a negligible role to play in the governance of RRBs in many cases.

2.31 It is observed that sporadic efforts are being made for training of officials and non-official directors of RRBs. However, there is a general impression that the majority of the Directors on the Boards of RRBs need to be adequately oriented towards the functions of RRBs and their own responsibilities as nominee directors.

2.32 The Task Force suggests that the role of sponsor bank should be supportive and be broadly confined to the following :

(i) Extending management support as required by RRBs.
(ii)Nominating its share of members in the Board of Directors to provide expert and unbiased advice to RRBs.
(iii) Providing funds for which the RRBs may also have the freedom to choose from any bank/financial institutions.
(iv) Providing expert guidance/ help in investment related issues for which RRBs may also have the freedom to choose from alternatives, if available from other banks/primary dealers.
(v) Conducting management audit till alternative arrangements are made by the RRBs, themselves.

Arrangements for Recruitment of staff at various levels.

2.33 The functioning of many RRBs is hampered by insufficiency of staff due to prescribed ban on staff recruitment. The age profiles of RRBs employees reveal that there would be mass retirements over the next six years. Staff augmentation remains an issue to be urgently addressed. However, the previously available instrument of Banking Services Recruitment Boards (BSRB), which the RRB Rules specifically provide for relating to recruitments, is no more functional. The Task Force recommends that GoI may urgently accredit and notify suitable access to All-India / State Level Staff Selection Institutions of repute (like IBPS, Mumbai, etc) which could conduct selection tests (written/oral) for recruitment of clerical/officer level staff for RRBs, on a State-wise basis.

Implementation of SARFAESI Act:

2.34 Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, which has come into force w.e.f. 21^st June 2002, commercial banks are empowered to deal with defaulter borrowers outside courts on their own. Under the provisions of this Act, authorised officers of commercial banks can issue a notice in writing to defaulter borrowers including guarantors to discharge in full his liabilities within 60 days from the date of notice, failing which the bank shall be entitled to take possession, manage or dispose of the asset in the manner prescribed in this Act without intervention of any court or tribunal.

Under these provisions of the SARFAESI Act, 2002 Commercial Banks have been able to recover substantial amount of dues from defaulters thereby reducing their NPAs. However, the RRBs have been kept out of the purview of this Act. RRBs are expected to depend on the recovery process through courts and Govt. machinery, which takes much time to effect recovery. RRBs also do not have the staff/legal expertise as available with commercial banks, for constituting a recovery cell or enforcing legal claims. To enable better recovery from defaulters, the Securitisation Act, 2002 should also be extended to RRBs. The Securitisation Act, if extended to RRBs, can enhance their recovery process and the Debt Recovery Tribunals (DRT) will have to be suitably notified.

2.35 As per Finance Bill, 2006 the provisions for exemption granted under section 80(P) of the Income Tax Act available to RRBs (treating them as deemed cooperative society) have been withdrawn. The RRBs are now required by law, to pay income tax on all earnings. The Task Force is of the opinion that in view of the developmental role played by the RRBs for development of the rural masses and considering their high cost of operations in rural areas with significant business and default risks, low profit margins, need to finance at lower rates of interest to financially weaker rural sections of societies and that the RRBs as a separate rural credit system are yet to consolidate and are poised at a critical stage of take off, post-amalgamation the provisions under section 80(P) of Income Tax Act may be continued for a further period of 5 years or till the restructuring process is completed, whichever is earlier.

2.36 One of the Terms of Reference is to elucidate how autonomy of the Board of RRB can be ensured while safeguarding the over sight of the Empowered Committees for RRBs. The Union Finance Minister in his Budget Speech for the year 2004-05 had stated that Government had entrusted the implementation of policy to enhance agricultural credit to all the banks. He had also indicated that RRBs should adopt a new governance standard and abide by the prudential regulations so that they will qualify for receiving funds from Government for their restructuring. In order to achieve the above objective, Reserve Bank of India by its notification No.RPCD.CO.RRB.175/ 03.05.33(F)/2004-05 dated 02 September 2004 had constituted a Committee which is known as the Empowered Committee (EC) for RRBs. The broad functions of the EC are as under-

(i) Monitor the flow of agricultural advances and advances granted by RRBs.

(ii) Work out institutional arrangements for monthly feedback on achievement of targets for advances, particularly to agriculture.

(iii) Remove impediments and procedural problems faced by RRBs in extending finance as well as formulate innovative products for stepping up credit in rural areas.

(iv) Provide guidance to the RRBs on operational issues/problems, implementation of Lead Bank Scheme and Service Area Approach, investment of non-SLR surplus funds, performance under Annual Action Plan and priority sector, credit under various Government sponsored programmes, prudential norms, branch expansion/rationalization programme, etc.

(v) Periodically review of financial performance of RRBs.

(vi) Examine the initiatives taken by RRBs for financing of contract farming, financing of input suppliers and output purchasers in case of agricultural lending, etc.

The meetings are conducted on a monthly basis. The Committee has the Regional Director, local office of RBI as Chairman and CGM, NABARD, GM In-charge of RRB Division of Sponsor Banks, senior functionaries SLBC and the State Governments as members. However, the Chairmen of RRBs are not made members of EC. The forum of EC is also being utilised to discuss and monitor the proposals for amalgamation of RRBs. With a view to ensuring smooth transition of the business/undertakings of the erstwhile RRBs to the new RRB from the effective date of amalgamation, the operational issues relating to maintenance of CRR, SLR, etc., by the erstwhile RRBs and subsequently by the new RRB/s, are also envisaged to be sorted out at the level of the Empowered Committee. Applications received from RRBs for opening of currency chests would be examined and recommended by EC based on the prescribed norms to Reserve Bank for consideration. On the issue of branch licensing of RRBs (which has been delegated to Regional Offices of RBI since June 13, 2006), the role of ECs is to examine and make recommendations on applications of RRBs for opening of new branches, merger of branches, etc. Similarly, requests from RRBs for conduct of forex business as limited authorised dealers (Category-II), opening/maintaining of NRE/NRO Rupee Accounts, etc. would also be examined by ECs. With a view to enlarging the scope of financial inclusion, ECs have been advised to identify the uncovered district/s, if any, which could be covered by the existing RRB/s so as to persuade the concerned sponsor bank to approach the Government of India (Ministry of Finance) for extension of the area of operation of RRB/s sponsored by it. ECs have been requested to discuss and ascertain as to which RRBs are desirous of handling pension / other government business of the State Government. Regional Directors would act as a facilitator for the RRBs to undertake the aforesaid business and request the State Government to do the needful. Considering the comprehensiveness and multiplicity of important issues being transacted by the EC, the Task Force feels that Chairmen of RRBs could also be appointed as Members of the Committee. The present periodicity for conduct of meetings on a monthly basis is too short a period for data collection, analysis and initiating follow up action. Therefore, the Task Force recommends that the meetings be held on a quarterly basis, for greater effectiveness. Besides, the Empowered Committee may ensure that no RRB is constrained in its business decisions by the sponsor bank and that requisite financial and managerial support is ensured.

CHAPTER 3

3.01 The fountain of resources for RRBs is the savings of the rural population. The Indian rural population, despite low incomes, has a strong tendency to save for tomorrow by postponing today’s meager consumption. This is true of even backward States and regions. The financial resources of RRBs are the share capital including share capital deposits, public deposits and refinance.

Owned Funds

Creation of awareness regarding the magnitude of the problem and its implications amongst the staff.

Performance in cash management to be incorporated as an integral part in the appraisal of the performance of the branch/staff concerned.

Opening of more currency chests.

Streamlining the process for sorting of notes, remittance of notes, etc.

Developing infrastructure for communication, faster reporting system and monitoring techniques.

Utilisation of common cash van/armed guards for prompt remittance of cash.

The linkage system now popularised by RBI wherein clusters of branches are linked to a currency chest for local cash management.

Implementation of the recommendations of the Nayak Committee such as coinisation of Rs.1, 2 and 5 the most commonly used denominations establishing currency transit centers to streamline the system of remittance of soiled notes, etc.

Investing in High Yielding bonds of public sector financial institutions.
Investing in Mutual Funds.
Investing in Shares and Debentures.
Investing in Bank FDRs.

A well-defined investment policy is in place.
Put in place a proper risk management system capturing and analyzing risk in NSLR
Investments are made in accordance with systems, procedures and prudential regulatory prescriptions.
Prescribe limit on certain investments as per regulatory norms
Review investments periodically twice in a year
Total investments and disinvestments
Compliance with prescribed prudential limits
Rating migration of issues / issues held
Periodic valuation / amortisation
Accounting for profit / losses
Creation of Investment Fluctuation Reserves

RRBs felt safe and free from any accountability
Delayed decisions resulted in missing many good investment opportunities
Due to lack of timely advice, RRBs failed to comply with amortization provision, valuation and accounting procedures
Adopt safer avenue to park in sponsor bank deposits irrespective of yield
Parking large amount in current account for liquidity purposes, which did not even fetch cost of funds as return

As regards investments in shares, convertible debenture of corporate and units of equity oriented mutual funds; the following norms are to be followed:
Guidelines to limit investments to unlisted securities (or where listing will be done in 3 months) and issuers with a current rating
Guarantee not to be the only factor for credit decision. Any proposal for funding government budgets should be avoided
Follow the norms laid down for NPIs
Bank investment in unlisted Non-SLR should not exceed 10% of its total investment in non-SLR securities as on March 31st of the previous year
The investment in unlisted Non-SLR may exceed limit of 10% by additional 10% if the investment is in securitisation papers for infrastructure projects, and bonds / debentures issued by Securitisation Companies and Reconstruction Companies

RRBs may need to be given autonomy in investment management and flexibility to take external advise and proper capacity building of its own staff
The Chairman of RRB may be empowered to make investment decisions independently upto certain limit.
RRBs may be allowed to participate in the Call Money Market. This will augment the profitability of the bank as the surplus funds can be invested on daily basis and earn interest at an average rate of 6%. To participate in Call Money Market, RRBs may need some initial guidance from sponsor banks.
RRBs may need to open a Back Office at the State Capital. Having a Back Office at state capital will help them to participate in the Money Market briskly and also help in getting the instruments drawn and collected easily, operate the RBI account for necessary investments on time. Investments in Commercial Papers and Call Deposits can also be made when the rate of return is more than the rate of return on short term FDRs of Banks, through the Back Office to generate income.
Constitution of a investment committee or investment committee of Board consisting experts in the field as member having adequate delegation to take investment decisions.
A panel of advisors could be identified from PDs / MFs / other agencies related to investment activities to extend guidance and also assistance in investments. A list of PDs and Mutual Funds for consultation by RRBs is placed in Annexure 3.2

(i) There was no effective concurrent audit.
(ii) There were no vigilance cells and preventive vigilance systems.
(iii) No system of test check of the statements submitted by the branches during the branch inspection.
(iv) No system of independent checking of previous day’s entries in books of account from vouchers.
(v) No verification of cash and other securities, dead stock articles and security documents, etc.
(vi) Delays and deficiencies in compliance of inspection reports.
(vii) Some of the banks had not prepared Accounting Manual/ operational manuals.
(viii) There was no system of checking of the data entered into the computer systems.
(ix) Know Your Customer norms were bypassed.
(x) The bank had not introduced register of customer service complaints/grievances.(xi) Ledgers not being balanced at frequent intervals.
(xii) There were huge arrears in reconciliation of Branch Adjustment account.
(xiii) The audit did not cover the HO and controlling offices.
(xiv) Internal audit did not pay attention to loan portfolio – appraisal, NPA classification, loan documents, etc.
(xv) The exercise of delegated powers, income leakages and expenditure control did not figure in branch inspection.
(xvi) The computer printouts at day end were not authenticated.
(xvii) There were arrears in reconciliation of link bank accounts.
(xviii) Many important registers like document register, loan application receipt and disposal register, DCB register, security stock register, insurance register, visit register, return control register, cash remittance register, etc., were not maintained by the branches. (xix) In HO, loan application register was not maintained properly.
(xx) Though investment details were maintained at HO, the FDRs were kept at the main branches were not verified periodically.
(xxi) Many documents had become time barred.
(xxii) There was no system of surprise balancing of books. Because of this, fraud committed by staff could be detected only after inordinate delay.
(xxiii) The liquid asset register for maintenance of CRR & SLR was not maintained on daily basis. Though, it was maintained in the computer on weekly basis, it was not seen by the Chairman.
(xxiv) Visit registers were not maintained in some branches and there was no record of visits of HO officials to the branch. There was no system of surprise visit to branches by HO officials.
(xxv) Debit balances in deposit accounts.
(xxvi) The inter branch account reconciliation was not being monitored by the bank and not reviewed by the Board. Arrears in reconciliation of long pending entries under inter-branch adjustment account, subsidiary balances not tallied with general ledger balances, balances in respect of deposit accounts maintained with Sponsor Bank not tallied with the balances of Gramin Bank’s books of accounts.
(xxvii) Security arrangements in some of the branches were not satisfactory.
(xxviii) Guarantees were issued to various parties without adequate security.
(xxix) The branches did not exchange/rotate the original keys of cash safes with the duplicate ones at periodic intervals to ensure that both sets of keys are usable.
(xxx) Not obtaining stock statements regularly from borrowers/units to whom CC limits have been sanctioned.
(xxxi) Non-maintenance of drawing power registers.
(xxxii) At the branches, the chart on interest rates on deposits and advances, salient features of the Banking Ombudsman Scheme-2002, Kisan Credit Card Scheme, Swarojgar Credit Card Scheme etc. were not displayed.
(xxxiii) Processing charges were not collected from the borrowers while financing working capital; cash credit limits and term loans.

(a) Active presence of a management, e.g. Board of Directors, Committees and senior mangers, sensitive to control culture prescribing ethical and integrity standards,
(b) Appropriate control culture with segregation of duties and standards of work, minimising potential conflicts and overlapping.
(c) Information/communication channels/systems encouraging smooth flow of reliable, constant, secured data/information / reports.
(d) Monitoring, processes / mechanisms and instruments facilitating ongoing review, reconciliation, verification / rectification of deficiencies.
(e) An effective, continuous and comprehensive risk recognition and assessment system to ensure proper safety and safe guarding assets.
(f) An alert and responsive external audit for constant evaluation of the system to suggest remedies, and
(g) Independent vigilance machinery for preventive vigilance.

Automatic Ledger Posting and customer accounts management
Customer Relations Management - Extension of online - remote access facility
Participation in National Payment System for transfer of funds
Participation in e-governance initiatives of State Govt.
Computer based integrated Data Base and MIS
Online trading linkages to Money markets and other agencies
Modules of House keeping
ATMs, Kisan and other credit cards
E-governance services

There is no standardisation of software platform even among sponsoring institutions and other agencies.
Level of computerisation in various RRBs is at different stages of implementation.
RRBs have already adopted sponsor banks' software which are different for each sponsor bank.
Some of the RRBs have achieved 100% computerization.
All RRBs have spent sizeable amounts according to their capacity for such technology.
Employees / officers are expected to be proficient in the particular technology.

Topography of the region
Sparse population settlements
Infrastructural bottlenecks such as transport, communication and power
Low level of commercial activity
Lack of entrepreneurship
Land tenure system especially in hilly areas not conducive for banking activities
Development strategy based on grants rather than on credit
Low network of branches
Lack of awareness of banking services
Experience of poor loan recovery by banks
Law and order conditions not conducive
Inadequate payments systems in place

8.02 Though the North Eastern region constitutes 8% of the geographical area, it accounts for nearly 3.73% of the population and the credit flow to the North Eastern Region for agriculture and allied sectors comprised less than 0.50% for the country as a whole during the years 2000-01 to 2004-05. The credit flow being low has to be seen in the context of the network of credit purveying agencies operating in the region. The Commercial Bank branch network is not very widespread. The only local credit agencies are the cooperatives and the RRBs. The cooperatives in the region are largely two-tiered and suffer from severe impairment and are virtually defunct.

8.03 There are eight RRBs in the region, two in Assam and one each in the remaining six States. There are no RRBs in the state of Sikkim. Five RRBs sponsored by SBI are in the States of Assam, Arunachal Pradesh, Meghalaya, Mizoram and Nagaland, while three RRBs sponsored by UBI are in Assam, Manipur and Tripura. Before amalgamation, there were 11 RRBs. The largest North-East RRB, i.e. Assam Gramin Vikas Bank, having 354 branches, was formed on January 12, 2006 through amalgamation of four RRBs, viz. Cachar Gramin Bank, Lakhimi Gaonlia Bank, Pragjyotish Gaonlia Bank and Subansiri Gaonlia Bank, all sponsored by UBI in Assam, with its head office at Guwahati.

8.04 The RRBs, with a total network of 645 branches, cover 60 out of 79 districts in the region. The largest network of branches is in Assam with 399 branches followed by Tripura (87), Mizoram (54), Meghalaya (51), Manipur (29), Arunachal Pradesh (17) and Nagaland (8). There are 19 districts not covered by any RRBs in the region, 10 of which are in Arunachal Pradesh, six in Nagaland, three in Meghalaya and four in Sikkim. There is need for the districts to be allocated to the respective RRBs in the States at the earliest.

8.05 The performance indicators of RRBs in the region for the years 1999-2000 and 2004-05 are given below -

Table 8.1

Key Financial Parameters of RRBs in NER

During the period, total deposits and advances of RRBs in the region had registered compounded annual growth rate of 17.3 per cent and 24.8 per cent, respectively. The CD ratio rose from 30.5 to 41.6. Gross NPAs of the RRBs fell from 46.6 to 16.4 while loan recovery percentage was raised from 30.9 in 2000 to 63.3 percent in 2005. Thus, there has been a significant improvement in the operational parameters and accumulated losses have decreased mainly on account of increased business, better recovery and reduction in NPAs.

8.06 A review of the bank-wise performance (Annexure 8.1) reveals that where business levels have not been raised and /or where NPA ratios have not been reduced, the banks have not been able to improve the operational performance and their accumulated losses have increased. These include Langpi Dehangi Rural Bank, Arunachal Pradesh Rural Bank, Nagaland Rural Bank and Manipur Rural Bank. In the case of three banks viz. Arunachal Pradesh Rural Bank, Manipur Rural Bank and Nagaland Rural Bank, the level of NPAs at 60.3, 33.3 and 32.8 per cent, respectively and continued to be very high. The Langpi Dehangi Rural Bank in Assam covers only two backward hilly districts of Karbi Anglong and N.C. Hills and its poor financials are partly due to the limited scope for business. Langpi Dehangi Rural Bank, Manipur Rural Bank and Nagaland Rural Bank have low staff productivity levels (Rs. 77.6 lakh, Rs. 66.1 lakh and Rs. 73.9 lakh, respectively) and branch productivity levels (Rs. 322.9 lakh, Rs. 209.8 lakh and Rs.40.3 lakh, respectively) as compared with the average in the NER (staff productivity: Rs. 130.85 lakh and branch productivity: Rs 645 lakh). Incidentally, it is observed that except Assam Gramin Vikas Bank and Manipur Rural Bank, per staff business in the remaining RRBs is much less than the All India average (Annexure 8.2).

8.07 The share of RRBs in the regional credit flow was around 10-15% until 2003-04. However, the Government’s policy of improving credit flow to agriculture has boosted the RRBs' share to 22%. In the context of the North Eastern Region, even this is felt to be inadequate and the RRBs need to cover at least 35-40% of the credit flow, due to the poor performance of cooperatives.

8.08 The problems of RRBs are compounded by inadequately trained staff, low level of motivation, etc. With localized recruitments attracting talent is a major challenge. The way ahead must comprise of short term contract appointments as a prelude to selective recruitment and appropriate training for staff. The problems faced by RRBs include lack of dynamism/ motivation of the CEO, inadequate interest taken by sponsor banks, sub-optimal size and restrictions on expenditure for business promotion due to accumulated losses. There is shortage of staff in many RRBs in the region even going by the present staffing norms of four per branch currently laid down by NABARD. The long-term solution in terms of economic operations to improve outreach and increase productivity would consist of using information technology as a key driver. Taking into consideration the entire gamut of issues, the following measures are recommended to improve the performance of the RRBs:

8.09 Recommendations for RRBs in North Eastern Region:

i.The Task Force examined the specific issues of RRBs in the NE Region. It endorses the recommendations of the Committee on Financial Sector Plan for North Eastern Region, set up under the chairmanship of Smt. Usha Thorat, Deputy Governor, Reserve Bank of India. The recommendations relating to RRBs, may be implemented at the earliest so as to strengthen the rural banking infrastructure as the rural cooperative credit structure is poor.

ii. The sponsor banks may consider giving more operational freedom to RRBs that are doing well in terms of incremental growth in business and incremental reduction of NPAs and are in the process of wiping out accumulated losses. The areas in which more freedom should be given include all policy matters such as using intermediaries, relationship managers, Post Offices as agents and other IT based solutions for increasing outreach as also staffing. The Boards may be empowered to decide on incentives on the basis of performance in cases where all accumulated losses are wiped out and business growth and the business model, warrants such incentives.

iii. The banks may achieve optimum financial inclusion through intensive SHG linkages, joint liability groups, issue of Kisan Credit Cards, Swarojgar Credit Cards and Grameen Cards.

iv. To solve the long term need for trained bank officials in the North Eastern Region for all Commercial Banks, RRBs, Financial Institutions including MFIs and NBFCs, it is suggested that the IIBM Guwahati may consider implementing a one-year course on Banking and Finance based on the NIBM, Pune syllabus.

v. In the RRBs for Arunachal Pradesh, the financial margin as on 31 March 2005 is negative (i.e., -1.6%) which leads to negative net financial margin. This is a matter of concern as regards the long term survival of the Bank and a viability study may be taken up specifically by SBI/SBIRD, Hyderabad to address the issues of operational viability of the Bank.

vi. In general, the loan recovery position of RRBs in North Eastern Region is substantially low and it is necessary that a robust NPA management system is given utmost priority. It is recommended that the Board members also be sensitised to this issue. The loan policy of the North Eastern RRBs may be revised/modified giving due importance to the schemes of Self Help Groups, Joint Liability Groups and Village Development Boards/Councils schemes, etc. analysing their advantages and disadvantages, in tune with local needs/norms. Village based/community finance schemes may be experimented with.

vii. RRBs may concentrate on projects involving exploitation of local natural resources, such as horticultural and bio-diesel species, bamboo, spices and aromatic plants which are available abundantly in the region and can be a good source of raw materials. Value added products can be thought of and suitable bankable schemes can be formulated. Therefore, the business policy of North Eastern Region RRBs may be prepared according to the local needs and local raw materials availability.

viii. The problem of mass unemployment especially of school educated/college graduates is a matter of serious concern in all N.E.States and needs to be urgently addressed. RRBs need to address the issues of underdeveloped rural economies and creation of self-employment opportunities especially in the cluster tourism and service sector. Development of inland fisheries, animal husbandry and especially the poultry sectors holds enormous promise for self-employment opportunities among the educated youth, in the absence of industries/SMEs. Agro-processing is another sector as also Micro-hydel power generation for the far-flung and remote villages, which could be developed by RRBs in coordination with the State Governments.

'Work for something because it is good, not just because it stands a chance to succeed'- Vaclav Havel

Summary and Recommendations

With a view to increasing the operational efficiency of RRBs, Reserve Bank of India vide its letter no.RPCD.CO.No.RRB.2584 /03.05.33 (F)/2006-07 dated 11 September 2006 set up a Task Force to deliberate on areas where more autonomy could be given to the Boards of RRBs, with broad Terms of Reference and additional areas to be covered. A brief summary of the report including background and important recommendations of the Task Force, is presented below:

Background:

Regional Rural Banks (RRBs) were conceived and created in 1975, following the recommendation of the Narasimhan Committee (1975) when the thrust of the country's banking policy laid emphasis on the three pillars of rural credit viz., expansion of branch banking infrastructure, directed lending and subsidised credit. The RRBs were envisaged as rural credit institutions that combined commercial orientation with the local feel. Under the multi agency approach, 196 new localised banks were set up between 1975 and 1988 based on the Ordinance in 1975 and the RRB Act passed by Parliament in 1976. These institutions succeeded in creating a formidable network of 14494 branches having total business of Rs.112274 Crore as on 31 March 2006. However, they had a chequered existence so far. Most of the RRBs were hampered by viability issues and could not deliver fully on their promise, in terms of market share, introduction of new banking products and services, launching new banking technologies in the rural areas, etc. The concept of RRBs as low cost rural commercial banks and a source of cheap and directed credit to small and marginal farmers and other rural producers, etc. underwent policy reforms. These reforms were also supplemented by need-based capital strengthening programmes, partial consolidation of banks (limited to the same sponsor bank on a State-wise basis) to enable them to attain certain minimum critical mass, etc. These measures along with the formidable institutional capacity building initiatives mounted by GOI, RBI, NABARD and sponsoring banks, significantly improved the financial position of RRBs. In view of the large scope for further improvement in the performance of RRBs, the implementation of much needed reforms especially in the functioning of Board of Directors, HR practices, capacity building, resource mobilisation and deployment, IT initiatives, staff motivational levels, etc. have gained importance which resulted in the setting up of the Task Force by RBI.

Recommendations

1. As on date, out of 605 districts of the country, RRBs have been able to cover 525 districts. The Task Force recommends that the feasibility of covering the uncovered districts may be explored. (Para 1.20)

2. RRBs need to shed their earlier image of 'narrow' banks and consider providing a range of products for all financial needs and focus on financial inclusion through progressive use of technologies and low cost alternative delivery channels like business correspondents and business facilitators. (Para 1.21)

3. As they function in the same business and product market space, sponsor banks are sometimes perceived as competitors of RRBs. The relationship between sponsor banks and RRBs needs to be changed into a synergistic one, beneficial to both banks. Sponsor Banks are responsible for the performance of the RRBs sponsored by them. The Task Force recommends that an MoU be executed between the sponsor banks and the Govt. of India with regard to the performance of the RRBs under various key parameters (such as incremental growth in business, outreach, profitability, improvement in CD ratio, reduction in NPAs, etc.).In turn, sponsor banks, may, as usual, sign MoUs with their sponsored RRBs. (para 2.9)

4. The RRB Act, 1976 provides that the Central Government may increase the number of Directors on the Boards of RRBs Board up to 15. The Task Force feels that such a provision may be invoked on selective basis in case of large sized banks, created after amalgamation. In this exercise, due weightage may be given to professionals. Presence of woman members on the Board may also be considered. (Para 2.17)

5. Section 11 of the RRB Act 1976 provides for the sponsor bank to appoint the Chairman of RRBs from among its officers. The Task Force recommends that the Chairman be selected on merit and appointed by the sponsor bank from amongst a panel of qualifying officers in coordination with NABARD. (Para 2.19)

6. To encourage the deputation of talented officers as Chairman of RRBs, it is recommended that the RRB Chairman be given due weightage for promotion to the next higher grade in the parent institution as and when they are eligible. The pay, allowances and incentives should be attractive so as to encourage performance. (Para 2 .19)

7. The RRB Act, 1976 does not prescribe any minimum period for appointment of a Chairman, though maximum period is stipulated. The Task Force recommends that Chairman may have a minimum service period of 2 years and up to a maximum of 5 years. (Para 2.19)

8. As of now, the term of nominee directors is two years and a nominee director continues to be in position till his successor is nominated. It is recommended that the term of nominee directors may be as long as prescribed by the institutions nominating them but in any case not exceeding two terms of two years at a point of time and no director may be nominated for more than two terms of two years each. (Para 2.20)

9. The RRB Act, 1976 provides for setting up of Committees within the bank or as sub-committee of the Board, as may be needed. It is, therefore, suggested that the Board of Directors of RRB may constitute such Committees as may be required by them for efficient operations of the respective Banks but they must necessarily have the following Committees: (i) Risk Management Committee (ii) Management Committee (iii) Investment, HR and IT Committee and (iv) Audit Committee (Para 2.21)

10. The Board of Directors are to be made more independent by providing them a broader policy framework within which the RRBs should develop their own operations and policies. It is recommended that each Bank’s Board take total responsibility for business policies. As regards staffing pattern and HR issues, each Bank’s Board can finalise the staff requirements of branch/controlling office within the prescribed ceiling, based on earlier experience as also efficiency and business requirements. Directors on the Board of RRBs should be free from any personal business or other relationship with the RRB that could interfere with their independent judgment. (Para 2.22)

11. The Agenda issues as suggested to the Board of Directors by GOI / RBI / NABARD should be placed before the Board from time to time for information. The Agenda issues as suggested in the calendar of meetings should be structured such that all-important policy and operational issues are covered in Board Meetings so as to ensure Board oversight and review of operational aspects of the RRB. (Para 2.23)

12. It is observed that sporadic efforts are being made for training of official and non-official directors of RRBs. However, there is a general impression that majority of such non official Directors on the Boards of RRBs need to be adequately oriented towards the functions of RRBs and their responsibilities as nominee Directors. (Para 2.31)

13. The Task Force suggests that the role of sponsor bank should be supportive and broadly confined only to: (i) Extending management support as required by RRBs. (ii) Nominating its share of members in the Board of Directors to provide expert advice to RRBs.(iii) Providing funds for which the RRBs may also have the freedom to choose from any bank/financial institutions. (iv) Providing expert guidance/ help in investment related issues for which RRBs may also have the freedom to choose from alternatives, if available from other banks/primary dealers and (v) Conducting management audit till alternative arrangements are made by the RRBs themselves. (vi) Assisting RRBs in all HR matters as may be referred to them by the RRBs. (Para 2.32).

14. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, (SARFAESI Act) which covers Commercial Banks, may also be extended to RRBs. (para 2.34).

15. As per Finance Bill, 2006 the provisions for exemption granted under section 80(P) of the Income Tax Act available to RRBs (treating them as deemed cooperative society) have been withdrawn. The Task Force is of the opinion that in view of the high cost of operations in rural areas having significant business and default risks, low profit margins, need to finance at lower rates of interest to financially weaker sections of the rural society and that the RRBs as a separate rural credit system are yet to consolidate and are poised at a critical stage of take off, the provisions under section 80(P) of Income Tax Act may be continued for a further period of 5 years or till the restructuring process is completed, whichever is earlier.( Para 2.35).

16. The Task Force recommends that Chairmen of RRBs, should also be appointed as Members of the Empowered Committee (EC) constituted by RBI to bring in more efficiency in the functioning of RRBs. The Empowered Committee may ensure that no RRB is constrained in its business decisions by sponsor bank and that requisite support is forthcoming. (para 2.36).

17. The Task Force recommends that once the present process of amalgamation is over, the RRBs be subjected to the same level of safeguards and regulatory norms regarding capital adequacy as applicable to commercial banks. The RRBs, to start with, may strive to comply with a Capital to Risk weighted Asset Ratio (CRAR) requirement of 7%. The shareholders of RRBs may review the position after 3 years and consider recapitalisation wherever necessary so as to enable the RRBs to attain 7% CRAR. Further requirements of funds to elevate the CRAR to 9% in stages may be met through internal accretions of business surpluses by the RRBs themselves. (Para 3.03)

18. Due to the complexities of money market, locational disadvantages, non-availability of proper skilled staff, most RRBs have entrusted the trustee management to the Sponsor Banks. However, in the changed scenario RRBs should develop their own internal capacities including setting up of separate investment cells, risk evaluation system, positioning of trained personnel (if available within or accessing from market). The purchase and sale of government securities, may however, be done with the support of the sponsor bank. Till such time RRBs are able to nurture adequate levels of expertise within the institution, RRBs could take the help of sponsor banks, primary dealers and mutual funds. (Para 3.32).

19. The Task Force feels that there is considerable scope for enhancing treasury income of RRBs by adding depth to their investment portfolios. They may also be enabled to place their short-term surpluses for CBLO investments through any Commercial Bank. Investments in STDRs and Inter Bank – Inter RRB deposits / Inter Bank Participatory Certificates, may also be permitted. Scope for investment under SLR could be considered for extension to GOI bond, State Government bond, Treasury bill, Central/State Govt. Guaranteed bonds and other approved securities. RRBs may also be allowed to deal in NRE / FC / NRB / FCRA, certificates of deposits, etc. in consortium with sponsor bank. Besides, RRBs should be given freedom to place their money in term deposits with any bank. (Para 3.32)

20. Savings products form the core services provided by RRBs. Next in order of importance are micro credit products and project finance, Housing, Education, Personal Loans which are a part of the credit portfolio. The RRBs may focus on enhancing incomes from other sources by way of Issue of Bank Guarantees. RRBs in consortium with sponsor bank may enter in to remittance services not only within the District/State but also across the country and in some cases to foreign countries, life and non-life insurance including crop insurance, animal insurance and health insurance, transacting in government securities, mutual funds and equities on behalf of clients, etc. Similarly, capital-gains deposit accounts, collection of taxes and other government business and salary disbursements are other service products that can boost RRBs income. (Para 4.12)

21. While 60% of the advances may be earmarked for the priority sector with a sub-limit of 40% for agriculture and agro processing, the banks may lend 40% for other commercial purposes. With the help of refinance the banks can increase the CD ratio to 80% in two years (Para 4.13)

22. The RRBs may be encouraged to play a credit-led leadership role by providing credit across the supply chain including storage, processing, transportation, marketing and retailing that can result in overall advantage for all participants in the rural sector. An important advantage of the approach is that credit disbursed to one segment will help in recovery of loans in another link in the chain. (Para 4.15)

23. There may be occasions when the rural bank would have opportunities to finance in excess of the exposure limits under regulatory norms or self-imposed norms by the Board of Directors. In such a case, RRBs may join in consortium finance arrangements on pari passu basis with Public Sector Banks/DFIs. (Para 4.16)

24. Credit becomes an effective instrument of development when it is coupled with relevant knowledge inputs. Farmers need both technological inputs and commercial information. The former will include soil and water management, agronomical practices, inputs management, organic farming, precision approach, etc. The latter is about demand and supply projection, price discovery, crop diversification, contract farming, organizing producer groups/companies, etc. The bank may arrange both technical and commercial extension services with the help of professional agencies and technology platforms. (Para 4.17)

25. The banks may develop savings, credit and other products keeping in view the existing and potential requirements of the clientele. The credit products should address the needs of all those who want to help themselves through new ventures and improve/expand existing enterprises in all the three sectors (ISB), which appreciate the needs of the customer in a flexible way, depending upon the project life cycle. The bank has to review the total credit needs of the venture and not confine itself to certain components. Developing a continuing relationship in banking acts as a collateral substitute. RRBs need to build up rural banking skills and recognise acceptable banking risks so as to mitigate them in lending decisions. (Para 4.19).

26. The issue of Organisational Structure and staffing norms of RRBs need to be viewed in the context of the ongoing process of amalgamation. The structure should be conducive for decentralised decision-making without compromising on efficiency, accountability and controls. The Task Force recommends that matters relating to categorisation of branches, staffing norms and promotion policies and other HR matters may be studied in depth by a Committee/Task Force, set up for the purpose by RBI/GOI. (Para 5.08)

(i) Where banks have introduced a four-tier structure (with both Regional and Area Offices), they may revert back to the tree-tier structure of Head Office-Controlling Office – Branches (Para 5.10).

(ii) The delegation of powers should be such that about 75% of the sanctions are made at the branch level and upto 95% at controlling office level (Para 5.10).

27 Human Resources Management:

(i) The functioning of many RRBs is hampered by acute shortage of staff due to lack of staff recruitment. The Task Force recommends that the Board may initiate the process of recruitment of staff at various levels as per the status of vacancies after the banks make a comprehensive manpower assessment and keeping in view the sustainability of the business. However, the previously available institutions like Banking Services Recruitment Boards (BSRB), which the RRB Rules specifically provided for issues related to recruitment in RRBs is no more functional. The Task Force recommends that RRBs may be enabled to conduct written examinations for recruitment as well as promotions through reputed organisations like IBPS, etc. (Para 5.17,5.18)

(ii) The Task Force recommends that the RRBs may initiate need based promotion processes at all levels of staff as per the existing guidelines (Para 5.13).

(iii) Consequent to amalgamation of RRBs, the area of operation of many banks extends upto 10 to 12 districts, involving distances exceeding 600-700 Kms, Staff transfer is an issue which needs to be handled carefully and should be need based. (Para 5.15)

(iv) Non-monetary incentives successfully tested in many banks for recognition of officers for their performance like deputation for training programmes /exposure visits to foreign countries, performance awards, by way of having lunch with Chairman/GM, etc, merit certificates, transfers to places of choice, etc. may be considered for rewarding good performance. (Para 5.20)

(v) The RRBs may initiate the process of introducing a training cell within the Human Resources Management Department and put in place a training system for upgrading knowledge and skills, based on Training Needs Identification process (Para 5.22)

(vi) The sponsor banks may consider earmarking one of their training institutions in any State where the presence of their sponsored RRBs is substantial and organise training programmes as suggested in this report for staff / officers of the RRBs. (Para 5.23)

(vii) The Task Force has received various suggestions regarding amendment of service regulations. The suggestions for amendment in Service Regulations may also be considered by the authorities, which have been given at Annexure 5.1. (Para 5.26)

28. RRBs may set up an exclusive and dedicated Supervision Cell to attend internal control measures, address external supervision issues, organise periodic inspection of the branches/ controlling office/ HO and follow up, co-ordinate with concurrent auditor/ Management Audit Team of Sponsor bank and statutory auditor, facilitate smooth conduct of various types of audit and ensure timely and satisfactory compliance thereto, co-ordinate with the Department of Supervision of NABARD and facilitate smooth statutory inspection and submission of compliance thereof, to ensure submission of Off-site surveillance and other statutory returns to NABARD and RBI, co-ordinate with ALCO/Audit Committees and facilitate enforcement of risk management measures and decisions, etc. (Para 6.13)

29 All RRBs may set up a separate Internal Vigilance Cell to carry out interventions in conformity with the directions and guidelines of the CVC. Apart from promptly reporting incidence of frauds to NABARD, the progress and trends in frauds and misappropriations may be periodically analysed and placed before the Board on an annual basis so that steps for recovery of funds and internal disciplinary action, as well as police action (for following up criminal cases against erring staff/fraudulent customers) can be initiated. All banks may ensure this and provide certificates to NABARD and RBI, in confirmation. (Para 6.06, 6.16)

30 Concurrent Audit, regular internal inspection by the bank, statutory audit by the Statutory Auditor and statutory inspection by NABARD are independent instruments of supervision and RRBs may be subjected to these processes. The audit machinery, methods/ tools, need to be upgraded and audit classification norms may be introduced. (Para 6.07)

31 RRBs should have a Manual of Instructions for their IOs/ Auditors and it should be updated periodically. (Para 6.08)

32 A mechanism for rating of branches, IRs and compliance may be developed for objective evaluation of the performance of branches, the quality of Inspection Reports and the Compliance Reports. The banks may put in place a health card for the branch, based on select parameters. (Para 6.15)

33 A working group comprising the officers from Supervision, Finance and Administration & Establishment may be constituted in each RRB, which would take steps to minimise the arrears in reconciliation of accounts (branch adjustments, sundry debtors, etc. (Para 6.16)

34. In the context of increased and diversified loan/ investment portfolio, introduction of new banking products/ financial services, ALM, MIS needs, etc., rapid data availability and computerisation is an imperative and RRBs may set up a computerised data processing system. (Para 6.17)

35. After an in-depth examination of the prevailing scenario in rural banking operations, expected role of RRBs, amalgamation of RRBs at State level, level of computerisation in various RRBs, financial health of RRBs and also future challenges before RRBs as a one-stop entire banking service provider, the Task Force recommends the following:

(i) RRBs need to take up computerisation of major areas of operations, MIS in branches, controlling offices and HO in the next 3 years by adopting an Action Plan. Efforts may be made to introduce / adopt website, on line banking, ATMs, EFT, Networking of HO / branches, inter branch system network, remote account transaction / access facility, debit / credit card to the maximum extent.

(ii) Within broad indicative norms, the RRBs may be given autonomy to take their own decision on designing of their computerisation process and they may seek guidance from their sponsor institutions wherever necessary.

36. Technology is likely to remain the growth engine in rural banking in the years to come. However, IT in RRBs is in a nascent stage. Though the K.P. Agarwal Committee had recommended the computerisation of 50% of branches by 31 March 2007, progress till date however, has not been satisfactory. The lack of uniformity in the software across RRBs or even within RRBs is another major issue to be resolved as they move along the path towards greater consolidation. (Para 7.07)

37. Recommendations for RRBs in North Eastern Region:

i. The sponsor banks may give more operational freedom to RRBs that are doing well such as using intermediaries, relationship managers, Post Offices as agents and other IT based solutions for increasing outreach as also in respect of staffing functions. The Boards may also be empowered to decide on issues relating to incentives on the basis of performance in cases where all accumulated losses are wiped out and if business model warrants such incentives. (Para 8.9- ii).

ii. To solve the long term need for adequately trained bank officials in the North Eastern Region for all Commercial Banks, RRBs, Financial Institutions including MFIs and NBFCs, it is suggested that the IIBM, Guwahati may consider implementing a one-year course on Banking and Finance on the lines of NIBM Pune syllabus. (Para 8.9 – iv)

iii. In Arunachal Pradesh RRB, the financial margin as on 31 March 2005 is negative (i.e., -1.6%). Therefore, a viability study may be taken up specifically by SBI/SBIRD, Hyderabad to address the issues of operational viability of the Bank. (Para 8.9-v)

iv. The Board Members need to be adequately sensitized about the fact of poor loan recovery position of RRBs in North Eastern Region. The loan policy of the North Eastern RRBs may be revised/modified giving due importance to the schemes such as Self Help Groups, Joint Liability Groups and VDC schemes, etc. (Para 8.9-vi)

v. The problem of mass unemployment, especially among educated youth, is a matter of serious concern in all N.E.States. RRBs need to address the issues of underdeveloped rural economies and creation of self-employment opportunities especially in sectors such as medicinal herbs and aromatics, bamboo, bio-diesel, horticulture and wasteland development. Development of inland fisheries, animal husbandry and poultry sectors holds enormous promise for self-employment opportunities among the educated youth, in the absence of industries/SMEs. Agro-processing is another sector as also Micro-hydel power generation for the far-flung and remote villages, which could be financed by RRBs. (para 8.9-viii)