What is the Difference between RRBs and Nationalised Banks?

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Nationalisation of Banks

Bank jobs have become quite popular in recent years among the job aspirants all over India, owing to the security, dignity and facility that they provide along with attractive pay scales. Banks have covered a long journey since they initially came into actual existence and started their operations. The Reserve Bank of India, which keeps a check on all banks and their activities, was established in 1935 which was further followed by the establishment of Punjab National Bank, Canara Bank and Indian Bank. SBI was the first bank in India that was nationalised in 1955. After SBI, Govt. of India 14 banks were nationalised in 1969 and the remaining 7 were nationalised in 1980. These were the banks that were relatively bigger in size.

What is Nationalisation?

The term ‘nationalisation’ refers to the process of shifting of private assets to the public sector which will further be operated or owned by the state / government. In simpler words, banks which were in the private sector before were transferred to the public sector. Thus, ‘nationalisation’ can be understood as the government taking control over assets / an organization by acquiring a majority / complete share in it.

Nationalisation of Banks – The main reason

Earlier, all the banks were managed and controlled by private houses and therefore they used to lend mainly to big corporates. Thus they usually were working for their own motives and were unable to contribute to the Government’s objectives. Therefore, the Government decided to nationalise the banks keeping in mind the following reasons:

  • To make the credit facility available for the productive sectors, such as agriculture and Small and Medium Enterprises,the village industries of the Indian economy which were in need of some capital for their economic development and expansion of business.
  • To control the privatized money lending that was directed towards only certain business houses and corporates, to make sure that the credit facility can be extended to the economically weaker sections.
  • By controlling privatization of banks, the scope of banking could also be expanded. Nationalisation helped in increasing the reach of banks to the unbanked areas too.

Nationalised Banks and RRBs

RRBs refer to Regional Rural Banks which were created in 1975. They were created with the idea of developing something which is a combination of rural characteristics and the professionalism of commercial banks. Government of India chose to establish these RRBs keeping in mind the need of specialised institutions for rural lending. Though, cooperative banks have been doing rural lending since a long time but even they did not solve the bigger purpose as they were handled very unprofessionally and corruption existed in the system.

The shareholding in RRBs was fixed as:

  • GOI – 50%
  • Sponsor Bank – 35%
  • State Government – 15%

The sponsor bank is supposed to provide all management support that is needed to run the bank. Most of the nationalised commercial banks have been promoting some RRBs by sponsoring them. There were 196 RRBs working mainly in 2-3 districts in adjoining areas. These RRBs were smaller in size, therefore in last 10 years there has been consolidation of RRBs and the number came down to 56 covering 525 districts with a network of about 15 thousand.

RRBs do full-fledged banking but have to lend 75% to the priority sector compared to 40% priority sector lending done by other commercial banks including the nationalised banks.

Conclusion

Thus, we can say that RRBs are smaller banks that work only in few of the districts, providing loans to agriculture and priority sector. They lack professionalism of nationalised banks and get their top management from the sponsor bank (nationalised banks). Also, RRBs cannot open their branches outside the districts allotted to them whereas, nationalised banks have numerous branches all over India.

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