^ / Financial Performance of Regional Rural Banks in India b

'N / O^ and after Amalgamation

Thesis submitted to
Veer Narmad South Gujarat University, Surat.

For the degree of

Doctor of Philosophy
in
Commerce

By
Prof. Minaxi M. Jariwala
(M.Com, M.Ed.)
Vivekanand College of Education
Jahangirpura, Surat.

Under the supervision of

Dr. Martina R. Noronha
Vice-Principal
Head, Department of Accountancy
S.P.B. English Medium College of Commerce, Surat

Veer Narmad South Gujarat University, Surat.

October, 2012

r f-' !! ' •

HL.,.
 OE^VICAI^
7'his is to certify that <Brof. MinoKi M. JariwaCa,
student of 'Doctor of (Phifosophy in the subject of
Commerce/JLccounting has successfuCCy compCeted her research
wor^ entitCed "TinanciaC (Performance of (RegionaC (Ruraf (Banh^
in India (Before andjAfter jAmatgamation" as partialfnfitiment
of the degree of (Doctor of (Philosophy during the academic year
2010-2012. 'This thesis wor^incorporates the result of her study
andanaCysis.

October, 2012 Dr. Martina R. Noronha

Place: Surat (Research Guide)
Vice-Principal,
Head, Dept of Accountancy
S.P.B. Englisli Medium
College of Commerce, Surat.

Dr. Vipin D. Naik

Dean, Faculty of Commerce
Principal, S.P.B. English
Medium
College of Commerce, Surat.
 <D(EC£A^1^0!N'

/; the undersigned (Prof. MnojQ. M. JariwaCa hereby,

decCare that this thesis entitfed "TinanciaC <Peformance of

^gionat ^rat'P>anks in India before and after Jlmafgamation"

is a resuCt of my own research wor^ carried out during the

academic year 2010-2012 and has not been previously submitted

to any other "Universityfor any other examination.

I hereby dec fare that a[[ information in this document has

been obtained and presented in accordance with academic rufes

and ethicaC conduct.

October, 2012 Prof. Minaxi M. Jariwala

Place: Surat (Research Scholar)
 I than^the Jifmighty for his Benign presence with me
aCC through the journey of the preparation of this thesis. I express
my deep gratitude to ®r, 'Martina % 3^oronha, my guide -who has
helped me at every point in time white compiiing this thesis.
Without her effective direction, this thesis woufdnot have Seen a
reaCity. She heCpedme to set the Benchmarh^andako ensured that
I realized them wett in time. I sincerety thanh^ her for her
invaCuaBCe suggestions, guidance, great understanding,
perseverance, immense ^owfedge andpatience.

I aCso express my profound sense of gratitude to

(Prin. (Dr. Vipin 0. W^z^ (Dean TacuCty of Commerce,
'Veer H^armad South Qujarat Vniversity, Surat and (PrincipaC,
S.'P.(B. CoCCege of Commerce, Surat for his continuous
encouragement and motivation.

Let me humBfy ac^owfedge my than^ to my mother

Mrs, (BhanuSen 94.. Jariwala and my father Late.Mane^C

JariwaCafor their Benediction. 7'hey have Been an immense source

of strength for me and have stood By me at a[[ times andimBiSed

111
the much needed confidence in me. My Brother Mr. Sanjay Shinde
has been a constant support to me during this endeavor.

I am indeedgratefut to Mrs. (Furnima V. Mehtafor

heCping me in the statisticaf anaCysis and providing me aCC
necessary information as and when needed. I also than^ Miss
(priyan^ J-C. Sarangfor typing the thesis.

October, 2012 Prof. Minaxi M. Jariwala

Place: Surat (Research Scholar)

IV
 Tj(ecutive Summary
lihe institute of ^giona[ ^raf (Ban^ (^R^^s) was created to
meet the ey^ess demand for mstitutionaC credit in the ruraC areas,
particuCarCy among the economicaffy and sociaffy marginafized
section. JlCthough the co-operative (Banh^ and the commerciaf
6an^ hadreasonaSfe records in terms ofpopufation group the co-
operative 6anh^ had a cCearurSan Bias. In order to provide access
to Cow cost San^ng facidities to the poor, the ^arshimhan
wor^ng group (1975) proposed the estaSRshment of a new set of
6anh^ as institution which "comSine the CocaC feef and the
famifiarity with ruraf proSfems which the co-operatives possess
and the degree of Business organization, aSifity to moSifize
deposits, access to centra f money mar^ts and modernized out foo^
which the commerciaf banks have"

T^he main objective of the study is to anafyse the financiaf

performance of '^gionaf'^raf (Ranks in India before and after
Jtmafgamation and to understand the working of <Regionaf ^raf
(Banks in India.

I^he study is divided into sij{^ chapters. 'The first chapter is

introductory in nature which covers devefopment of banking in
India, meaning and definition of banking, features of banking
and cCassification of (Ban^. The second chapter deals with
(Review of Literature. The third chapter deals with ^R^s and
incCudes meaning of ^R^s, capitaC structure, management of
(R^s. ^search Methodology is deaft with in the fourth chapter.
The fifth chapter deaCs with financiaC performances of'R^s in
India Before and after Jlmafgamation with the hefp of statistical
anaCysis. The sixth chapter gives the cone fusion and suggestions
hasedon data analysis.

It is inferred that the 'R^^s are weff positioned to pfay a major

rofe in financial incfusion. 'R^^s have improved their performance
due to amafgamation.

VI
 TABLE OF CONTENT
CHAPTER 1 1
INTRODUCTION 1
1.1 Origin of B anldng 1
1.2 Meaning and Definition of Banldng 2
1.2.1 Meaning of Bank 2

1.2.2 Definition of Banlc 2

1.2.3 Definition of Banking 2

1.3 Characteristics of Banldng 3

1.4 Development of Banldng in India 3
1.5 Classification of Banks 8
1.5.1 Commercial B anks 8

1.5.2 Co-Operative Bank 10

1.5.3 Specialized B anks 11

1.5.4 Central Bank 12

1.6 Structure of Banldng Industry in India 14

1.7 Banking and Economic Development 15
1.8 Functions of Commercial Banl<; 19
1.8.1 Primary Functions of Commercial Banks: 20

1.8.2 Secondary functions of Commercial Banks: 23

1.9 Regional Rural Bank: (RRBs) 28

CHAPTER 2 30
REVIEW OF LITERATURE 30
CHAPTER 3 38
REGIONAL RURAL BANKS 38
3.1 Introduction 38
3.2 Regional Rural Banl^s (RRBs) 38
3.3 Establishment and Incoiporation of Regional Rural Banks 40
3.4 Capital Structure and Sponsorship 40

vu
 3.5 Management of Regional Rural Bank 41
3.6 Objectives of Regional Rural Banks 41
3.7 Functions of Regional Rural Banks 42
3.8 Present Scenario of RRBs 42
3.9 Statewise Distribution of RRBs 44
3.10 Sponsor Banks 46
3.11 Progress of RRBS 49
3.11.1 Restructuring Strategies 50
3.11.2 Notification regarding amalgamation by Government of India 52

CHAPTER-4 57
RESEARCH METHODOLOGY 57
4.1 Introduction 57
4.2 Research Statement 57
4.3 Research Design 57
4.4 Objectives of the study: 58
4.5 Scope of the study 58
4.6 Hypothesis 58
4.7 Sample selection 59
4.8 Data Collection 64
4.9 Period of Study 64
4.10 Significance of Study 64
4.11 Tools and techniques 65
4.11.1 Ratio Analysis 65

4.11.2 Mean 67

4.11.3 Variance 70

4.11.4 T-Test 72

4.11.5 Analysis of Vaiiance (ANOVA) 74

4.11.6 Regression Analysis: 77

4.12 Limitations of the study ^^ 79

vui
CHAPTER 5 80
DATA ANALYSIS 80
5.1 Growth of Regional Rural Banks in India 80
5.2 Number of RRBs in Profit/Loss as % of Total Numbers of RRBs _ 81
5.3 Manpower Deployment 82
5.4 Geographical Coverage 83
5.5 Capital Composition 84
5.6 Deposits Mobilization 86
5.7 Investment 88
5.8 Sector wise Loan Disbursement 89
5.9 Disbursement of loans to various groups in the priority sector 91
5.10 Loans to Agriculture and Allied Activities 93
5.11 Disbursement of loans to Agricultural Sector and Non-Agricultural
Sector 95
5.12 Gross NPA and Net NPA 96
5.13 Changes in Composition of Net Worth of RRBs 97
5.14 Financial performance of RRBs before and after Amalgamation 98
5.14.1 Cash-Deposit Ratio 98

5.14.2 Credit-Deposit Ratio 99

5.14.3 Investment-Deposit Ratio 101

5.14.4 (Credit + Investment) Deposit Ratio 103

5.14.5 Ratio of Deposits to Total Liabilities 104

5.14.6 Ratio of Term Deposits to Total Deposits 106

5.14.7 Ratio of Priority Sector Advances to Total Advances 108

5.14.8 Ratio of Term Loan to Total Advances 110

5.14.9 Ratio of Interest Income to Total Assets 112

5.14.10 Ratio of Net Interest Margin to Total Assets 113

5.14.11 Ratio of Non Interest Income to Total Assets 115

5.14.12 Ratio of Intermediation cost to Total Assets 117

IX
 5.14.13 Ratio of Wage bills cost to Intermediation cost 118

5.14.14 Ratio of Wage bills to Total Expenses 120

5.14.15 Ratio of Wage bills to total Income 122

5.14.16 Ratio of Burden to Total Assets 123

5.14.17 Ratio of Burden to Interest Income 125

5.14.18 Ratio of Operating profits to total Assets 127

5.15 Regression Analysis 128

CHAPTER 6 132
CONCLUSION AND SUGGESTIONS 132
6.1 Conclusion 132
6.2 Suggestions 135
REFERENCES AND WEBSITES 140
 List of Tables
Table Page
Particulars
No. No.
1 Progress of Commercial Banking in India 10
2 Basic Business Indicators of RRBs 43
3 State Wise Distribution of RRBs. (As end of March 2005) 44
4 State Wise Distribution of RRBs. (As end of March 2009) 45
5 Sponsor Banks (As end of March 2005) 47
6 Sponsor Banks (As end of March 2009) 48
7 List of Regional Rural Banks in India (as end of March 2009) 59
8 Growth of Regional Rural Banlcs in India 80
9 Numbers of RRBs in profit or loss as % of total numbers of
RRBs 81
10 Manpower Deployment 82
11 Coverage of Districts 83
12 Components of Total Capital funds 84
13 Deposits 86
14 Growth of Investments 88
15 Sector wise Loan Disbursement 89
16 Disbursement of loans to various groups in the Priority Sectors 91
17 Disbursement of short-Term Loans (Crop Loans) and Term
Loans (Agriculture and Allied Activities) by RRBs 93
18 Loans disbursed to Agricultural and Non-Agricultural Sectors
(in %) 95
19 Gross NPA and Net NPA 96
20 Composition of Net Worth (in %) 97
21 Cash -Deposit Ratio before Amalgamation 98
22 Cash -Deposit Ratio after Amalgamation 98
23 Credit-Deposit Ratio before Amalgamation 99
24 Credit-Deposit Ratio after Amalgamation 100
25 Investment-Deposit Ratio before Amalgamation 101

XI
Table Page
Particulars
No. No.
26 Investment-Deposit Ratio after Amalgamation 101
27 (Credit + Investment) Deposit Ratio before Amalgamation 103
28 (Credit + Investment) Deposit Ratio after Amalgamation 103
29 Ratio of Deposits to Total Liabilities before Amalgamation 104
30 Ratio of Deposits to Total Liabilities after Amalgamation 105
31 Term Deposits to Total Deposits Ratio before Amalgamation 106
32 Term Deposits to Total Deposits Ratio after Amalgamation 106
33 Ratio of Priority Sector Advances to Total Advances before
Amalgamation 108
34 Ratio of Priority Sector Advances to Total Advances after
Amalgamation 10 8
35 Ratio of Term Loan to Total Advances before Amalgamation 110
36 Ratio of Term Loan to Total Advances after Amalgamation 110
37 Ratio of Interest Income to Total Assets before Amalgamation 112
38 Ratio of Interest Income to Total Assets after Amalgamation 112
39 Ratio of Net Interest Margin to Total Assets before
Amalgamation 113
40 Ratio of Net Interest Margin to Total Assets after Amalgamation 114
41 Ratio of Non Interest Income to Total Assets before
Amalgamation 115
42 Ratio of Non Interest Income to Total Assets after Amalgamation 115
43 Ratio of Intermediation cost to Total Assets before
Amalgamation 117
44 Ratio of Intermediation cost to Total Assets after Amalgamation 117
45 Ratio of Wage bills cost to Intermediation cost before
Amalgamation 118

46 Ratio of Wage bills cost to Intermediation cost after

Amalgamation 119

47 Ratio of Wage bills to Total Expenses before Amalgamation 120

48 Ratio of Wage bills to Total Expenses after Amalgamation 120

XII
Table ^ ^. , Page
Particulars
No. No.
49 Ratio of Wage bills to total Income before Amalgamation 122
50 Ratio of Wagebills to total Income after Amalgamation 122
51 Ratio of Burden to Total Assets before Amalgamation 123
52 Ratio of Burden to Total Assets after Amalgamation 124
53 Ratio of Burden to Interest Income before Amalgamation 125
54 Ratio of Burden to Interest Income after Amalgamation 125
55 Ratio of Operating profits to Total Assets before Amalgamation _ 127
56 Ratio of Operating profits to Total Assets after Amalgamation 127

xni
 List of Graphs
Particulars ,T
No.
Number of RRBs 80
Number of Branches 80
Numbers of RRBs in profit or loss as % of total numbers of RRBs 81
Number of Staff Employed 82
Number of District Covered 83
Components of Total Capital funds 85
Deposits 87
Growth of Investments 88
Sector wise Loan Disbursement 90
Disbursement of Loans to various groups in the Priority Sectors 92
Disbursement of short-Term Loans (Crop Loans) and Term Loans
(Agriculture and Allied Activities) by RRBs 94
Loans disbursed to Agricultural and Non-Agricultural Sectors (in %) 95
Gross NPA and Net NPA 96
Cash -Deposit Ratio 98
Credit-Deposit Ratio 100
Investment-Deposit Ratio 101
(Credit + Investment) Deposit Ratio 103
Deposits to Total Liabilities Ratio 105
Term Deposits to Total Deposits Ratio 107
Priority Sector Advances to Total Advances Ratio 109
Term Loan to Total Advances Ratio 110
Interest Income to Total Assets Ratio 112
Net Interest Margin to Total Assets Ratio 114
Non Interest Income to total Assets Ratio 116
Intermediation cost to Total Assets Ratio 117
Wage bills cost to Intermediation cost Ratio 119
Wage bills to Total Expenses Ratio 121
Wage bills to Total Income Ratio 122
Burden to Total Assets Ratio 124
Burden to Interest Income Ratio 126
Operating profits to Total Assets Ratio 127

XIV
 CHAPTER 1
INTRODUCTION

1.1 Origin of Banking

The development of "Banking" is evolutionary in nature. Banking in its crude
form is an age-old phenomenon. It was in existence even in ancient times, a
French writer, for instance, mentions about bank and bank notes in Babylon in
600 B.C. In India references to money lending business are found in the Manu
Smriti also. There is evidence to show that money lending existed even during
the Vedic period.

The origin of modern banks is traced to thi-ee important sources. They are/-
(i) goldsmiths
(ii) moneylenders and
(iii) merchant bankers.

The goldsmith by virtue of dealing in gold, had facilities for safe keeping of
valuables. He accepted for safe custody the money, another important valuable
item, belonging to his customers. The goldsmiths began to lend the money
knowing that all the depositors do not withdraw their savings at a time. The
money lender lent his surplus funds to the needy and had to oblige his
customers by accepting their money for safe custody.

Banldng made its first appearance as a public enterprise in the year 1157 in
Italy with the establishment of "Bank of Venice". The "Bank of Barcelona"
was started in year 1401, the "Bank of Genoa" in year 1407 and the "Bank of
Amsterdam" in year 1609. The Lombards who migi-ated to Europe and England
from Italy were responsible for the development of modern banking. When
severe restrictions were imposed on them by King Charles 11, their business
was affected at large, the goldsmiths were gi'adually replaced by private
bankers. After the Banking Act was passed in 1833 in England, the growth of
joint stock commercial banking took place during the 19"^ centuiy.
1.2 Meaning and Definition of Banking
1.2.1 Meaning of Bank
A bank is like a reservoir into which flow the savings, the idle suiplus
money of households and from which loans are given on interest to
businessman and others who need them for investment or productive
uses. A bank is an institution which deals in money and credit. Thus,
bank is an intermediary which handles people's money to earn profit.

The word "bank" in the modem sense, can be traced to the German
word "Banck" which means heap or mound or joint stock fund. Later the
Italian word "Banco" meaning heap of money was coined.

Some people believe that the word "bank" is derived from the French
words "bancus" or "banque" which means a "bench". Initially, the
bankers, the Jews in Lombardy, transacted their business on benches in
the market place and the bench resembled the banldng counter. If a
banker failed, his "banque" (bench) was broken up by the people, hence
the word "bankrupt".

1.2.2 Definition of Bank

According to Oxford Dictionary:
"Bank is an establishment for the custody of money, which it pays out
on a customer's order."

According to Prof. Coiicher:

"A bank is a financial institution which can accept the suiplus savings
from the individuals in the form of deposits and when the depositor
demands money, the institution can immediately pay the amount
invested."

1.2.3 Definition of Banking

According to Indian Banking Regulation Act 1949 "A banking company
means any company which transacts the business of banking which
 means accepting for the purpose of lending or investment of deposits
from the public, repayable on demand or otherwise and withdrawn by
cheque, draft and order or otherwise."

1.3 Characteristics of Banking

The following are the basic characteristics of banldng:
a. Dealing in money:
The banks accept deposits from the public and advance them as loans to the
needy people. The deposits may be of different types-current, fixed, saving
accounts. The deposits are accepted on various terms and conditions.

b. Deposits must be withdrawable:

The deposits made by the public can be withdrawable by cheques, drafts or
otherwise. The deposits are usually withdrawable on demand.

c. Dealing with credit:

The banks are institutions that can create credit, i.e., creation of additional
money for lending. This is a unique feature of banking.

d. Commercial in nature:
Since all the banking functions are earned on with the aim of making profit, it
is regarded as a commercial institution.

e. Nature of an agent:
Besides the basic functions of accepting deposits and lending money as loans,
banks possess the character of an agent because of its various agency services.

1.4 Development of Banking in India

The banking functions became an effective force only after the first decade in
20* century. The Agency Houses, established by the East hidia Company were
basically trading firms and carried on banking business as part of their main
business. Because of this dual function and lack of their own capital they failed
and vanished from the scene during the third decade of 18* centuiy.

The first bank in hidia was established in 1786. Since 1786, the journey of
Indian banking system can be segregated into thi-ee distinct phases.
 Early phase Second phase Third phase
1786 to 1949 1949 to 1991 After 1991
• Setting up of bank Nationalisation of banks Advent of Indian
• Slow growth of bank Financial and Banking
sectors reforms

EARLY PHASE
The General Bank of India was set up in the year 1786, followed by Bank of
Hindustan and Bengal Bank.
The East India Company established three banks:
(1) Bank ofBengal in 1809.
(2) Bank of Bombay in 1840.
(3) Bank of Madras in 1843.
These banks were also l<nown as "Presidency Banks". These banks were
amalgamated in 1920 and Imperial Bank of India was established which started
private shareholders bank. Mostly Europeans were shareholders of the bank. In
1865, Allahabad bank was established exclusively by Indians. "Punjab
National Bank" Ltd was set up in 1894 with Head Quarters at Lahore. Between
1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank and Bank of Mysore were set up. Reserve Bank of India
was setup in 1935.
During the first phase, the growth of banking was very slow and banks also
experienced periodic failures between 1913 and 1948. There were
approximately 1100 small banks. During this phase, the public had less
confidence in bank. As a result, deposit mobilization was slow. To streamline
the functioning and activities of commercial banks, the Government of India
came up with the Banking Companies Act, 1949 which was later changed to
Banking Regulation Act, 1949 as per amendment Act of 1965 (Act no. 23 of
1965). Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking authority.
SECOND PHASE
The Government took major steps towards Indian Banlcing Sector reforms after
Independence. In 1955, it nationalized the Imperial Bank of India. It formed the
State Bank of India to act as the principal agent of RBI and handle banking
transactions of the Union and State Governments all over the country. The
nationalization of bank restored harmony of interest and softened the intensity
of booms and depressions.

14 leading commercial banks, with deposits exceeding ?50 crore each, were
til

nationalized on 19 July, 1969. Their take-over was intended "to serve better
the needs of development of the economy in conformity with national priorities
and objectives."
The banks which were nationalized are:
(i) The Central Bank of India
(ii) The Bank of India
(iii) The Punjab National Bank
(iv) The Bank of Baroda
(v) The United Commercial Bank
(vi) The Canara Bank
(vii) The United Bank of India
(viii) The Dena Bank
(ix) The Syndicate Bank
(x) The Union B ank of India
(xi) The Allahabad Bank
(xii) The Indian Bank
(xiii) The Bank of Maharashtra and
(xiv) The Indian Overseas Bank.

This step brought 80% of the banking segment in India under government
ownership.
The following steps were taken by government of India to regulate banking
institutions in the country:
> 1949- Enactment of Banking Regulation.
> 1955- Nationalization of State Bank India (SBI).
> 1961- Insurance cover extended to deposits.
> 1969- Nationalization of 14 major banks.
> 1971 - Creation of credit guarantee coq^oration.
> 1975- Creation of Regional Rural Banks.
> 1980- Nationalization of six banks with deposit over 200 crores. (Punjab
and Sindh Bank, Vijaya Bank, Oriental Bank of Commerce (OBC), Andhi-a
Bank, Corporation Bank and New Bank of India)

Banking under Government ownership gave the public implicit faith and
immense confidence about the sustainability of these institutions.

THIRD PHASE
This phase introduced many more products and facilities in the banking sector.
In 1991, under the chairmanship of M. Narsimhan, a committee was formed for
the liberalization of banking practices.

Internet Banking was introduced. At present there are 27 public sector banks
and a new private sector banks and 11 foreign banks operating in India. The
financial system of India has shown a great deal of resilience This is due to a
flexible exchange rate regime and high foreign reserves.

The following are the scheduled Banks in India

(PubHc Sector) 1. State Bank of India

(26 Banks) 2. StateBankofBikaner& Jaipur
3. State Bank of Hyderabad
4. State B ank of Indore
5. State Bank of Mysore
6. State Bank of Patiala
7. State Bank of Travancore
8. Andhra Bank
 9. Allahabad Bank
10. BanlcofBaroda
11. Bank of India
12. Bank of Maharashtra
13. CanaraBank
14. Central B ank of India
15. Corporation Bank
16. DenaBank
17. Indian Overseas Bank
18. Indian Bank
19. Oriental Bank of Commerce
20. Punjab National Bank
21. Punjab and Sindh Bank
22. Syndicate Bank
23. Union Bank of India
24. United Bank of India
25. UCOBank
26. VijayaBank

(Private Sector) 1. Vysya Bank Ltd

(9 Banks) 2. AXIS Bank Ltd
3. Industrial Bank Ltd
4. ICICI Banking Corporation Bank Ltd
5. Global Trust Bank Ltd.
6. HDFC Banlc Ltd.
7. Centurian Bank Ltd.
8. Bank of Punjab Ltd.
9. IDBI Bank Ltd.

(Foreign Banks) 1. American Express Bank Ltd.

(11 Banks) 2. ANZ Gridlays Bank P/c
3. Banl'C of America NT & SA
4. Bank of Tokyo Ltd.
5. Banque Nationale de Paris
6. Barelays Bank P/c
 7. CitiBankN.C.
8. Hong Kong and Shanghai Banking Corporation
9. Deutsche Bank AC
10. Standard Chartered B anlc
11. JPMorgan Chase Bank Ltd.

1.5 Classification of Banks

Financial requirements in a modem economy are of a diverse nature. Hence,
different types of banks have been instituted to cater to the varying needs of the
community.

Financial institutions in the organized sector have grown significantly in the

last three decades. Amongst the institutions in the organized sector of the
Indian money market, commercial banks and co-operative banks have been in
existence for a pretty long time. An important development in the organized
sector was the formation of Regional Rural Bank (RRBs) in the seventies, to
cater to the financial needs of rural areas. Besides the co-operative banks,
commercial banks and regional rural banks, a variety of specialized financial
institutions have been set up in the country to cater to the specific needs of
trade, commerce, agriculture, industiy and other activities.

Banks in the organized sector may, however, be classified into the following:-
1.5.1 Commercial Banks
A commercial bank may be defined as a financial institution that accepts
deposits of money from the public and uses the money for lending. The
distinctive function of a Commercial bank is that it accepts deposits
called demand deposits from the public which are withdrawable by
means of cheques. Acceptance of deposits alone, however, does not give
it the status of a bank. Its essential function is to make use of these
deposits for lending.

Commercial banks are the oldest banking institutions in the organized

sector of the Indian money market. They cater to the needs of trade,
commerce, industry, agriculture, small business, and even other sectors.
With a wide network of branches throughout the country. Commercial
banks command a major share in the total banking operations.

Commercial banks usually give short-term loans and advances. They

occupy a dominant place in the money market. They form the biggest
component of the banking structure of any country. The commercial
banks in India are governed by the India Banldng Regulation Act, 1949.

In capitalist countries, like the UK and the USA, commercial banks are
usually in private sector, owned by share holders. In sociahst countries
like Russia, they are completely nationalized.

1.5.1.1 Commercial Banks in India

In India, however, there is a mixed banking system. Prior to July 1969,
all the commercial banks 73 scheduled and 1564 non-scheduled banks,
except the State Bank of India and its subsidiaries- were under the
control of private sector. On July 19, 1969, however 14 major
commercial banks with deposits of over 50 crores were nationalized. In
April 1991, other six commercial banks were taken over by the
government.

At present, there are 21 nationalized banks plus the State Bank of India
and its 6 subsidiaries constituting public sector banking which controls
over 90 percent of the banking business in the countiy.
 The following table shows the progress of banking in India.
Table 1
Progress of Commercial Banking in India
Particulars June 1969 March 2011
Public Sector Banks 22 21
Regional Rural banks - 82
Foreign Banks 14 33
Other Scheduled Commercial Banks 37 83
Total 73 219

1.5.2 Co-Operative Bank

Co-operative banks are a gi'oup of financial institutions organized under
the provisions of the Co-operative Societies Act. These banks are
essentially co-operative credit societies organized by members to meet
their short term and medium term financial requirements.

Special types of banks are necessary for the financing of agriculture.

Co-operative banks are best suited for this puipose. The object of
co-operative banks is to offer banldng facilities to persons of limited
means requiring credit for productive purposes in the use of the land and
labour at their disposal.

The co-operative banking system in hidia is, however, small sized in

comparison to the commercial banking system. Its credit outstanding is
just less than one-fifth of the total credit outstanding of the commercial
banks. Nonetheless, co-operative credit system is the main institutional
source of rural, especially, for agricultural finance in India.

The state co-operative banks lie at the apex of the entire co-operative
credit structure. Evety state co-operative banks basic function is to
furnish loans to the central co-operative banks in order to enable them to
help promote the lending activities of the primary credit societies. The

10
 state co-operative banks, thus, serve as the final link between the money
market and co-operative sector of the country.

1.5.3 Specialized Banks

There are specialized banks which cater to some special needs, e.g.
Foreign Exchange Banks, Industrial Bank, Development Banks, Land
Development Bank etc.

Some of the specialized banks are explained as follow:

(1) Foreign Exchange Bank.
Foreign Exchange Banks or simply exchange banks are meant
primarily to finance the foreign trade of a country. They deal in
foreign exchange business, buying and selling of foreign
currencies discounting, accepting and collecting foreign bills of
exchange. They also do ordinary banking business such as
acceptance of deposits and advancing of loans, but in a limited
way.

(2) Industrial Bank.

Industrial banks are primarily meant to cater to the financial
needs of industrial undertakings. They provide long-term credit to
industries for the purchase of machinery, equipments etc.
In India, there are some special financial institutions which are
called "Development banks". Presently, at the all-India level there
are five such industrial development banks:
a. The Industrial Development Bank of India (IDBI)
b. The Industrial Finance Corporation of India (IFCI)
c. The Industrial Reconstruction Corporation of India (IRCI), for
large industries
d. The Industrial Credit and Investment Corporation of India
(ICICI)
e. The National Small Industries Corporation (NSIC) catering to
the needs of the small industries.

I ^ ^ ^
 Except for ICICI which is owned by the private sector, all these
institutions have been formed by the Government.
Similarly, at the state level there are three such industrial
development banks:
a. The State Finance Corporation (SFCs);
b. The State Industrial Development corporations (SIDs);
c. The State Industrial Investment Coiporation (SIICs)
(3) Land Development Bank.
Land Development Banks are meant to cater to the long and
medium-term credit needs of agriculture in our country. They are
mainly district level banks. Since the Land Development Banks
give loans to their members on the mortgage of land, previously
they were called Land Mortgage Banks. There are state land
development banks at the top level and primary land development
banks at the base or local level.
(4) Agriculture Refinance and Development Corporation.
It is a kind of agriculture development bank which provides
medium and long-term finance to agriculture in our county.
Agriculture Refinance and Development Coiporation operates by
making provisions of refinance to state Land Development
Banks, State Co-operative Banks and Scheduled Commercial
Banks which are its shareholders.
(5) Export Import Bank in India.
Exim Bank has been instituted for planning, promoting and
developing exports and imports of the country.
In Western Countries, there are specialized banks such as
discount houses, investment banks, labor banks etc. catering to
the specialized needs of the people.
1.5.4 Central Bank
A central bank is the apex financial institution in the banking and
financial system of a country. It is regarded as the highest monetary
authority in the country. It acts as the leader of the money market. It

12
supervises, controls and regulates the activities of the Commercial
Banks. It is a service oriented financial institution primarily concerned
with the supervising, regulating and development of the banl<;ing system
in the country. As a Central Bank, it is able to influence monetary and
credit condition and financial developments in a countiy. It is charged
with the responsibility of carrying out the monetary and credit policies.
India's central bank is the Reserve Bank of India, established in 1935.

13
 structure of Banking Industry in India
Reserve Bank of India
i
Scheduled
i
Non-Scheduled
i
Regional
i
(Cooperative
I
Alllhdia Financial
Commercial Commercial Rural Banks Institutions
Banks Banks Banks (AIFIs)

i 1
(i) Public Sector Development
Banks Banks
(ii) Private Sector
Banks (old)
(iii) Private Sector
1
NABARD,IDBI,
Banks (New iFci,iaa,
Started after SIDBI, etc.
Banking sector
Reforms 1991)
(iv) Foreign Banks i
Primary Urban
1'

1'
Primary Primaty
Coop. Banks District Coop. Coop. /
Central Agriculture Agriculture
Coop. Banks and Rural and Rural 1
Development Development \
Primary Banks Banks
State Coop.
Banks Agricultural
14 credit
societies
1.7 Banking and Economic Development
Banks play a very important role in the economic development of every nation.
They have control over a large part of the supply of money in circulation.
Through their influence over the volume of bank money, they can influence the
nature and character of production in any country.
Economic development is a dynamic and continuous process. Banks are the
main stay of the economic progress of a country, because, the economic
development highly depends upon the extent of mobilization of resources and
investment and on the operational efficiency of the various segments of the
economy. The major role played by the banks in the development of economy
of a countr>' can be summarized as follows:-

Employment

industrial
Development

Banking
System

15
In the process of economic development, the significance or contribution of
banking system can be summarized as follows:
(i) Capital formation
(ii) Creation of money
(iii) Strengthens the linlc between organized and unorganized sectors
(iv) Provision of long term loans
(v) Aids agriculture and small scale industry,
(vi) Entrepreneurial development
(vii) Cheque system-medium of exchange
(viii) Regulation of the flow of national savings
(ix) Maintaining Balance of Trade
(x) Catalyst for social change

(i) Capital Formation

Capital formation depends upon savings. Banks' offers facilities for
savings and thus, encourages the habits of thrift and industry among
people. They mobilize the idle and dormant capital of a community and
make it available for productive purposes. The banks design a variety of
schemes to attract prospective customers.

(11) Creation of Money

Creation of money, a unique feature of commercial banks is of great
economic significance. Bank money forms a large part of the total
quantity of money supply and represents a cheap, efficient and
economical means of payment. It results in the economic progi'ess of the
country. Banks are described as factories of credit.

(ill) Strengthens the link between organized and unorganized Sectors

Indian money market consists of organized and unorganized sectors.
Both are linked to the economic well being of the country. The banks
link the organized and unorganized sectors for the overall economic
development of the Country.

16
(iv) Provision of Long Term Loans
Industrial development which is necessary for the economy depend upon
the long term loans. Banks provide medium and long-term loans for
industries.

(v) Aids agriculture and small scale industries

The development of a country not only depends upon the industrial
development but also on the development of agricultural and small scale
industries. Similarly, small scale industries provide large employment
opportunities and goods manufactured by this sector are also exported
out of India. Banks cater to the financial requirements of these sectors
which leads to the economic progress of the countiy.

(vi) Development of entrepreneurs

Banks have specific schemes for the development of entrepreneurship.

(vii) Medium of Exchange

Bank provides the "cheque payment system" which is a convenient and
safe method to make payments. Banks settle transactions and act as a
medium of exchange and helps in the promotion of trade and industry.

(viii) Regulation of National Savings

Banks regulate the flow of national savings into various productive
channels. While lending money, they discriminate between a genuine
trader and a speculator and they discourage the speculator. Thus banks
ensure the diversion of national savings to productive purposes.

(ix) Maintaining Balance of Trade

Through properly devised banking system, a country can promote
exports through easy and timely credit facilities to exporters. This helps
to maintain the balance of trade at favorable position.

(x) Catalyst in Social change

Banks are regarded as catalysts in bringing the desired social change in
the community. Through its loans to priority sectors, and other social

17
development progi'ammes, the desired change can be achieved. In India,
banks are required to provide certain percentage of their total loans and
advances for the "priority sector" purposes. This includes loans to
weaker sections, agricultural purposes, scheduled casts and small
traders, labourers, etc.
 1.8 Functions of Commercial Bank
Functions
r"
Primary
»

Secondary
Functions Functions

Raising of Funds
T
Lmding of Money Money Dnmsfer
r
Discounting of
BiHs
I
Agency Service
]
Mtscellaneoos Services
Issuing of credit instnimoits; —Letter of Credit
-Fixed Account — C a s h Credit ~ cheques and circular notes
—Saving Bank Deposits —Foreign Exchange
Over Draft —Execution of Standing Ordos
— S a f e custody of valuables
-—Current Deposits Loans —Collection of Dividents and interest
— Locker facility
—Personal Loan — Purchase and Sale of Securities
- Nomination
— C a r Loan or Auto Loan — Remittance of funds
—• Acting as a Referee
— L o a n against shares
—Underwriting

— Merchant Bankmg
• Education Loan or Student Loan
— Bid Bonds and p^ormance guarantee

19
1.8.1 Primary Functions of .Commercial Banks:
Primary functions of commercial banks are as follows:
A. Raising of Funds
Raising of funds by accepting deposits is the primary function of a
commercial bank. By receiving deposits from the public, commercial
banks mobilize savings of the household sector. Banl<s generally accept
deposits through following accounts:
1. Fixed Account
Deposits in fixed account are time deposits. In the normal course,
deposits cannot be withdrawn before the expiry of the specified time
period of the deposits. A premature withdrawal is, however, permitted
only at the cost of forfeiture of the interest payable, at least partly. On
these deposits, commercial banks pay higher rates of interest, and the
rate become higher with the increase in duration.

2. Savings Account
Saving accounts are maintained for encouraging savings of households.
Banks pay a rate of interest on the savings account deposits as
prescribed by the Central bank.

3. Current Accounts
Deposits in current account are withdrawable by the depositors by
cheques for any amounts to the extent of the balance at their credit, at
any time without any prior notice. Deposits of current accounts are, thus,
known as demand deposits. Such accounts are maintained by
commercial and industrial finns and businessmen.

4. Other Accounts
Banks also receive deposits from their customers through other
accounts. In one such account, the Recurring Deposit account, the
customer is required to deposit a fixed sum of money every month for a
specific period of time. After the completion of the specified period, he

20
gets back all his deposits along with the cumulative interest which has
accrued. The purpose of this account is to encourage customers to save
every month and get a large accumulated sum after a specified period.
Cumulative interest is allowed on these accounts, and the rate of interest
is higher than on savings bank deposits and in some cases, higher than
on fixed deposits accounts.

B. Lending of money
The second important function of a banker is to lend money. The
business of lending is usually done in the forms of loans and advances,
overdrafts, cash credit, and discounting of bills of exchange. It is this
function of a Banlcer's activities which is largest contributor to the banl<:'s
profit.

Advances by a banker may be either clean advances against personal

credit or against tangible or maintainable securities, lodged or pledged
with them. Advances generally take three forms - cash credits,
overdrafts, and loans.

1. Cash credit
A cash credit is an arrangement by which a banker allows his customer
to borrow money up to a certain limit against securities. This is the most
common mode of borrowings by large commercial and industrial houses
in India because of the advantage .that a customer need not borrow the
whole amount at one time but may draw such amounts as at different
times as per his requirements. He may deposit in the bank, such surplus
amount as may be with him for the time being. The banker, while
granting cash credit and overdraft facilities, has to estimate the amount
of the customer's requirement. If the actual drawings fall much below
his estimate, he may lose interest on the funds that remain unused. In
order to minimize such losses, a banker's cash credit agreements
generally provide a half or quarter interest clause, according to which

21
the customer has to pay interest on at least half or quarter of the amount
of cash credit allowed to him, even when he does not use that amount.

2. Overdraft
When a customer requires temporaiy accommodation, he may be
allowed to overdraw on his current account, usually against collateral
securities and pay interest on the amount actually used by him.

3. Loans
When a banker makes an advance in a lump sum which cannot be paid
wholly or partly and which the customer has permission to withdraw
subsequently, it is called a loan. If the customer repays it, either wholly
or partly, and wishes to have subsequent accommodation, the latter will
be treated as a separate transaction to be entered into if the bank agrees
to do so, and subject to'such terms as it may want to impose. Thus, the
bank does not suffer any loss of interest as a result of carrying excessive
cash, as it may be in the case of credits and overdrafts.

C. Money Transfer
Besides lending and depositing money, banks also transfer money from
one comer of the globe to another. Apart from banks, financial
institutions and online portals gives services of money transfer to India.
Some of them are as under:
> Western Union Money Transfer
> Union Money Transfer
> nCOBO Money Transfer
> Cash 2 India.com
> Remit to India.com
> Samachar Money Transfer
> Timessoftmoney.com
> Wells Fergo International Money Transfer
> Travelers Express

22
> Money Gram International

1.8.2 Secondary functions of Commercial Banlis:

Secondary functions of commercial banks are as follows:
A. Discounting of bills
The banks facilitate trade and commerce by discounting bills of
exchange called trade bills. A trader often draws bill of exchange to
meet his obligations in business transitions. Such a trade bill is payable
in cash on maturity. But many times the holder of such bills may be in
urgent need of cash before the maturity period. In such case, he may
seek help from the bank. Since such bills are negotiable instruments, the
banks discount them. The banks pay cash to the endorser of trade bills,
equivalent to the amount of bills minus the amount of discount. And,
when the bill matures, the banks claim the amount from the drawee.
Obviously, discounting of bills by the bank amounts to granting of credit
to the party concerned ,till the maturity date of the bill. This type of
advances by banker is very popular. The reasons for this popularity are:
> A fixed and unalterable amount, irrespective of any fall in the value
of securities;
> Certainty of payment on the due date;
> Continuous supply of funds through planned arrangement;
> Rediscounting facilities by the Central banlc at bank rate;
> Deduction of discount from the advance.

B. Agency Services
The services which a banlc generally renders as an agent are:
r

1. Issuing of credit instruments; cheques and circular notes:

Under the cheque system, the depositors are entrusted the right to
withdraw from their deposits any amount at their convenience by
writing cheques. The currency note is legal tender money. The cheque is
the most developed credit instrument.

23
2. Execution of standing orders:
By charging a small commission, the bank makes regular payment to the
concerned parties such as premium to L.I.C., electric bill and gas bills,
property tax etc. as per the standing instructions of the customers.

3. Collection of dividend and interest

The customer may instruct the issuer of securities that he should pay
interest or dividend that may be declared to his bank. He will thus avoid
the trouble of endor-sing and paying such dividend warrants. The banker
usually levies a very small charge for the collection of dividend and
interest on behalf of his customer.

4. Purchase and Sale of Securities

A banker may advise his customer regarding investments. He also
undertakes to purchase or sell stocks or shares on behalf of his
customers.

5. Remittance of funds:
All commercial banks, have a network of branches thi'ough the country.
With this facility banks can conveniently provide the service of transfer
of funds from one place to another. Remittances of funds by banks are
simple, convenient, safe and inexpensive. Important modes of transfer of
funds are:
> Mail Transfer
Banks provide the facility of sending money through mail
transfer to any person at any place where the bank has a branch
and the person has an account in any other branch of the same
bank. For this purpose the sender shall have to furnish details the
name of the beneficiary, account number, the amount to be
transfen-ed and the name of the branch where the account is
maintained.

24
 > Telegraphic Transfer
If the money is to be sent urgently, the bank may be requested for
telegraphic transfer on payment of a nominal charge and telegram
charges, but the facility of telegraphic transfer and mail transfer,
money can also be made payable to a beneficiary on
identification. For this purpose, beneficiary's address is also
given.

> Bank Drafts

Banks issue bank drafts or demand drafts on their branch at the
place of destination for remitting money from one place to
another. According to section 85-A of the Negotiable Instruments
Act, a bank draft is an order to pay money, drawn by one office
of the bank upon another office of the same bank for a sum of
money payable to order on demand

> E-transfer of money

With the use of internet banldng facility an account holder can
transfer his money in any desired account on his own at his
convenient time. It is also loiown as Electronic Funds Transfer
(EFT).
It consists of three forais of transactions:
a) Paying fees through the ATM (Asynchronous Transfer
mode or Automatic Teller Machine) network.
b) Paying bills through monthly bank account deductions
c) Transfer of large sums of money among banks across the
world.

C. Miscellaneous Services
A banker performs many general, services for his customer. Some
services are:

25
1. Letter of Credit
A banker issues personal as well as commercial letters of credit. Thus,
money can be promptly paid to a customer or to his agent, and bills
drawn by his creditor can be accepted by the bank or any of its branches,
agencies or correspondents.

2. Foreign Exchange
The banks also deal in foreign exchange transaction. The commercial
community receives facilities for its dealings with foreign nationals- a
fact which is also a profitable business for a banker. In assisting foreign
trade by discounting foreign bills of exchange, a bank has sometimes to
arrange for the transport, insurance and warehousing of goods. A freight
and insurance department therefore, is a common feature of many
commercial banks.

3. Safe custody of valuables

A commercial bank receives securities, documents and valuable articles
like gold and jewellery for safe custody. Here the bank acts as the
custodian of the valuables belonging to the customers.

4. Locker facility
All the big commercial banks maintain safe deposit vaults for their
customers. A person can hire a locker against a small charge and keeps
his valuables in it and thus avoid the fear of theft or loss on account of
fire or flood.

According to section 45-ZE

An individual hirer of a locker may nominate one person to whom, in
the case of the death of the hirer, the banking company may give access
to the locker and liberty to remove the contents of the locker. In case the
locker is hired jointly by two or more individuals and operated under
joint signatures of two or more of such hirers, they may nominate one or
more persons, to whom in the event of the death of such joint hirer or

26
hirers, the bank may give jointly with the surviving joint hirer or joint
hirers, access to the locker and liberty to remove the contents of such
lockers.

5. Acting as a Referee
A banker sometimes acts as a referee as to the respectability and
financial standing of his customers. This is a very valuable service to
businessman, for it enables them to obtain reliable and speedy
information about the general standing of people with whom they have
business transaction with a view to avoid any loss by giving credit to
persons of little or no financial worth. The information is collected by a
banker with great care and is supplied under conditions of utmost
secrecy.

6. Underwriting
Banks often act as bankers to local and municipal authorities or other
public bodies, companies and corporations and also underwrite issues of
Government loans and loans raised by local and municipal authorities,
besides industrial securities.

7. Merchant Banking
Some of the services provided by the Merchant Banking departments of
banks include counseling about new projects relating to location, foreign
collaboration, tax benefits etc. prepai^ation of feasibility reports, help in
the procurement of letter of intent and other statutory permission,
appraisal of working capital requirements, an-angement of foreign
currency loans, help in negotiating joint ventures abroad and advice
about Government regulations. State Bank of India was the first bank in
the country to start merchant banldng services.

8. Bid Bonds and performance guarantee

Another service which is provided by banks is that they provide
guarantee on behalf of their customers to third parties specially

27
 government departments and foreign importers. Such guarantees given
by bank are called the Bid-Bond guarantee and performance guarantees.
When- a government department or public sector undertaking or a
foreign party invites tenders for the supply of certain materials or for
executing a certain type of work, the interested parties send their tenders .
, quoting their terms etc. such fu'ms ai-e required to give a cash deposit
equal to 2% to 5% of the- total value of the contract. The government
departments, or public sector undertaking and foreign parties also
accept, instead of cash deposit, a bond issued by a bank on behalf of the
firm, undertaking a guarantee that if the contract is entered into with it
customer natned therein, he will be able to execute the same. This bond
is called Bid-Bond.

1.9 Regional Rural Bank: (RRBs)

The large scale persistence of rural poverty even after the first two decades of
planning made the planners realize that achieving faster economic development
alone may not bring about any significant reduction in rural poverty. The
realization was based on the vicAv that percolation of the benefits of growth to
the rural poor has been hindered to a great extent by the existing inequitable
distribution of productive resources like land and capital.

Several policy initiatives were taken to ensure an easy flow of credit to the
rural poor. The creation of regional rural banl<s (RRBs) in 1975 to cater
exclusively to the credit needs of rural poor like small and marginal farmers,
rural artisans and agricultural laborers was one such initiative.

'The RRBs came into being mainly as a sort of via media between the
commercial bank and co-operatives which had for long neglected the rural poor
for various reasons. They were expected to serve the rural poor by combining
in them local feel of and familiarity with rural problems which the co-operative
have and the managerial and business abilities possessed by the commercial
bank.

28
The Institution of RRBs was- created to meet the excess demand for
institutional credit in the rural areas, particularly among the economically and
socially marginalized section although, the co-operati-ve banks and the
commercial banks had reasonable records in terms geographical coverage and
disbursement of credit. In. terms of population group, the co-operative banks
were dominated by the rural rich, while the commercial bank had a clear urban
bias. In. order to provide access to low cost banking facilities to the poor rural
banking in India was started. Rural banks- in those days mainly focused upon
the agro sector. RRBs in India penetrated every comer of the country and
extended a helping hand in the growth process of the country. It was envisaged
to combine desirable qualities of co-operative banks and commercial banks in
RRBs at the same time. It was emphasized that the role of RRBs would be to
supplement and not supplant other institutional agencies already existing in the
field.

29
Chapter- 2

Review of
Literature
 CHAPTER 2
REVIEW OF LITERATURE

Most of the studies have focused on commercial banks in India. Most of the
-studies on RRBs have touched upon some aspects of growth and regional
distribution of rural banking, role of RRBs in economic development, impact
of new technology on RRBs functionality, etc. Veiy few studies have studied
the performance of RRBs in India. |

Hester (1964) made an empirical investigation of regional variations in

commercial banks, rate of interest on deposit and credit on the database of
1959. He formulated and tested a number of hypothesis pertaining to the
divergence in deposits and advance rates in different regions of India. The
study revealed that banks in the South paid significantly higher rates on fixed
deposits and saving deposits, than the banks in the North. The researcher was
of the view that the growth of banking was actually stronger in the South
during 1940's and 1950's than in the North. Banlcs in the East paid lower
interest on the deposits.

Haslem (1968) revealed that the internal determinants originate from the
Balance Sheets and the Profit and Loss Accounts of the bank concerned and are
often termed as micro or bank specific determinants of profitability. The
external determinants are systematic forces that reflect the economic
environment. The literature provides mixed evidence on the impact of liquidity
on profitability.

Jakhade and Shivamaggi (1969) used banking data of 1966 and agriculture data
for the period between 1961 and 1965 for different states of India, to construct
composite indices, for agricultural development, spread of banldng facilities

30
and extent of mobilization of deposits for 300 odd districts in the country. It
was concluded that the higher the ranlc, the lower was the spread of banking
facilities. But, the ranks with respect to the deposit mobilization revealed that
the higher the rank, higher was the extent of deposit mobilization.

Basu (1973) made an attempt to explain the inter-district variation in banking

services in India. The study exhibited that the per capita deposits, number of
workers in manufacturing per 10000 of population and intensity of cultivation
together explained 63 percent of variation in per capital credit, whereas the
regression co-efficient of all the three variables were significant.

Basu (1974) studied the extent to which the aim of balanced regional
development in the banking has been fulfilled in India. It was concluded that
unfortunately banks seem to have failed to remove the regional imbalances in
banking development.

Shah and Dinkar (1975) studied the achievements of branch expansion

progi'amme with respect to its objective of naiTowing down regional
imbalances and provision of banking facilities in rural India. The analysis
pointed out that not only did regional imbalances persist, but there was also a
thin spread of banking facilities in the states.

Ghiara (1977) made an attempt to study regional distribution of direct

agriculture finance by scheduled commercial banlcs in India. He was of the
view that there has been no major shift in the pattern of agriculture finance.

An attempt to examine whether financial intermediation can be helpful for rui-al

development and to assess the role of commercial banks and co-operative
banks in context of rural development was made by Datar (1978). He was of

31
the view that even if credit deposit ratio was brought to near equality in
different regions it was not going to meet the credit needs of rural areas.

Revell (1979) studied the relationship between bank profitability and inflation.
He noted that the effect of inflation on bank profitability depends on whether
bank wages and other operating expenses increased at a faster pace than
inflation.

Short (1979) provides cross countiy evidence of a strong negative relationship

between government ownership and bank profitability.

Patel and Shete (1980) of the National Institute of Banking Management

analysed the performance and prospects of RRBs and gave a comparative
picture of performance in deposits, branch expansion and credit deployment of
the co-operative banks, commercial banks and RRBs in a specified area.

Chippa and Sagar (1981) discussed the variations in the level of banking
development in eighteen states in 1977 and studied its relationship with other
social, economic and infrastructural variables. The analysis revealed that
literacy rate followed by the infrastructural development emerged as the most
dominant variables influencing the level of banking development.

Angadi (1983) measured the extent of concentration of priority sector advances

in general and agi'iculture advances in particular in selected States in India. The
analysis revealed that the degree of concentration of both priority sector
advances and agricultural advances in the selected States had reduced in 1979
as compared to 1969-70.

Bhattacharya (1986) analysed the impact of branch expansion on the deposit

mobilization in the different states of India. The broad conclusion drawn by the
researcher was that all the four types of deposits were satisfactorily responsive

32
 to branch expansion in Maharashtra, Uttar Pradesh, Kamataka, Tamil Nadu,
Andhra Pradesh, Gujarat, Punjab, Kerala and New Delhi, However in the states
like Himachal Pradesh, Jammu and Kashmir, Assam, Orissa and Bihar, the
extent of branch expansion was very small in relation to the above mentioned
states.

( NABARD (1986) conducted a study on RRBs viability. The study revealed that
viability of RRBs was essentially dependent upon the fund management
strategy, margin between resources mobility and their deployment and on the
control exercised on current and future costs with advances?

Kumar and others (1987) made an attempt to study the expansion of

commercial banking facilities and extent of disparity in agriculture financed by
the commercial banks in various states of India. The analysis revealed that the
expansion of banking facilities had extended comparatively more rapidly in
mral areas as compared to Semi-Urban areas and Urban ai-eas.

Giri and Gupta (1988) estimated the inter-state and intra-state variations in the
distribution of institutional credit in India with the help of various dispersion
measures and concentration ratios. The study exhibited that there were large
inter-state variations in the distribution of loans from primary Agriculture
Credit Societies.

r
Kalkundrickar (1990) in his study on "Performance and Growth of regional
-Rural Banks in Karnataka" found that these banks had benefited the
beneficiaries in raising their income, productivity, employment and use of
modem practices and rehabilitate rural artisans y

Bal Krishna and Sooden (1991) made an attempt to ascertain the extent of
inter-state disparities with respect to commercial banking services in rural India

33
during 1975 to 1985. The analysis suggested that the extent of disparities with
respect to all indicators of banking development except rural deposits per rural
branch had come down in the year 1985 as compared to the yeai' 1975.

Molyneux and Thornton (1992) found a negative and significant relationship

between the level of liquidity and profitability while Miller and Noulas (1997)
stated that credit risk had a negative impact on profitability with RRBs Banks.

Kumar Raj (1993) carried out a study on the topic "Growth and Performance of
RRBs in Haryana". On the basis of the study of RRBs of Haiyana, it is found
that there was an enormous increase in deposits and outstanding advances. The
researcher felt the need to increase the share capital and to ensure efficient use
of distribution channels of finance to beneficiaries.

Ellinger (1994) study of the efficiency of the rural banks is particularly

important in the Indian context. 'Efficiency linkages to long-term viability are
especially critical to rural banks since these banlcs play a vital role in
influencing regional flows of funds'.

A. K. Jai Prakash (1996) conducted a study with the objective of analyzing the
role of RRBs in Economic Development and revealed that RRBs have been
playing a vital role in the field of rural development. Moreover, RRBs were
more efficient in disbursal of loans to the rural borrowers as compared to the
commercial banks. Support from the state Governments, local paiticipation,
and proper supervision of loans and opening urban branches were some steps
recommended to make RRBs more efficient. )

Chandrakanth K. Sonara (1998) assessed the performance of five Gramin

banks in Gujarat for a decade from 1985 to 1994. The result indicated that out
of the five RRBs only one had made negligible profit of 0.55 laldis in the year

34
1985. He suggested restructuring of RRBs in order to provide economics of
scale and by deploying their financial assets in such a manner, so as to provide
them substantial additional income without diverting the focus from agriculture
and rural development aimed at the weaker sections.

L.K Naidu (1998) conducted a study on RRBs talcing a sample of 48

beneficiaries of rural artisans in Cuddapah district of Andhra Pradesh state
under Rayale Seen Gramin Bank. In this study, it was concluded that the
beneficiaries were able to find an increase in their income because of the
finance provided by the bank. N

Swami B. N. Anantha (2001) made comparative analysis of the performance of

specific bank groups during 1996-2000 and concluded that the share in assets
of scheduled commercial banks was declining in public sector banks and
foreign banks while it was increasing in old private sector banks and new
private sector banks.

According to Nathan, Swami (2002), policies of current phase of financial

liberalization have had an immediate, direct and dramatic effect on rural credit.
There has been a contraction in rural banldng in general and in priority sector
lending and preferential lending to the poor in particular.

Malhotra (2002) considered 22 different parameters that impacted the

functioning of RRBs for the year 2000. Malhotra asserted that geographical
location of RRBs was not the limiting factor for their performances. He further
found that it is the specific nourishment which RRB receives from its sponsor
banks which is cardinal to its performance.

35
Rao (2002) analyzed the impact of new technology on the banking sector.
Technology changes the way business is done and opened new vistas for doing
the same work differently in the most cost effective manner.

Sinha (2003) in a field study of 5 RRBs found that non-priority sector advances
increased sharply in the second half of the 1990s for all the sample banks, of
which 4 banks had a significant 25 percent of their portfolio invested in non-
priority sector loans.

Nitin and Thorat (2004) provides a penetrating analysis as to how constraints in

the institutional dimension have seriously impaired the governance of the
RRBs. They have argued that perverse institutional arrangements that gave rise
to incompatible incentive structures for key stake-holder, such as political
leaders, policy maker, banks staff and elements have acted as constraints on
their performance.

Barth (2004) claim that government ownership of banks is indeed negatively

correlated with banks efficiency.

Chavan and Pallavi (2004) have examined the growth and regional distribution
of rural banking over the period 1975-2002. They have documented the gains
made by historical underprivileged region of east, northeast and central part of
India during the period of social and development banking. These gains were
reversed in the 1990s: cutbacks in rural branches in rural credit deposits ratios
were the steepest in the eastern and northeastern states of India. Policies of
financial liberalization have unmistakably worsened regional inequalities in
rural banking in India.

Athanasoglou, Brissimis and Delis (2005) results may be explained by taking

into account the fact that more the financial institutions are exposed to high risk

36
loans, the higher is the accumulation of unpaid loans implying that this loan
loss have produced lower returns to many commercial Banks.

The Internal working group on RRBs, (2005) (Sardesai Committee) viewed

that to improve the operational viability of RRBs and take advantage of the
economics of scale, the route of amalgamation of RRBs may be considered
taking into account the views of the various stakeholders. The group has put
forth two options: merger between RRBs of the same sponsor bank in the same
state and merger of RRBs in the same state.

Thingalaya N.K. (2006), Kamataka: fifty years development" reveals that

Gramin Banks in Karnataka compared operating in other states proved to be
viable rural credit agencies accessible to the weaker sections of the society. He
stressed the need after adopting modern practices by the Gramin Banks.

None of the studies reviewed have focused on the financial performance of

RRBs before and after amalgamation. The present study seeks to fill this gap. It
is an attempt to enrich the already scant literature on the financial performance
of RRBs pre and post amalgamation.

37
 CHAPTER 3
REGIONAL RURAL BANKS
3.1 Introduction
Small traders, village artisans, agricultural, labourers, etc. in rural and semi-
urban areas do not get adequate credit facilities from commercial banks since
these banks generally look for large boiTowers engaged in commercial business
activities. In order to provide adequate and timely credit to small borrowers in
rural and semi-urban areas. Central Government set up Regional Banks, known
as Regional Rural Banks all over India jointly with State Governments and
some commercial banks. The Rural sector is the backbone of Indian Economy
as over 40% of the Gross National product comes from this sector and priority
sector credit is one of the strategic inputs for the successful implementation of
Rural Development Schemes.

3.2 Regional Rural Banks (RRBs)

In the multi-agency approach to provide credit to agriculture, Regional Rural
Banlcs (RRBs) have a special place. They are state sponsored, regionally based
and rural oriented commercial banks. The Government of India in July 1975,
appointed a "working group" to study in depth the problem of devising
alternative agencies to provide institutional credit to the rural people in the
context of steps then initiated under the 20 point Economic Programme. The
working group identified various weaknesses of the co-operative credit
agencies and the commercial banks and felt that these institutions would not be
able to fill the regional and functional gaps in the rural credit system within a
reasonable period of time.

The Narasimhan Committee on rural credit recommended the establishment of

Regional Rural Banks (RRBs) on the ground that they would be much better
suited than the commercial banks or co-operative banks in meeting the needs of
rural areas. Accepting the recommendations of the Nai-asimhan Committee, the
government passed the Regional Rural Banks Act, 1976. The main objective of

38
RRBs is to provide credit and other facilities particularly to the small and
marginal farmers, agiicultural laborers, aitisans and small entrepreneurs and
develop agriculture, trade, commerce, industry and other productive activities
in the rural areas.

The Narashimhan working group (1975) proposed the establishment of a new

set of banks which combines,
(a) "Local feel and the familiarity with rural problems which the co-
operatives possess and the degi'ee of business organization, ability to
mobilize deposits, access to central money markets and modernized
outlook which the commercial banks have"
(b) Degree of business organization ability to mobilize deposit, access to
money market and modernized outlook which commercial banks have.
Thus, it was envisaged to combine desirable qualities of Co-operative
Banks and Commercial Banks in RRBs at the same time, it was
emphasized that the role of RRBs would be to supplement and not
supplant the other institutional agencies already existing in the field.

The committee recommended the establishment of regional Rural

Banks. The Government of India, with certain modification accepted the
recommendations of the group and Regional Rural Banks (RRBs) were
set up under the "Regional Rural Bank Ordinance 1975." promulgated
fh

by the President of India on 26 September 1975. It was subsequently

replaced by the "Regional Rural Banks Act 1976" on 9"' Feb, 1976.
The preamble to the Act states the objective to develop rural economy by
providing credit facilities for the development of agriculture trade, commerce
industry and other productive activities in the rural areas, particularly to small
and marginal farmers, agricultural laborers, artisans and small entrepreneurs.
Over the years, RRBs, are often viewed as the small man's bank.

39
Meaning of RRB
"Regional Rural Bank" means a Regional Rural Bank established under sub-
section (1) of section 3; (9) "Sponsor Bank" in relation to a Regional Rural
Bank, means a bank by which such Regional Rural Bank has been sponsored;
(h) "State Govemmenf means (i) in relation to a Regional Rural Bank
established in a Union Territory, the Central Government (ii) in relation to a
Regional Rural Bank established in a state, the government of that state; words"
and expressions used herein and not defined but defined in the Reserve Bank of
India Act, 1934.""^

3.3 Establishment and Incorporation of Regional Rural Banks

The Central Government may, if requested to by a Sponsor Bank, by
notification in the official gazette, establish in a'state or union territoiy, one or
more Regional Rural Banks with such name as may be specified in the
notification and may, by the said or subsequent notification, specify the local
limits within which each Regional Rural Bank shall operate.

3.4 Capital Structure and Sponsorship

Each RRB is to be sponsored by a scheduled commercial bank mainly by a
public sector bank. The RRB is established at the initiative taken by the state
and Central Government. A Regional Rural Bank is jointly owned by the
Government of India, the Government of concerned state and public sector
bank, which sponsored it. However, the sponsor bank continues to extend all
the facilities even beyond 5 years as of now.

The authorized capital of each RRB was fixed at 1 crore and the issued capital
at 25 lakhs. The issued capital would be subscribed by the Central Government,
the sponsoring bank and the State Government in the proportions of 50%, 35%
and 15% respectively. The Regional Rural Bank Act, 1987, which came into
force on 28* September 1988 has enlianced the authorized capital of RRB to 5
crore and paid up share capital to 1 crore.

40
3.5 Management of Regional Rural Bank
The general management of each RRB is vested with the Board of Directors.
The Board consists of nine directors including a chairman; the chairman is a
full time professional executive, appointed by the Central Government. He is
usually a senior officer from the sponsor bank. The management of RRB
consists of:

(i) Chairman who is an officer deputed by a sponsor bank but appointed by

the Government of India,
(ii) Thi-ee directors to be nominated by Central government,
(iii) Two directors to be nominated by the concerned state government,
(iv) Three directors to be nominated by the sponsor bank for a term of five
years.

RBI and NABARD can also nominate one director each to the Board of RRBs.
The Central Government can increase the number of Boai'd of Directors to a
maximum of 15. After the formation of NABARD in July 1982, most aspects
relating to the RRBs ai-e looked after by NABARD. The RBI as the Central
Banking Authority continues to prescribe various policy objectives and
guidelines for the RRBs.

3.6 Objectives of Regional Rural Banks

According to the RRB Act, the RRBs are to be set-up mainly with a view to
develop rural economy by providing credit facilities for the purpose of
development of agriculture, trade, commerce, industry and other productive
activities in the rural areas. Such facility is provided particularly to the small
and marginal farmers, agricultural labourers, artisans and small entrepreneurs
and for other related matters.

The objectives of RRB can be summarized as follows:

(1) To provide cheap and liberal credit facilities to small and marginal
farmers, agriculture labourers, artisans, small entrepreneiirs, and other
weaker sections.

4]
(2) To save the rural poor from the moneylenders.
(3) To act as a catalyst element and thereby accelerate the economic growth
in the particulai- region.
(4) To cultivate the banking habits among the rural people and mobilize
savings for the economic development of rural areas.
(5) To increase employment opportunities by encouraging trade and
commerce in rural areas.
(6) To encourage entrepreneurship in rural areas.
(7) To cater to the needs of the backward areas which are not covered by the
other efforts of the Government.
(8) To develop underdeveloped regions and thereby strive to remove
economic disparity between regions.

3.7 Functions of Regional Rural Banks

Every RRB may undertake the following types of functions:
(1) To grant loans and advances particularly to small and marginal farmers
and agricultural labourers, individually or to a group, co-operative
societies, agricultural processing societies, co-operative farming
societies, etc.

(2) To grant loans and advances to artisans, small entrepreneurs and small
traders, businessmen, etc. j

The Reserve Bank of India has brought RRBs under the ambit of priority sector
lending on par with the commercial banks. They have to ensure that 40% of
their advances are accounted for the priorit}' sector. Within the 40% priority
target 25% should be for the weaker section and 10% of their total advances to
the weaker section.

3.8 Present Scenario of RRBs

Every RRB has status of a scheduled commercial bank and has been
empowered to mobilize deposits and to grant short and term loans, and operate
within its specified area of operation. The number of RRBs which stood only at

42
six during 1975 has over the years increased to 196 RRBs with 14,446
branches working in 518 districts across the country in March 2005. Now there
is 84 RRBs with 15480 branches worldng in 618 districts in March 2009.
Table- 2
Basic Business Indicators of RRBs
As at the end No. of Districts No. of Outstanding
Deposits
of RRBs covered branches Advances
December 1975 6 12 17 0.20 0.10
December 1976 40 84 489 7.72 7.02
December 1981 107 182 4795 336.00 406.59
December 1986 194 351 12,838 1714.94 1784.84
March 1991 196 381 14,527 4989.24 3535.35
March 1992 196 392 14,539 5867.83 4090.86
March 1993 196 398 14,543 6938.14 4626.73
March 1994 196 408 14,542 8826.51 5253.02
March 1995 196 425 14,509 11150.01 6290.97
March 1996 196 427 14,497 14187.90 7505.03
March 1997 196 427 14,461 18032.01 8718.08
March 1998 196 451 14,475 22189.00 9861.00
March 1999 196 451 14508 23597.61 9367.21
March 2000 196 482 14311 32204.94 13814.89
March 2001 196 493 14311 38271.87 15816.30
March 2002 196 497 14390 44539.15 18629.22
March 2003 196 502 14433 50098.34 22157.85
March 2004 196 518 14446 56350.08 26113.86
March 2005 133 523 14484 61195 32870
Mai-ch 2006 96 525 14489 81620 39762
March 2007 90 545 14494 94412 39852
March 2008 86 616 14185 120184 48894
March 2009 84 618 15480 145035 82819
(Source: NABARD Annual Report, 2008-2009)

43
3.9 Statewise Distribution of RRBs
Table 3
State Wise Distribution of RRBs. (As end of Marcli 2005)
State No. of RRBs.
Andhra Pradesh 16
Ai'unachal Pradesh 01
Assam 05
Bihar 22
Chhattisgarh 03
Gujarat 09
Haryana 04
Himachal Pradesh 02
Jammu and Kashmir 03
Jharkhand 02
Karnataka 13
Kerala 02
Madhya Pradesh 19
Maharashtra 10
Manipur 01
Meghalaya 01
Mizoram 01
Nagaland 01
Orissa 09
Punjab 05
Rajasthan 14
Tamil Nadu 03
Tripura 01
Uttar Pradesh 36
Uttarakhand 04
West Bengal !-• 09
Total 196

44
 Table 4
State Wise Distribution of RRBs. (As end of March 2009)
State No. of RRBs.
Andhra Pradesh 05
Ai-unachal Pradesh 01
Assam 02
Bihar 04
Chhattisgarh 03
Gujarat 03
Haryana 02
Himachal Pradesh 02
Jammu and Kashmir 02
Jharkhand 02
Kamataka 06
Kerala 02
Madhya Pradesh 08
Maharashtra 03
Manipur 01
Meghalaya 01
Mizoram 01
Nagaland 01
Orissa 05
Punducheny 01
Punjab 03
Rajasthan 06
Tamil Nadu 02
Tripura 01
Uttar Pradesh 12
Uttarakhand 02
West Bengal 03
Total 84

45
3.10 Sponsor Banks
The duties of a sponsor Bank:
1) To promote the RRB.
2) Provide equity support to the extent of 35%.
3) Decide the place of Head Office/ Change of Head Office.
4) Extend managerial and financial support and training of the officials.
5) Provide services of chairman, general manager, and other officials as
needed.
6) Nominate two official directors in the Board.
7) Sponsor nominee directors for Government of India.
8) Provide refinance at concessional rate of interest and also help
maintaining liquidity of the RRB.
9) Provide expert guidance/ help in investment.
10) Conduct of management audit.
11) Assist assessment of manpower, creation of vacancy, recruitment and
promotion.
12) Enter into MOU and review and monitoring of perfoimance.
13) Guidance in administrative matters, recovery, credit dispensation and
legal advice.
14) Liaison with Government of India/RBI/N ABARD.
15) Help computerization.
16) Extension of area of operation.
17) Fixationof other allowances.
18) Fixingof Inter seniority.
19) Approve the categorization of branches.

46
 Table 5
Sponsor Banks (As end of March 2005)
Sponsor Bank No. of RRBs
Allahabad Bank 07
Andhra Bank 03
BankofBaroda 19
Bank of India 16
Bank of Maharashtra 03
Bank of Rajasthan 01
Central Bank of India 23
Canai'a Bank 08
Corporation Bank 01
Dena Banlc 04
Indian overseas Bank 03
Indian Bank 04
J and K Bank 02
Punjab and Sind Bank 01
Punjab National Bank 19
State Bank of Bikaner and Jaipur 03
State Bank of Haryana 04
State Bank of India 30
Stat Bank Indore 01
State Bank Mysore 02
State Bank of Patiala 01
State Bank Saurashtra 03
Syndicate Bank 10
United Bank Of India 11
UCO Banlc 11
U.P.S. CB 01
Union Bank of India 04
Vijaya Bank 01
Total 196

47
 Table 6
Sponsor Banks (As end of March 2009)
Sponsor Bank No. of RRBs
Allahabad Bank 03
Andhra Bank 01
Bankof Baroda 05
Bank of India 05
Bank of Maharashtra 02
Bank of Rajasthan 01
Central Bank of India 07
Canara Banlc 02
Corporation Bank 01
Dena Bank 02
Indian overseas Bank 02
Indian Bank 03
J and K Bank 01
State Bank of Patiala 01
Punjab and Sind Bank 01
Punjab National Bank 07
State Bank of Bikaner and Jaipur 01
State Bank of Haryana 01
State Bank of India 16
Stat Bank Indore 01
State Bank Mysore 01
State Bank of Hyderabad 01
State Bank Saurashtra 01
Syndicate Bank 05
United Banlc of India 04/
UCO Bank 05
Union Bank of India 02
VijayaBank 01
UP State Co-operative Bank 01
Total 84

48
At present there are 28 sponsor banks for 196 RRB at the end of March
2005.and now 24 sponsor banks for 84 RRBs at the end of March 2009.

3.11 Progress of RRBS

The developments in the RRB sector during the last three decades can be
summarized as under:
First Decade -1975-1985
First Five RRBs were established on October 2, 1975 under a Presidential
Ordinance.
60 RRBs with 2420 branches having deposit base of 123.22 crore and loans
outstanding of 161.41 crore were established by December 1979.
Prof. Dantawala committee in 1979 endorsed the need for intensification by
covering more areas under the ambit of RRBs.

Second Decade- 1985-1995

By December 1987, 196 RRBs with 13,353 branches came into being. Deposits
amounted to 2305.82 crore in 224 lakh accounts and loans of 2232.26 crore in
93 lakh accounts.
Some key financials as on March 31, 1994 are:
Accumulated losses of 1318.16 crore, non-performing assets at 43.07%,
Recovery rate at 46.23%, 173 RRBs in losses.
Cumulative loss of more than one crore per day.
Government of India embarked upon banking sector reforms in 1991.

Third Decade-1995-2005
Various credit delivery systems were introduced.
Government of India decided to recapitalize the weak RRBs to improve their
financial health.
Bhandari Committee and Basu Committee were constituted by Government of
India to suggest rehabilitation package consisting of both financial and non-
fmancial components.

49
3.11.1 Restructuring Strategies
The financial viability of RRBs has engaged the attention of the policy
makers from time to time. In fact, as early as 1981, the Committee to
Review Arrangements for Institutional Credit for Agriculture and Rural
Development (CRAFICARD) addressed the issue of financial viability
of the RRBs. The CRAFICARD recommended that 'the loss incurred by
a RRB should be made good annually by the shareholders in the same
proportion of their shareholdings. Though this recommendation was not
accepted, under a scheme of recapitalization, financial support was
provided by the shareholders in the proportion of their shareholdings.
Subsequently, a number of committees have come out with different
suggestions to address the financial non-viability of RRBs. For instance,
the Working Group on RRBs (Kelkar Committee) in 1984
recommended that small and uneconomic RRBs should be merged in the
interest of economic viability. Five years down the line, in a similar
vein, the Agricultural Credit Review Committee (Khusro Committee),
1989 pointed out that 'the weaknesses of RRBs are endemic to the
system and non-viability is built into it, and the only option was to
merge the RRBs with the sponsor banks. The objective of serving the
weaker sections effectively could be achieved only by self-sustaining
credit institutions'. The Committee on Restructuring of RRBs, 1994
(Bhandari Committee) identified 49 RRBs for comprehensive
restructuring. It recommended greater devolution of decision-making
powers to the Boards of RRBs in the matters of business development
and staff matters. The option of liquidation again was mooted by the
Committee on Revamping of RRBs, 1996 (Basu Committee). The
Expert Group on RRBs in 1997 (Thingalaya Committee) held that very
weak RRBs should be viewed separately and possibility of their
liquidation be recognized. They might be merged with neighboring
RRBs. The Expert Committee on Rural Credit, 2001 (Vyas Committee
I) was of the view that the sponsor banlc should ensure necessary

50
autonomy for RRBs in their credit and other portfolio management
system.
The Internal working group of the Reserve Bank of Lidia (RBI)
suggested that merger and amalgamation of Regional Rural Banks
(RRBs) may help in improving their health and viability, even as it
sought to bring in new banks both public and private as sponsors of the
merged RRBs.

In order to give a further boost of profitability of these banks and to

strengthen them further, a need was felt to amalgamate more than one
RRB of same sponsor bank operating in the same state. There were 196
Regional Rural Banks operating in the country as on March 31, 2004
which included 51 standalone RRBs. Most of the sponsor banks were
operating more than one RRB in one State which resulted in more
operational expenditure.

The gi'oup suggested two options for mergers/amalgamation: merger

between RRBs of the same sponsor bank in the same State and merger
of RRBs sponsored by different banks in the same State. The group
noted that merger of RRBs with the sponsor bank is not provided for in
the RRB Act, 1976, and that such mergers would go against the spirit of
setting up RRBs as local entities and for providing credit primarily to
weaker sections.

There were 33 RRBs having operational losses as on March 31, 2004

and to overcome the operational problems, reduce expenditure, enhance
operational efficiency, etc, the Reserve Bank of India decided in August
2004 that all RRBs sponsored by a bank and operating in one state
should be amalgamated into single entity. This decision was more
relevant in the fast changing environment in banlcing with introduction
of more and more new financial products necessitating RRBs to gi'ow
bigger. Moreover, in the changed scenario, computerization and volume

51
were considered key to success for these entities which is feasible and
viable only when RRBs are big in size.

The merged entities and the existing RRBs that have accumulated losses
can be capitalised to wipe out the loss and satisfy the minimum capital
requirement. The additional capital can be subscribed in the same
proportion as the issued capital by the different stakeholders, are
provided in the RRB Act, 1976.

The group observed that RRBs could be advised to maintain a desirable

level of capital adequacy. However, it is felt that while RRBs are
required to maintain CRAR, the ratio may not be as high as that of
commercial banks and may be initially kept at 5 per cent as about 100
RRBs are falling short of 5 percent CRAR.

The process of Amalgamation was started in early 2005and first set in

September, 2005. As on March 31, 2007 145 RRBs was amalgamated
and 45 new entities emerged reducing total RRBs from 196 to 96 and
further to 88 at the end of June 2008. This included 45 amalgamated
banks 42 stand alone banks and one new bank (puduvai Bharathiar
Grama) Bank with jurisdiction over the union Tenitoiy of Puducheny).
The process of amalgamation resulted in 84 RRBs as on Januaiy 1,
2010. " ^

3.11.2 Notification regarding amalgamation by Government of

India
The authorised capital of the transferee Regional Rural Bank shall be
rupees five crore divided into five lakh number of fully paid shares of
rupees one hundred each. The subscribed share capital of the transferee
Regional Rural Bank shall be equal to the subscribed share capital of
transferor Regional Rural Banks and, therefore, the entire subscribed
share capital of the transferor Regional Rural Banks shall be deemed to
have been transferred to and shall be deemed as subscribed share capital

52
 of the transferee Regional Rural Bank. The entire share capital and share
capital deposit of the transferee Regional Rural Bank shall be as under:-

(a) Central Government: Rupees Two Hundred Lakh.

(b) State Government: Rupees Sixty Lakh.
(c) Sponsor Bank: Rupees One Hundred and Forty Lakh; and
(d) Share Capital Deposit: Rupees Nineteen Crore Ninety Seven Laldi
and Thirty Two Thousand.

From the effective date of amalgamation, the transferor Regional Rural Banks
viz. Malprabha Gramin Bank, Bijapur Gramina Bank, Netravati Gramina Bank
and Varada Gramina Bank shall cease to caiTy on the business including that of
making any payment to any depositors or discharge any liability or obligation
to the creditors except to the extent as may be necessary for implementation of
the provision of the amalgamation as per this notification.

(i) From the effective date of amalgamation, the undertakings of the

transferor Regional Rural Banks shall be transferred to and shall vest in
the transferee Regional Rural Bank:

(ii) The undertakings of the transferor Regional Rural Banks shall include
all assets, rights, powers, authorities and privileges and all property
movable and immovable, cash balance, reserve funds, investments and
all other rights and interest in or arising out of such property, as are
immediately before the commencement of this notification, in the
ownership, possession power or control of the transferor Regional Rural
Banlcs whether within or outside India and all boolcs of accounts,
registers, records and all other documents of whatever nature relating
thereto and shall also be deemed to include all bon'owings, liabilities
and obligations of whatever kind then subsisting of the transferor
Regional Rural Banks.

53
(iii) All contracts, deeds, bonds agreements, guarantees, power of attorney,
grants of legal representation and other instruments of whatsoever nature
subsisting or having effect immediately before the commencement of
this notification and to which the transferor Regional Rural Banks are a
party or which are in favour of the transferor Regional Rural Banks shall
be in full force and effect against or in favour of the transferor Regional
Rural Banks shall be in full force and effect against or in favour of the
transferee Regional Rural Bank and may be enforced or acted upon as
fully and effectively as if in the place of the transferor Regional Rural
Banks, the transferee Regional Rural Bank has been a party thereto or as
if they had been issued in favour of the transferee Regional Rural Bank;

(iv) If, on the effective date of amalgamation, any suit, appeal or other
proceedings of whatsoever nature in relation to any business of the
transferor Regional Rural Banks are pending by, or against to, the
transferor Regional Rural Banks, the same shall not abate, be
discontinued or be, in any way, prejudicially affected by reason of the
transfer of the undertaking of the transferor Regional Rural Banks or of
anything contained in this notification but the suit, appeal or other
proceedings may be continued, prosecuted and enforced by, or against,
the transferee Regional Rural Bank;

(v) Any reference to the transferor Regional Rural Banlcs in any agreement,
contract, conveyance, assurance, power of attorney or any other
document of whatsoever nature shall be deemed to be a reference to the
transferee Regional Rural Bank and the rights and obligations of the
transferor Regional Rural Banks shall be deemed to be the rights and
obligations of the transferee Regional Rural Banlc

(vi) In respect of eveiy savings banks account or current account or any

other deposit account including a fixed deposit, cash certificate, monthly
deposit, deposit payable at call or short notice or any other deposits by

54
 whatever name called with the transferor Regional Rural Bank, the
transferee Regional Rural Banlc shall open with itself on the effective
date of amalgamation a corresponding and similar account in the name
of the respective holder(s) thereof crediting thereto full amount
including interest to the extent payable.

Provided that where the transferee Regional Rural Bank entertains a

reasonable doubt about the correctness of the entries made in any
particular account, it may with the approval of the Sponsor Bank
withhold the credit to be made in that account for a period not exceeding
three months from the effective date of amalgamation within which the
transferee bank shall ascertain the correct balance in such account.

(vii) In respect of eveiy other liability, notwithstanding anything contained in

the Transfer of Property Act, 1882 or the Registration Act, 1908, this
notification shall be sufficient conveyance, in accordance with the
provisions of this notification, of the business, properties, assets and
liabilities, rights, interests, powers, privileges, benefits and obhgations
of whatever nature of the transferor Regional Rural Banks to the
transferee Regional Rural Bank.

(viii) The service of all the employees of the transferor Regional Rural Banks
(excepting such of them as it being workmen within the meaning of the
Industrial Disputes Act, 1947) shall continue in the transferee Regional
Rural Bank at the same remuneration and on the same term and
conditions of service, which they were getting or as the case may be, by
which they were governed immediately before the effective date of
amalgamation. The inter-se-seniority of officers and employees, directly
recruited and/or promoted, to be decided by the Committee representing
the sponsor bank and the National Bank for Agiiculture and Rural
Development.

55
(ix) The transferee Regional Rural Bank shall have the power to post the
employees in the interest of the bank and the public as a whole
anywhere in the entire area of operation of the transferee Regional Rural
Bank.

(x) The area of the transferee Regional Rural Bank shall be the combined
area of operation of the transferor. Regional Rural Banks viz. Malprabha
Gramin Bank, Bijapur Gramina Bank, Netravati Gramina Bank and
Varada Gramina Bank in Dharwad, Beigaum Haveri, Gadag, Bijapur,
Bagalkot, Uttara Kannada, Dakshina Kannada and Udipi Districts of the
State of Kamataka.

(xi) Unless otherwise expressly provided in this notification, the provisions

of the Act shall have the same effect on the transferee Regional Rural
Bank as if it has been established under sub-section (1) of section 3 of
the Act.

(xii) If any difficulty arises in giving effect to the provisions of this

notification, the Central Government may make such order, not
inconsistent with the provisions of the Act, as may appear to it to be
necessary for the purpose of removing such difficulty.

56
 CHAPTER-4
RESEARCH METHODOLOGY

4.1 Introduction
Research in common parlance refers to a search for knowledge. One can also
define research as a scientific and systematic search for pertinent information
on a specific topic.

P.M. Cook: "Research is an honest, exhaustive, intelligent searching for facts

and their meanings or implications with reference to a given problem. It is the
process of arriving at dependable solutions to problem tlirough planned and
systematic collection, analysis and interpretation of data." *

The present study focuses on the financial performance of Regional Rural

Banks in India before and after amalgamation with the help of Mean,
percentage. Ratio Analysis, t-test, and Anova. This chapter deals with the
stepwise procedure followed in-erderto carry out the present research work.

4.2 Research Statement

The research statement studied is entitled "Financial Performance of Regional
Rural Banks in India before and after Amalgamation"

The process of amalgamation was initiated in 2005. As a result of

amalgamation process, the number of RRBs in the country declined from 196
to 96 at the end of March 2007 and further to 84 at the end of March 2009.

4.3 Research Design

A research design is a plan of action to be carried out in connection with a
research project. It is the conceptual structure within which research is
conducted and it constitutes the blue print for the collection, measurement and
analysis of data. It is the specification of methods and procedures for acquiring
the information needed for solving the problem.

57
 Kerlinger (1986)
"A research design is a plan, stmcture and strategy of investigation so
conceived as to obtain answers to research questions or problems. The plan is a
complete scheme or program of the research. It includes an outline of what the
investigator will do from writing the hypothesis and their operational
implications to the final analysis of data".

1^^4.4 Objectives of the study:

V-. The objectives of the study are as follows:
Main objective:
• To analyse the financial performance of Regional Rural Banks in hidia
before and after amalgamation.
Subsidiary objective:
• To understand the working of Regional Rural Banks in India. \

4.5 Scope of the study

The scope of present study is confined only to Regional Rural Banks in India.
The study mainly involves the financial performance of Regional Rui'al Banks
in India before and after amalgamation. The present study is restricted to
collecting information about the Regional Rural Banks from websites, Journals,
magazine, newspapers and annual reports. Similar studies on this line may be
conducted for other amalgamated banks in India.

/ 4.6 Hypothesis
\ Null Hypothesis:
HQ: There is no significant difference in financial performance of RRBs in
India after amalgamation.
Alternative Hypothesis:
Hi: There is a significant difference in financial performance of RRBs in
India after amalgamation, "^N

58
 4.7 Sample selection
or the present study, all the regional rural banks in India were taken for
analysis. The process of amalgamation was initiated in 2005. As a result of
amalgamation process, the number of RRBs in the country declined from 196
to 96 at the end of March 2007 and to 84 as on March 2009.

Table 7
List of Regional Rural Banks in India (as end of March 2009)
NAME OF NEW
No. STATE SPONSOR BANK AMALGAMATED RRB
RRB
Andlira Chaitanya Godavari • Chaitanya GB
1 Andhra Bank
Pradesh GB • Godavari GB
• Kanakdurga GB
2 - do - Indian Bank Saptagiri GB
• Shri Venkateshwara GB
« Golconda GB
State Bank of • Sri Rama GB
3 - do - Deccan GB
Hyderabad • Sri Saraswathi GB
• Sri Santhavaha GB
• KakathiyaGB
• ManjiraGB
4 - do - State Bank of India Andlira Pradesh GVB • Nagarjuna GB
• Sangameshwara GB
« Sri visakha GB
• Pinakini GB
5 - do -- Syndicate Bank Andhra Pragathi GB • Rayalseema GB
• Sree Anantha GB
Arunachal Arunachal Pradesh
'6 State Bank of India
Pradesh Rural Bank
• CacharGB.
Assam Gramin Vikas • Lakhimi gaonlia GB.
7. Assam United Bank of India
Bank • Pragjyotish gaonlia GB.
• Subansiri gaonlia GB.
8. - do -- State Bank of India Langpi Rural banlc
• Champaran KGB.
« Gopalganj KGB.
9. Bihar Central Bank of India Uttar Bihar GB. • Madhubani KGB.
• MithilaKGB.
» Saran KGB.

59
 NAME OF NEW
No. STATE SPONSOR BANK AMALGAMATED RRB
RRB
• SiwanKGB.
• Vaishaii KGB.
• Kosi KGB.
• Uttar Bihar KGB.
• Bhajpur Rohtas Gb.
• Magadh GB.
10. - do - Punjab National Bank Madhya Bihar GB.
• NalandaGB.
• Patlipura GB.
• Begusarai KGB.
11. - do - UCO Bank Bihar KGB • Bhagaiput bank KGB.
• Monghyr KGB.
12. - do - State Bank of India Samastipur KGB
• BastarKGB.
13. Chhattisgarh State Bank of India Chhattisgarh GB. • Bilaspur Raipur GB.
• Raigarh KGB.
14. - do - Dena Bank Durgraj andgoon GB.
15. - do - Central Bank of India Surguja KGB.
• Panchrnahal GB Vadodara
16. Gujarat Bankof Baroda Baroda Gujarat GB. • Surat Bharuch GB.
«> Valsad Dangs GB.
• Banaskantha- Mehsana GB.
17. - do - Dena Bank Dena Gujarat GB. • Kunoh GB.
• Sabarkantha Gandhinagar GB.
• Jamnagar Rajkot GB.
State Bank
18. - do -- Saurashtra GB. • Junagadh Amreli GB.
of Saurashtra
• Surendranagar Bhavnagar GB.
• Ambala kurukshetriya GB.
19. Haryana Punjab National Bank Haryana GB. • Haryana KGB.
• Hissar-sirsa KGB.
20. - do - Syndicate Bank Gurgaon GB.
Himachal
21. Punjab National Bank Himachal Gramin bank
Pradesh
22. - do - Stat Bank of India Par\'atiya GB.
Jammu o Kamraz RB
23. J and K Bank Ltd J and K GB.
Kashmir • Jammu RB.
24. - do - Stat Bank of India Ellaqui Dehati GB.
• Gii-idih KGB.
25. Jharkhand Bankof India Jharldmnd GB.
• Hazaribagh KGB.

60
 NAME OF NEW
No. STATE SPONSOR BANK AMALGAMATED RRB
RRB
• RanchiKGB.
• SinghbhumKGB.
• Palamau KGB.
26. - do - State bank of India Vananchal GB.
• Santhal Paraganas GB.
» Chitadurga GB.
• Lolar GB.
27. Karnataka Canara Bank Pragathi GB.
• SahyadriGB.
• TungbhadraGB.
Cauvery Kaloathary • Cauvery GB.
28. - do -- State Bank of Mysore
GB. • Kalpathary GB.
• Bijapur GB.
• Malaprabha GB.
29. - do - Syndicate Bank Karnataka Vikas GB.
• NetravatiGB.
• Varada GB.
30. - do - Corporation Bank Chikamagalur GB.
31. - do - State Bank of India Krishna GB.
32. - do -- Vijaya Bank Visveshwarya GB.
33. Kerala Syndicate Bank North Malabar GB.
34. - do - Canara Bank South Malabar GB.
• Dewas shajapur GB.
Madhya • Indore-Ujjain KGB.
35. Bank of India Narmada Malwa GB.
Pradesh • Nimar KGB.
• Rajgarh- sehore KGB.
• Satpura KGB.
Satpura Narmada
36. - do - Central Bank of India • Chambal-Gwalior KGB.
KGB.
• Ratlam-Mandsaur KGB.
• Bundelkhand KGB.
37. - do -- State Bank of India Madhya Bharath GB. • Damoh-Panna Sagar GB.
• Sivpuri-Guna KGB.
38. - do - BankofBaroda Jhabya-Dhar KGB.
39. - do - UCO Bank Mahakaushal KGB.
40. - do - Union Bank of India Rewa sidhi GB.
41. - do - Allahabad Bank Sharda GB.
42. - do - Stat Bank of Indore Vidisha Bhopal KGB.
• Akola KGB.
43. Maharashtra Central Bank of India Vidarbha KGB. • BuldhanaGB.
• Yavatmal KGB.
44. - do - Bank of Maharashtra Wainganga Krishna 0 Ratnagiri sindhudurg GB.

61
 NAME OF NEW
No. STATE SPONSOR BANK AMALGAMATED RRB
RRB
GB. • SoIapurGB.
• Wain ganga KGB.
• Marathwala GB.
45. - do - Bank of Maharashtra Maharashtra GB.
• Maharashtra Godavari GB.
46. Manipur United Bank of India Manipur Rural Bank
47. Meghalaya State Bank of India Meghalaya Rural Bank
48. Mizoram State Bank of India Mizoram Rural Bank
49. Nagaland State Bank of India Nagaland Rural Bank
Neelachal Gramya • Puri GB.
50. Orissa Indian overseas Bank
bank • DhenkanalGB.
• * Balasore GB.
51. - do - UCO Bank Kalinga Garmya bank
• * Cuttack GB.
• Bolangir Anchalik GB.
52. - do - State Bank of India Utlal GB • Kalahandi Anchalik GB.
• Karaput Panchbati GB.
53. - do - Bank of India Baitarani GB
54. - do - Andhra Bank Rushikulya GB.
55. Punducherry Indian Bank Pudvai Bharthiar GB.
• Gurdaspur Amritsar KGB.
56. Punjab Punjab National Bank Punjab GB. • Lapurthala Ferozpur KGB.
• ShivlikKGB.
Punjab and Sind
57. - do - Sutlej GB.
Bank
58. - do - State Bank of Patiala Malwa GB.
• Aravaii KGB.
• Bhilwara-AjmerKGB.
59. Rajasthan Bankof Baroda Baroda Rajasthan GB. • Bundi-ChittorgarhKGB.
• Dungarpur- Banswara KGB.
• MarudharKGB.
• Alwar Bharatpur Anchalik GB.
60. -- do -- Punjab National Bank Rajasthan GB.
• Shekhawati GB.
• Bikaner KGB.
State Bank of Bikaner Marwar Ganganagar e Marwar KGB.
61. - do -
and Jaipur Bikaber GB MGB GB. • Sriganganagar KGB.

• Jaipur Nagaur Anchalika GB.

62. - do -- UCO Bank Jaipur and Thar GB.
• Thar Anchalik GB.
63. - do - Central Bank of India Hadoti KGB.

62
 NAME OF NEW
No. STATE SPONSOR BANK AMALGAMATED RRB
RRB
64. - do - Bank of Rajasthan Mewar- Anchalik GB.
• Adhiyaman GB.
65. Tamilnadu Indian Bank Pallavan Grama Bank
• VallarGB.
66. - do - Indian overseas Bank Pandyan GB.
67. Tripura United Bank of India Tripura Gramin bank
• Bhagii-ath GB.
68. Uttar Pradesh Allahabad Bank Luclaiow KGB. • Sarayu GB.
• ShravastiGB.
• Chaltrasal GB.
69. - do -- Allahabad Bank Triveni KGB. • Tuisi GB.
• Vindhyavasini GB.
Baroda Uttar Pradesh • Baroda Eastern UPGB.
70. - do - Bank of Baroda
Gramin Bank • Baroda western GB.
• AvadhGB.
71. - do - Bank of India Aryavart GB • Barabanki GB.
• Farrukhabad GB.
• Aligarh GB.
72. - do -- Canara Bank Shreyas GB. • Etah GB.
• Jamuna GB.
• BalliaKGB.
73. - do - Central Bank of India Ballia-Etawah GB.
• Etawah KGB.
• Uttar Pradesh GB.
• Rani Lakshimbai KGB.
74. - do - Punjab National Bank Sarva up gi-amin Bank
• Devi Patan KGB.
• Kisan GB.
Purvanchal Gramin • BastiGB.
75. - do -- State Bank of India
Bank • GorakhpurKGB.
76. - do - Syndicate Bank Prathama Bank
• GomitGB.
Kashi Gomti Samyut
77. - do - Union Bank of India • Kashi GB.
GB
• Samyut GB.
• Baroda Eastern Uttar Pradesh
Up State cooperative HB.
78. - do - Kshetriya Kisan GB.
Bank • Baroda western Uttar Pradesh
GB.
• Hindoo GB.
79. - do - Punjab National Bank Uttar Pradesh GB. • Muzaffarnagar KGB.
» Uidur GB.

63
 NAME OF NEW
No. STATE SPONSOR BANK AMALGAMATED RRB
RRB
• AlaknandaGB.
80. Uttarakhand Bank of India Uttaranchal GB. • Ganga-Yamuna GB.
• Pithorgarh KGB.
81. - do ~ BankofBaroda Nainital AlmoraKGB. N

82. West Bengal Central Bank of India Uttar Banga KGB.

• SagarGB.
• GaurGB.
Bangiya Gramia Vikas
83. - do ~ United Bank of India • MallabhiimGB.
bank
• Murshidabad GB.
• Nadia GB.
• Howrah GB.
84. - do ~ UCO Bank Paschim Banga GB. • Bardhaman GB.
• Mayurakshi GB.

GB - Gramin Bank
KGB - Kshetriya Gramin Bank
RB - Rural Banlc

4.8 Data Collection

The secondary data collection is mainly done by collecting information thi-ough
various journals, magazines, newspapers, and annual reports and websites of
Regional Rural Banks and through various search engines. ^

/^4.9 Period of Study

i

^ T h e financial performance of RRB's has been studied from 2001-02 to 2008-09

covering a period of 8 years i.e. 4 years prior to amalgamation and 4 years post
amalgamation.
/ 4.10 Significance of Study
^-^Rural banking has assumed gi'eat importance in recent years. There is a very
low output of research pertaining to RRBs since their inception. The present
study assumes significance in view of the fact that the studies made so far ai-e
both inadequate in their coverage and analysis. There are no studies pertaining
to financial performance of all RRBs post amalgamatiom"

64
5. Ratio of Deposits to Total Liabilities
Deposits
Ratio of Deposits to Total Liabilities =;
Total Liabilities
Deposits to total Liabilities represents Total Liabilities of bank

6. Ratio of Term Deposits to Total Deposits Ratio

Term Denosits
Ratio of Term Deposits to Total Deposits Ratio =
Total Deposits
7. Ratio of Priority Sector Advances to Total Advances

Ratio of Priority Sector advances to Total Advances =

Total Advances

8. Ratio of Term Loan To Total Advances

Ratio of Term Loan to Total Advances = -

Total Advances

9. Ratio of Interest Income to Total Assets

T, . ^T T rr. , A Interest Income
Ratio of Interest Income to Total Assets =
Total Assets
10. Ratio of Net Interest margin to Total Assets
o *• f" XT + T + ^ • + T^ * 1 A + Net Interest margin
Ratio of Net Interest margin to Total Assets = —
Total Assets
Net Interest Margin = Interest Earned - Interest paid

11. Ratio of Non Interest Income to Total Assets

Ratio of Non - Interest Income to Total Assets =

Total Assets
12. Ratio of Intermediation cost to Total Assets

Ratio of Intermediation cost to Total assets =

Total Assets
Intermediation cost = Total Operating expenses

66
13. Ratio of Wage Bills cost to Intermediation cost
Wage Bills
Ratio of Wage Bills cost to Intermediation cost = -
Intermediation Cost
Wage bills are defined as payment to and provisions for employees.

14. Ratio of Wage Bill to Total expenses

Wage bills
Ratio of Wage Bills to Total expenses ••
Total expenses
Total expense = Interest expended + Operating expenses

15. Ratio of Wage Bills to Total Income

Wage Bills
Ratio of Wage Bills to Total Income = •
Total Income
Total Income = Interest earned + Other income

16. Ratio of Burden to Total Assets

Burden
Ratio of Burden to Total Assets = -
Total Assets
Burden = Burden is defined as the total non interest expenses less total
\ "
non interest income

17. Ratio of Burden to Interest Income

Burden
Ratio of Burden to Interest Income = -
Interest Income

18. Ratio of Operating profits to Total Assets.

Ratio of Operating Profits to Total Assets = —

Total Assets

Operating profit is defined as total earning less total expenses, excluding

provisions and contingencies.

4.11.2 Mean
(i) Mean is a single value that describes the characteristic of the entire
mass of unwieldy data. Such a value is called the central value or an

67
 "average" which depicts the characteristic of the whole group. Since
an average represents the entire data, its value lies some where in
between the two extremes. It facilitates comparison.

It is clear from the above definition that average is a single value that
represents a group of values. Such a value is of great significance
because it depicts the characteristics of the whole group. Since the
average represents the entire data, its value lies somewhere in
between the two extremes, i.e., the largest and the smallest items; for
this reason an average is frequently referred to as a measure of
central tendency.

4.11.2.1 Requisites of a Good Average

(i) It should be easy to understand.
(ii) It should be simple to compute.
(iii) It should be based on all observations.
(iv) It should not be unduly affected by extreme items.
(v) It should be rigidly defined.
(vi) It should be capable of further algebraic treatment.
(vii) It should have sampling stability.

4.11.2.2 Arithmetic Mean

The most popular and widely used measure for representing the entire
data by one value is what most laymen call an average and what the
statisticians call the arithmetic mean. It is found by dividing the total by
the number of items.
Arithmetic mean may either be
(1) Simple arithmetic mean
(a) Weighted arithmetic mean

Calculation of simple Arithmetic Mean- The process of computing mean

incase of individual observation

68
 N N
Here, X - Arithmetic Means
^ X = Sum of all the values of the variable
Steps:
(1) Add together all the values of the variable X and obtain the total i.e.

(2) Divide this total by the number of the observations i.e., N

4.11.2.3 Merits and Limitations of Arithmetic Mean

Merits
(i) Arithmetic mean is most widely used in practice because it is
simple to understand and easy to compute,
(ii) It is defined by the value of every item in the series,
(iii) Being determined by a rigid mathematical formula, it lends itself
to subsequent algebraic treatment better than the median or mode,
(iv) It is relatively reliable in the sense that it does not vary too much
when repeated samples are taken from one and the same
population at least not as much as some other kind of statistical
description,
(v) It is the calculated value and not based on position in the series,
(vi) It is the centre of gravity balancing the values on either side of it.
Limitations
(i) Since the value of mean depends upon each and every item of the
series, extreme items, i.e. very small and very large items, unduly
affect the value of the average,
(ii) In a distribution with open end classes, the value of the mean
cannot be computed without making assumptions regarding the
size of the class interval of the open end classes. If such classes
contain a large proportion of the values, then the mean may be
subjected to substantial error.

69
4.11.3 Variance
Average alone cannot adequately describe a set of observations. It is
necessary to describe the variability or dispersion of the observations.
Measures of dispersion help us in studying this important characteristic
of a distribution. "Dispersion is the measure of the variation of the
items" - A.L Bowley

Measures of variation are needed for four basic purposes:

a) To determine the reliability of an Average.
b) To serve as a basis for the control of the variability.
c) To compare two or more series with regard to their variability.
d) To facilitate the use of other statistical measures.

Standard Deviation
Standard deviation was introduced by Karl Pearson in 1893. It is by far
the most important and widely used measure to study dispersion.

Standard deviation is also known as root mean square deviation for the
reason that it is the square root of the mean of the squared-deviations
from the arithmetic mean. Standard deviation is denoted by the small
Greek letter a (read as sigma)

Standard deviation measures the absolute dispersion or variability of a

distribution. The greater the amount of dispersion or variability, greater
the standard deviation and greater will be the magnitude of the
deviations of the values from their mean. A small standard deviation
means a high degree of uniformity of the observations as well as
homogeneity of a series; a large standard deviation means just the
opposite. Thus, if we have two or more comparable series with identical
or nearly identical means it is the distribution with the smallest standard
deviation that has the most representative mean. Hence standard
deviation is extremely useful in judging the representativeness of the
mean.

70
 4.11.3.1 Calculation of Standard Deviation
In case of individual observations, standard deviation may be computed
by applying any of the following two methods :-
(i) By taking deviations of the items from the actual mean.
(ii)By taking deviations of the items from an assumed mean.
i) Deviations taken from actual mean
When deviations are taken from actual mean, the following formula is
applied.

Where, x = (x - x) and
N = Number of observations.

ii) Deviations taken from assumed mean

When the actual mean is in fractions, it would be too cumbersome to
take deviations from it and then obtaining squares of these deviations. In
such a case, either the mean may be approximated or else the deviations
be taken from an assumed mean. When deviations are taken from
assumed mean the following formula is applied.

(J =
N N

4.11.3.2 Merits and Limitations of Standard Deviation

Merits
1) The standard deviation is the best measure of variation because of its
mathematical characteristics. It is based on eveiy item of the
distribution.
2) It is possible to calculate the combined standard deviation of two or
more groups. This is not possible with other measures.

71
3) For comparing the variability of two or more distributions, coefficient of
variation is considered to be most appropriate and this is based on mean
and standard deviation.
4) Standard deviation is most prominently used in further statistical work.
For example, in computing skewness, correlation, etc.

Limitations
1) As compared to other measures, it is difficult to compute. However this does
not reduce the importance of this measure because of high degree of accuracy
of result it gives.
2) It gives more weight to extreme items and less to those which are near the
mean. It is because of the fact that the squares of the deviations which are big
in size would be proportionately greater than the squares of those deviations
which are comparatively small.

4.11.4 T-Test
Theoretical work on t distribution was done by W. S. Gossett in the early
1900s. Gossett was employed by the Guinness son. Brewery in Dublin, Ireland,
which did not permit employees to publish research findings under their own
names. So Gossett adopted the pen name "Student" and published his findings
under this name. Thereafter, the t-distribution is commonly called student's t-
distribution or simply student's distribution. The t-distribution is used when
sample size is 30 or less and the population standard deviation is unknown.

The "t-statistic" is defined as

X - Li r-
t= x^|n

Where, S = . ^
V n-l
Where,
S= the standard deviation of the sample

x= the mean of the sample

n = sample size

72
It takes the following form,

^^. ^1 ^2

Where,

Xi = mean of the first sample

Xi = mean of the second sample

ni = number of observation in the first sample
n2 = number of observation in the second sample
s = Combined standard deviations.

4.11.4.1 Properties of t-distribution

1) The variable of t-distribution ranges from minus infinity to plus infinity.
2) The constant C is actually a function of V (pronounced as nu) so that for
a particular value of v, the distribution of f(t) is completely specified.
Thus, f{t) is a family of functions, one for each value of v.
3) Like the standard normal distribution the t-distribution is symmetrical
and has a mean zero.
4) The variance of the t-distribution is greater than one, but approaches one
as the number of degrees of freedom. And, therefore, the sample size
becomes large. Thus the variance of the t-distribution approaches the
variance of the standard normal distribution as the sample size increases.
It can be demonstrated that for an infinite number of degrees of freedom,
the t-distribution and normal distribution are exactly equal. Hence there
is a widely practiced rule of thumb that samples of size n > 30 may be
considered large and the standard normal distribution may appropriately
be used as an approximation to t-distribution. The following diagram
compares normal distributions of different sample sizes:

73
 normal
distribution
1^
t-distribution- t-distribution
for sample size m=15^ [pie size n=2

Nonnal Distribution, t-Distribudon for Sanqvle Size a=15, and

t-Distribution for San^le Size n=2

The above diagram shows two important characteristics of t-distribution. First,

a t-distribution is lower at the mean and higher at the tails than a normal
distribution. Second, the t-distribution has proportionately greater area in its
tails than the normal distribution. Interval widths from t-distributions are,
therefore, wider than those based on the normal distribution.

4.11.4.2 Application of t-distribution

1) To test the significance of the mean of a random sample.
2) To test the difference between the means of the two samples
(independent samples)
3) To test the difference between the means of two samples. (Dependent
samples or paired observation)
4) To test the significance of an observed correlation coefficient.

4.11.5 Analysis of Variance (ANOVA)

The analysis of variance frequently refeiTed to by the contraction
ANOVA is a statistical technique specially designed to test whether the
means of more than two quantitative populations are equal.

The analysis of variance technique developed by R.A. Fisher in 1920s,

is capable of fruitful application to a diversity of practical problems.
Basically it consists of classifying and cross-classifying statistical results
and testing whether the means of a specified classification differ

74
 significantly. In this way it is determined whether the given
classification is important in affecting the results. From the cross-
classification, it could be determined whether the mean qualities of the
outputs of the various machines differed significantly. Such a study
would determine, for example, whether uniformity in quality of outputs
could be increased by standardizing the procedures of the operators and
similarly whether it could be increased by standardizing the machines.
Analysis of variance thus enables us to analyze the total variation of data
into components which may be attributed to various "sources" or
"causes" of variation.

The analysis of variance originated the agrarian research and its

language is thus loaded with such agi'icultural terms as block and
treatments which are differentiated in term of varieties of seed,
fertilizers or cultivation methods. The word treatment in analysis of
variance is used to refer to any factor in the experiment that is controlled
at different levels or values.

4.11.5.1 ONE-WAY CLASSIFICATION

The steps in carrying out the analysis are:
1. Calculate variance between the samples. The variance between samples
(groups) measures the difference between the sample mean of each
group and the overall mean weighted by the number of observations in
each group. The variance between samples takes into account the
random variations from observation to observation. It also measures
difference from one group to another. The sum of squares between
samples is denoted by SSC. For calculating variance between the
samples we take the total of the square of the deviations of the means of
various samples from the grand average and divide this total by the
degree of freedom. Thus the steps in calculating variance between
samples will be:

(a) Calculate the mean of each sample i.e. X^,X^, etc.

75
(b) Calculate the grand average X. Its value is obtained as follows:
~ X ^ + JL 2 + X^ +...
X = •
N,+N.,+N,+...
(c) Take the difference between the means of the various samples and the
grand average.
(d) Square these deviations and obtain the total which will give sum of
squares between the samples; and
(e) Divide the total obtained in step (d) by the degrees of freedom.

2. Calculate variance within the samples. The variance (or sum of squares)
within samples measures those inter-sample differences due to change
only. It is denoted by SSE. The variance within samples (groups)
measures variability around the mean of each group. Since the
variability is not affected by group differences it can be considered a
measure of the random variation of values within a group. For
calculating the variance within the samples we take the total of the sum
of squares of the deviation of various items from the mean values of the
respective samples and divided this total by the degree of freedom.
Thus, the steps in calculating variance within the samples will be:
(a) Calculate the mean value of each sample, i.e. X^,X2,X^, etc.:
(b) Take the deviations of the various items in a sample from the mean
values of the respective samples:
(c) Square these deviations and obtain the total which gives the sum of
square within the samples and
(d) Divide the total obtained in step (c) by the degrees of freedom. The
degree of freedom is obtained by deduction from the total number of items
the number of samples.
3. Calculate the ratio F as follows:
Between - column variance
F
Within - column variance

76
4. Compare the calculated value of F with the table value of F for the
degree of freedom at a certain critical level generally we take 5% level
of significance. If the calculated value of F is greater than the table
value, it is concluded that the difference in sample means is significant.
Analysis of variance (ANOVA) Table: One way classification
Source of Sum of degree of Mean Square Variance
variation Squares Freedom MS Ratio of F
Between ssc V|= C-1 MSC = SSC/ (c-1)
Samples
Within SSE V2~ n - c MSE = SSE/(n-c) MSC/ MSE
Samples
Total OST n-1

SST = Total sum of squares of variations

SSC= Sum of squares between samples (columns)
SSE = Sum of squares within samples (rows)
MSC = Mean sum of squares between samples
MSE = Mean sum of squares within Samples

Compare the calculated value of F with the table value of F for the degi^ees
of freedom at a certain critical level. If the calculated value of F is greater
than the table value, it is concluded that the difference in sample means is
significant; on the other hand, if the calculated value of F is less than the
table value, the difference is not significant and has arisen due to
fluctuations of simple sampling.

4.11.6 Regression Analysis:

Regression analysis is a statistical method that deals with the analysis of
mathematical models expressing the relationship between several variables.
The regression analysis is basically useflal for two primaiy purposes,
(i) It can be used to predict the value of one variable when the value(s) of
other related variable(s) is (are) known; and

77
(ii) It can be used to examine whether there is a relationship between two or
more variables and it can further describe the strength of that
relationship.

A simple and most common form of mathematical relationship used between

two variables is the linear of the straight line. The form of the relationship can
be expressed as y = a+by, where y represents the dependent variable and X is
the independent variable; a and b are the parameters of the regi'ession equation.

The method of least squares chooses a line such that the sum of the squares of
these deviations is minimum.

The general form of a linear regression model is

Yi = a + bxj + e;
Where CJ: i=l, 2, .... N, is the random error term con-esponding to the ith
observation and a and b are the regression parameters. The error term
represents the amount of the observed value of yi which deviates from its
estimated value. The regression model discussed here is built upon the
following underlying assumptions.
(i) The regression function is linear. If X and Y are not linearly related, it is
sometimes possible to transform one variable or both variables, so that a
linear relationship is established .Further non-linear regi-ession analysis
which is an extension of the linear regression analysis, also uses the
concepts of the least squares method.
(ii) The conditional probability distributions of Y (dependent variable), given
X (independent variable) are normally distributed for all X. As the
independent variable, X in the regression analysis is treated as
predetermined, no assumption is required with respect to the conditional
probability distribution of X, given Y.
(iii) All the conditional, standard deviations are equal. The characteristic in
regression analysis is referred to as 'homeoscedasticity' meaning equal
variance.

78
(iv) The error terms, Ci, are independent random variables, with E(ei) — 0 and
variance (Cj) = a^ for all I = 1, 2, .... N.

INTA (Investment as percentage to Total Assets), LIQ (Liquidity as percentage

to Total Assets), OE (Operating Expenses as percentage to total expenses),
LOTA (Loan advances as percentage to Total Assets) are independent variables
while NITA (Net Income as percentage to Total Assets) is the dependent
variable.

4.12 Limitations of the study

The present research work is undertaken to maximize objectivity and minimize
the errors. However, there are certain limitations of the study, which are to be
taken into consideration for the present research work
• The study fully depends on financial data collected from the published
financial statements of banks. This study incorporates all the limitations that
are inherent in the financial statement.
• Financial statement reflects the book value and the management might have
window dressed or manipulated the values.

79
 CHAPTER 5
DATA ANALYSIS

5.1 Growth of Regional Rural Banks in India

Till the birth of RRBs in India, Commercial Banks and Co-operative Banks
rendered services to the rural public. But despite such a large network of bank
branches, the credit needs of the rural population in India were quite
inadequate. RRB is a bank for rural poor peoples; its presence in all the states
of country especially in underdeveloped states and union territories is strongly
realized. The growth of regional rural banks in India is shown in Table-8
^ Table 8
\ Growth of Regional Rural Banlcs in India
Years Number of RRBs Number of Branches
2001-02 196 14390
2002-03 196 14433
2003-04 196 14446
2004-05 196 14484
2005-06 133 14494
2006-07 94 14520
2007-08 90 24761
2008-09 84 15480

ftomberofRRE Numberof Branches

30000
250
23000
«g 200 (A
&
V£.
•g 20000
^ 150 c
o
I 100
E
196 196 196 196
^ 15000

o
•••••
Z 50
133
M •z
5000
p I I 1 1 \ i]
lo to lo
.JIL.JI
o
o
-J.

h
to
o
o
b
O
C3
U
b
o
o
b
UI
o
o
UI

b
O
o
b
-4
O
o
b
CO
o
o
CD
b
ID
M
O

O
K3

O
O

CO
i O
O
o
cn
O
O
o
a>
o
o
?
o
O
o
-4

b
00
O
o
00

b
CO
Year n Number of RRBs Year a Number of Branches

80
Table-8 shows that the number of RRBs decreased from 196 in the year
yfSeln 2008-09. This was due to the amalgamation that took place
2001-02 to(^86/in
since the year 2005-06 wherein relocation of unprofitable branches took place.
However the number of branches has significantly increased from 14390 to
15181 over the period of the study. The increase over the period was
1.05 times.

5.2 Number of RRBs in Profit/Loss as % of Total Numbers of RRBs

Table 9
Numbers of RRBs in profit or loss as % of total numbers of RRBs
Number «f RRBs ia ProSt/Loss as Percentage
Year
Number of RRBs in Profit Number of RRBs in Loss
2001-02 85 15
2002-03' SO- 20-
2003-04 83 17
2004-05 85 15
2005-06 83 17
2006-07 84 16
2007-08 91 9
2008-09 93 7

Numbers of RRBs in profit or loss as % of

total numbers of RRBs
100
so
80
O) 70
i -.

S 50 9t ti3=
a, 40 85 80 83 85 83 84
I 30
10
0 • 1 f i
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
02 03 04 05 06 07 08 09

Years t3 Number of RRBs in Profit

• Number of RRBsin.Loss.,

Table 9 indicates that loss making RRBs declined and profit making RRBs
have incpsased after amalgamation-. 15% of RRBs- w©r€ loss- making RRBs- in

81
2001-02 but the number decreased to 7% in 2008-09. This proves that
amalgamation has been beneficial to RRBs.

5.3 Manpower Deployment

Regional Rural Banks (RRBs) were established in India essentially for taking
banking to fhe doorsteps of rural masses, particularly in areas without banking
facilities. RRBs covered 525 out of 605 districts as on 31st March, 2006. After
amalgamation, RRBs have become quite large covering most parts of the states
in India. As many as 616 out of 640 districts were covered by RRBs as on 31
March 2009.
Table 10
Manpower Deployment
Years Number of staff Employed
2001-02 69876
2002-03 69547
2003-04 69249
2004-05 68912
2005-06 68629
2006-07 68289
2OO7-0& 68€05-
2008-09 68526

Number of Staff Employed

70000

^ 69500

•Q. 69000

£
LU oo
$: 68500 at
to CD
en
xo CM
(0
"o 68000 00 to
• (O

zo
OO 00
00
oo o
o
67500 00,

67000
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
D Number of Staff
Year Employed

82
Table-10 reveals manpower deployment of RRBs. The Staff employed in
2001-02 was 69876 which reduced to 68005 in 2007-08 but it again increased
to68526in200S-09-

5.4 Geographical Coverage

TaHe 11
C Coverage of Districts
Years Number of Districts covered
2001-02 511
2002-03 516
2003-04 518
2004-05 523
2005-06 525
2006-07 534
2007-08 594
2008-09 616

NufRfeer of D [strict^ eov^red

7fln -,

600 -

500

400 -
'
300 594 616
511 516 518 523 525 534
"
200 -

100- ^ -r-

A
1 1 1 1 1 1 1

2001-02 2002-03 2003-04 2004-05 2 D05-06 2006-07 2007-08 2008-09

Year • Number of Di^ftcts covered:

Table 11 reveals that a significant improvement was witnessed over the period
of study in terms of number of districte covered. RRBs covered 511 districts as
on 31st March, 2002 which increased to 616 as on 31st March, 2009. The
increase €vef &e period-was 1.20-times.

83
Ho - There is no difference in coverage of Districts of RRBs due to
amalgamation
Hi - There is difference in coverage of Districts of RRBs due to amalgamation
Amalgamation ^ Variance Observation |t| to.05 Ho
Period R/A
Before 517 18.5 4 2.437 2.353 R
After 567.25 1495.69 4

The result shows that the calculated value of statistics 111 =2.437 is greater than
the table value to.05,3 = 2.353. So, HQ is rejected at 5% level of significance
which signifies that there is difference in districts covered by RRBs due to
amalgamation.

The number of districts covered by RRBs has considerably increased year by

year owing to the expansion of RRBs after amalgamation which is an indicator
of RRBs efficiency.

5.5 Capital Composition

RRBs occupy an important position in the rural credit market of India. Sound
financial position is essential for any organization to survive. The detailed
components of capital funds are ftimished in Table 12.
Table 12
Components of Total Capital funds (? in Crore)
Owned Borrowed
% to Total % of Total Total Funds
Years funds funds
Funds Funds (? in Crore)
(? in Crore) (? in Crore)
8583
2001-02 4059 47.30 4524 52.70
(100%)
9465
2002-03 4666 49.30 4799 50.70
(100%)
10033
2003-04 5438 54.20 4595 45.80
(100%)
11705
2004-05 6181 52.80 5524 47.20
(100%)

84
 Owned Borrowed
% to Total % of Total Total Funds
Years funds funds
Funds Funds (? in Crore)
(^ in Crore) (? in Crore)
13950
2005-06 6647 47.65 7303 52.35
(100%)
9775 1.70,62,
2006-07 7286 42.70 57.30
(100%)
20227
2007-08 8733 43.17 11494 56.83
(100%)
23646
2008-09 10910 46.14 12736 53.86
(100%)

CompiDTieritsof Total Capital Ftmds (Rs. in Crofes) t2736

13000 -T149r
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0

Year -•—Owned funds

-a— Borrowed fiindis

Table 12 reveals year wise components of total capital composition of owned

funds and borrowed funds of RRBs.

Ho - There is no change in the capital composition of RRBs due to

amalgamation
Hi - There is change in the capital composition of RRBs due to amalgamation
Amalgamation Ji Variance Observation . I.tl, Ho
to.05
Period R/A
Before 9936.5 1325264.75 4 4.019 2.353 R
After 18721.25 13009595.68 4

85
The result indicates that the calculated value of statistics 111 = 4.019 is greater
than the table value to.05,3 = 2.353. So, HQ is rejected at 5% level of significance
which signifies that there is difference in capital composition of RRBs due to
amalgamation.

Both owned funds and borrowed funds have constantly increased over the
period of study. It can be observed from the above table that borrowed funds
constitute a greater percentage than the owned funds during the post
amalgamation period.

5.6 Deposits Mobilization

RRBs are expected to mobilize resources from rural areas and play a significant
role in developing agriculture and rural economy by mobilizing resources in
rural sectors for the needy. The business performance of RRBs in terms of
Deposits mobilization is presented in Table 13.

Table 13
Deposits
Years Deposits (in ?)
2001-02 44539
2002-03 50098
2003-04 56350
2004-05 62143
2005-06 71329
2006-07 83144
2007-08 99093
2008-09 120189

86
 Deposits (Tn Rupees)
140000
120189
120000
99t)93.
100000
83144
80000 71329
62143
56350
60000 -swas-
44539
40000

20000

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year - Deposits.(in Rupees)

RRBs have shown considerable improvement in deposits mobilization in Table

13.

Ho - There is no change in Deposits of RRBs due to amalgamation

Hi - There is change in Deposits of RRBs due to amalgamation

Amalgamation Ho
ii Variance Observation . !.t|. to.os
Period R/A
Before 24942.75 4 4 3.4693 2.353 R
After 53748 4 4

The calculated value of statistics | 11 = 3.4693 is greater than the table value
to.05,3 = 2.353. So, Ho is rejected at 5% level of significance which means that
there is difference in Deposits of RRBs after amalgamation.

The deposit mobilized by the bank has increased from 44539 crores in the year
2001-02 to 120189 crores in 2008-09. The increase over the period was
2.7 times.

87
5.7 Investment
Investment as window of deployment of funds is given more emphasis than
lending. Growth of Investment is important for stability of any bank. The
business performance of RRBs in terms of Investments is presented in Table 14
Table 14
Growth of Investments
Amount of Investment % Increase
Years
(f in crores) over previotts year
2001-02 30532 —

2002-03 33063 8.28

2003-04 36135 9.29
2004-05 36762 1.73
2005-06 41182 12.02
2006-07 45666 10.88
2007-08 48560 6.33
2008-09 65910 35.72

Growiri of "mvestment 65910_

70000

60000

50000
U)
0)
O 40000
o
£ 30006
w
20000

10000

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year Amount of
investment (Rs. in

There has been consistent growth in the sphere of Investment activity. It has
been observed that the amount of Investment of the bank has increased from

88
30532 crore in the year 2001-02 to ?65910 crore in 2008-09. The year 2008-09
registered the highest growth of Investment of 35.72% over the previous year.

5.8 Sector wise Loan Disbursement

Before the initiation of banking reforms, lending from the RRBs was largely
restricted to the priority sector. From September 1992 onwards, RRBs were
allowed to finance non-target groups to the extent not exceeding 40 percent of
their incremental lending. This limit was subsequently enhanced to 60 percent
in 1994. As a result the RRBs diversified into a range of non-priority sector
(NPS) advances, including jewel and deposit linked loans, consumer loans and
home loans.

Priority Sector is a sector which is given priority in offering financial services

by the banks. The concept of priority sector was first brought into the financial
system in 1968, when the government imposed social control over the banks.
Banks are directed to lend a certain percentage of loans to the sector listed in
the priority sector, hi 1968, three sectors namely agriculture, small industry and
exports were treated as priority sector. Gradually, the list of segments under
priority sector increased. At present it consist of agriculture, small scale
industry, small transport operators, exports, small business housing, self
employed persons, professionals, education. Recently, micro finance through
self-help group (SHG) is also included in priority sector.

Table 15
Sector wise Loan Disbursement
Priority %to Non-priority %to Total
Years Sector total Sector total Loans
(? in crores) loans (? in crores) loans (^ in crores)
12441
2001-02 9640 77.49 2801 22.51
(100%)
12641
2002-03 10096 79.87 2545 20.13
(100%)
15579
2003-04 12731 81.72 2848 18.28
(100%)

89
 Priority %to Non-priority %to Total
Years Sector total Sector total Loans
(? in crores) loans (f in crores) loans (f in crores)
21082
2004-05 16724 79.33 4358 20.67
(100%)
25313
20105-06 20471 80.87 4842 19.13
(100%)
33043
2006-07 27155 82.18 5888 17.82
(100%)
38582
2007-08 31984 82.90 6598 17.10
(100%)
43367
200S-09 36425 93.3€ 7242 16.70
(100%)
Source: Central Statistical I:nformation Department, NABARD.

Sectorwise Loan Disbursement

100
90 _^
93.3
80 —•—
-7-9.87 51Z2_ J5a.a2L_ 82.18 82.9
Oi 70 —77:49- -7^^3-
3 60
i 50
E 40
a. 30
20
22.51 -20-13 =fS;28 2SLS1 nM ^f^gg-
10
-tTtr "TOT

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year •—%tototaMoans
•— % to total loans

Hn There is no difference in the disbursement of loans to priority sector of

RRBs after amalgamation.
H, There is difference in the disbursement of loans to priority sector of
RRBs after amalgamation

Amalgamation Period ^ ObseiTation t to.05 HoR/A

Before 2012.13 8
4.5378 2.977 R
After 5010 8

The result shows that there is strong evidence that the calculated value of
statistics 11 j = 4.5378 is greater at 5% level- of sigriifieance-which means that

90
 there is difference in the disbursement of loans to priority sector of RRBs due
to amalgamation.

Table 15 reveals year wise loans issued to both priority and non-priority sectors
by RRBs. It is important to observe from the table that the loans issued to
priority sectors constitute a greater percentage than the loans provided to the
non-priority sector. Loans to the priority sector has increased from 77.49% in
2001-02 to 93.30% in 2008-09.

5.9 Disbursement of loans to various groups in the priority sector

Rural Credit policy in India envisaged the provision of a range of credit
services, including long-term and short-term credit loans to rural community.
During the operation of three decades, the RRBs in India have recorded a
significant growth in the disbursement of loans to priority sector. Table 16
depicts the loans issued to various groups in the priority sector.
^ Table 16
f Disbursement of loans to various groups in the Priority Sectors
Small Self- Other
Rural Retail
Scale Help Priority
Artisans Trade
Years Industry Group Sector
(RA) (RT)
(SSI) (SHG) (OPS)
(^ in crores) (^ in crores)
(? in crores) (^ in crores) (? in crores)
2001-02 181 70 1123 310 8102
2002-03 236 138 1421 350 819
2003-04 276 167 1653 510 1941
2004-05 316 210 1967 858 1290
2005-06 304 342 1841 1171 2282
2006-07 320 342 1984 1406 2222
2007-08 326 638 2024 2107 2775
2008-09 552 670 2370 2388 3662
Soun:e: Central Staticitical Informatio ti Department, ^"ABARD

91
 iSlsbtjfsement of Loans to various groops in the Priority Seetora
2008-09 552 ^ Q

2007-08 }2i

2006-Or !2oH 19&4

2 2005-06 1841
>
2004-05 &1PIE 1967

2003-04 : ^ 1553

2002-03 ::3i 1421 550

2001-02 '»i 1123 111

=F
1000 2000 3000 4000 5000 6000 7000 8000 9000 1OOO0
a Rural Artisans (RA) 1 Small Scale Industry ^SSI}^ Olfetail Trade (RT>^
a Self -Help Group (SKG) • Other Priority Sector (OPS)

Ho - Disbursement of loans to various priority sector by RRBs is equal

Hi - Disbursement of loans to various priority sector by RRBs is not equal

Groups Count Sum Average Variance

Loans to RA 8 2513 314.125 10263.81
Loans to SSI 8 2577 322.125 47173.48
Loans to R.T 8 14383 1797.875 90253.9
Loans to SHG 8 9100 1137.50 595184.2
Loans to OPS 8 15793 1974.125 875620.3

Source of Ho
SS df MS F Fo.05 (4.33)
Variance R/A
Between groups 10130087.64 4 253252.91
Within groups 21702064.46 33 657638.32 3.85 2.6896 R
Total 31832152.1 37

According to the above results, F-Statistics is more than the critical value; we
reject the null hypothesis feat loans disbursed to all the: groups in the priority
sector loans are equal. Likewise all the groups show an increasing trend over
the period of the study.

92
It has been observed from the Table 16, that the loans provided by the RRBs to
various groups have been increasing year after year. The loans to rural artisans
have increased from ?181 crores in 2001-02 to ?552 crores in 2008-09. The
increase over the period was 2.3 times. The loans to small scale Industiy have
increased from ?70 crores in 2001-02 to 670 crores in 2008-09. The loans to
Retail Trade (RT) have increased from 1123 crores in 2001-02 to 2370 crores
in 2008-09. The loans to self-help groups (SGH) have increased from 310
crores in 2001-02 to 2388 crores in 2008-09. The loans to other priority sectors
have increased from 8102 crores in 2001-02 to 3662 crores in 2008-09.

5.10 Loans to Agriculture and Allied Activities

Agriculture is the mainstay of Indian economy. RRBs provides short-term
(crop loans) and term loans (Agricultural and Allied Activities) to farmers.
^ Table 17
\^ Disbursement of short-Term Loans (Crop Loans) and Term Loans
(Agriculture and Allied Activities) by RRBs

Amount of %of %of

Increase Amount of Increase
Short Term
Years over Term Loans over
Loans
previous (? in crores) previous
(? in crores) year year
2001-02 3095 — 871 —

2002-03 4834 56.19 1045 19.98

2003-04 6133 26.87 1042 26.87
2004-05 9883 61.14 2043 61.14
2005-06 12575 27.23 2144 27.23
2006-07 17031 35.43 3198 35.43
2007-08 20377 19.64 3461 19.64
2008-09 22851 12.14 3648 12.14

93
 Disbursement of Short-Term Loans and Term
Loans by RRBs
30000

25000

20000

TSOOO
22851
10000 20377
170S1

imm mmm
12575
som 983y
4834 6133
3GS5

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

B Amount of Term Loans
Year • Amount of Short Tefm^ Loans

Table 17 exhibits that short term loans for crop has been increasing year after
year. Short-term loans have increased from ?3095 crores in 2001-02 to ?2285I
crores in 2008-09.

The disbursement of term loan for agriculture and allied activities by the RRBs
is also encouraging. It has increased from ?871 crores in 2001-02 to ?3648
crores in 2008-09. The increase over the period was 4.18 times.

In order to test whether the disbursement of short-term loans has the linear
elationsbip with the term, loans, ox not^^ con:el.ation. was found.. The. result Is.
shown below.

Column 1 Column 2
Column 1 1
Column 2 0.98909 1

The disbursement of short-term loans and term-loans of the RRBs has a strong
positive correlation. The linear correlation co-efficient is 0.98909 which is
close to +1. This means that the demand for short-term loan increases the
demand for the term-loan.

QA
5.11 Disbursement of loans to Agricultural Sector and Non-Agricultural
Sector
The year wise percentage of loans disbursed to agriculture and non agriculture
is furnished in Table 18.
Table 18
Loans disbursed to Agricultural and Non-Agricultural Sectors (in %)
Years Agriculture Non-Agriculture
2001-02 45 55
2002-03 46 54
2003-04 45 55
2004-05 51 49
2005-06 54 46
2006-07 57 43
2007-08 56 44
2008-09 64 36

Loans disbursed to Agriculture and Non-

Agricuitum
70

60

2001- 2002- 2003- 2004- 2005- 200&- 2007- 2008-

02 03 04 05 06 07 08 09
D Agriculture
Year H Nbn-Agricurture

Ho - There is no change in the loan disbursed to agriculture sector after

amalgamation
Hi - There is change in the loan disbursed to agriculture sector after
amalgamation

95
 Mean 52.25 47.75
Standard Deviation 6.359088 6.359088

Table 18 reflects that loans to Agricultural Sector has increased after

amalgamation. It is clearly observed that preference has been given to priority
sectors. This indicatestlmt RRBs have fulfilled tlie purpose of theirexisteiice.

5.12 Gross NPA and Net NPA

Tabte 19
Gross NPA and Net NPA
Year Gross NPA .Net NPA
2001-02 16.4 11.53
2002-03 14.44 9.51
2003-04 1,2,63. - 8.54
2004-05 8.53 4.84
2005-06 7.28 3.92
2006-07 6.55 - 3.46
2007-08 6.04 3.36
2008-09 4.14 1.76

Gross NPA & N€t NPA

18
16
14
12
10-j
8-1 16.4
6 12.6;:
4 8.S3
^'^^ H H 6-55 ff^n 6.04 g ^ l I
2-11
0 •
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Year n Q-oss NPA
a Met NPA

Table 19 reveals that gross NPA of RRBs have reduced from 16.4% in 2001-02
to 8.53% in 2004-05. But after amalgamation the Gross NPA's have further
reduced firom 7.28% to 4.14%. This shows that amalgamation has been
beneficial for RRBs in reducing, their eross NPA..

96
Also Net NPA of RRBs has reduced from 11.53% in 2001-02 to 4.84% in
2004-05. But after amalgamation the Net NPA's have further reduced from
3.92% to 1.76%. This shows that amalgamation has been beneficial for RRBs
to reduce their Net NPA.

The successful RRBs continue to serve predominantly low income clients and
it is the better management policies incorporating a reasonable focus on
lending and diversified portfolios with good repayment performance that
enables them to perform better. The successful RRBs essentially outperform
their peers on account of their superior operational strategies enabled by better
leadership.

5.13 Changes in Composition of Net Worth of RRBs

Table 20
Composition of Net Worth (in %)
Year Accumulated Loss Net Worth
2001-02 66 34
2002-03 59 41
2003-04 50 50
2004-05 44 56
2005-06 40 60
2006-07 38 62
2007-08 30 70
2008-09 21 79

Table 20 reveals that accumulated loss of RRBs have reduced from 66% in
2001-02 to 44% in 2004-05. But after amalgamation the losses have further
reduced from 44% to 21%. This shows that amalgamation has been beneficial
for RRBs to reduce their accumulated losses.

At the same time, Net worth of RRBs has increased from 34% in 2001-02 to
56% in 2004-05. But after amalgamation, the Net worth has further increased
from 56% to 19%. This shows that amalgamation has been beneficial for RRBs
in increasing the Net worth of RRBs.

97
5.14 Financial performance of RRBs before and after Amalgamation
5.14.1 Casli-Deposit Ratio
Table 21
Casli -Deposit Ratio before Amalgamation
Year Cash-Deposit Ratio
2001-02 1.09
2002-03 1.06
2003.-04. i..oa
2004-05 1.60

Table 22
Cash -Deposit Ratio after Amalgamation
Year Cash-Deposit Ratio
2005-06 1.45
2006-07 1.46
2007-08 1.42
2008-09 1.27

Cash Deposit RaticT

1.8
1.6
1.4
1.45 1.46 1.42
1.2
1-2r
1.€9 1.06
0.8
0.6
0.4
0.2
1 1 1 1 1 1 1

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year Cash-Deposit Ratio

Ho - There is no significant difference in Cash-Deposit ratio of RRBs in India

after amalgamation.
H] - There is a significant difference in Cash-Deposit ratio of RRBs in India
after amalgamation.

98
 Amalgamation Ho
^ SD |t| t 0.05,6
period R/A

Before 1.19
0.0424 7.02 2.4469 R
After 1.40

Source of Sum of Sum of Mean F0.05, Ho

d.f F
variance Squares Squares Square (1,6) R/A

Between columns ssc (2-l)=l 0.09 0.09

Rows SSR (8-2)=6 0.2551 0.0425 2.12 <5.99 A

Total SST (8-l)=7 0.3451

The calculated value of statistics | t | = 7.02 is greater than the table value
t 0.05, 6=2.447. So, Ho is rejected at 5% level of significance, which signifies
that there is significant difference in the cash deposit ratio of RRBs in India
after amalgamation.

The calculated value of statistics F=2.12 is less than the table value F 0.05,
(1,6) = 5.99, which signifies that there is no significant difference in variability
of the Cash-Deposit ratio of RRBs in India after amalgamation.

5.14.2 Credit-Deposit Ratio

The credit deposit ratio of the bank indicates the creation of credit out of the
deposit mobilized by the banks.
/ Table 23
\ Credit-Deposit Ratio before Amalgamation
Year Credit-Deposit Ratio
2001-02 42.51
2002-03 45.00
2003-04 44.70
2004-05 51.20

99
 Table 24
Credit-Deposit Ratio after Amalgamation
Year Credit-Deposit Ratio
2005-06 55.70
2006-07 58.50
2007-08 60.30
2008-09 58.50

Credit Deposit Ratio

7n

60 - ^

50- jtr-""^^ 58.5 ^^-^ 58.5

^^--^ 65i7
4 .^'''^ SI 2
40 -
42.51 **» '^'^

on -

in -

fl=

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09;

Year -Credit-Deposit Ratio

Ho - There is no significant difference in credit-Deposit ratio of RRBs in

India after amaI<Janiation.
Hi - There is a significant difference in credit-Deposit ratio of RRBs in India
after amalgamation.
Amalgamation Ho
^ SD |t| 10.05,6
Period R/A
Before 45.85
2.962- 98.4i 2.4469- R
After 58:25

Sofireeof Siim^f Slim of Mean F«;05v 11^

d.f F
Variance Squares Squares Square (1,6) R/A
Between Columns ssc (2-l)=l 307.34 307.34
73. »>»,..«
SSR J (•8--2)=6- 52.71- • 8-.78-5- 34.98 > 5:99- R
Total SST (8-l)=7 360.05

100
The calculated value of statistics | 11 = 98.41 is greater than the table value
10.05, 6=2.447. So, Ho is rejected at 5% level of significance, which signifies
that there is significant difference in the credit deposit ratio of RKBs in India
after amalgamation. The credit deposit ratio has increased from 42.51% in
2001-02 to 58.50% in 2008-09.

The calculated value of statistics F=34.98 is greater than the table value F 0.05,
(1, 6) = 5.99, which signifies that there is significant difference in variability of
the Credit-Deposit ratio of RRBs in India after amalgamation.

5.14.3 Investment-Deposit Ratio

Table 25
( Investment-Deposit Ratio before Amalgamation
V Year Investment-Deposit Ratio
2001-02 15.70
2002-03 25.90
2003-04 30.60
2004-05 39.50

Table 26
Investment-Deposit Ratio after Amalgamation
Year Investment-Deposit Ratio
2005-06 57.70
2006-07 54.90
2007-08 49.00
2008-09 48.80

Investimnt Deposit Ratio

70
60
50
40 ^is^
30
20 ~^~1S^
10 15.7

2001- 2002- 2003- 2004- 2005- 2006- 20O7- 2008-

02 03 04 05 06 07 08 09
-investment-
Year Deposit Ratio

lai
 Ho- There is no significant difference in Investment-Deposit ratio of RRBs
in India after amalgamation.
Hi There is-a-significant difference in Investment-Deposit ratio of R^t^Bs-in-
India after amalgamation.

Amalgamation
|Ll SD |t| 10.05,6 HoR/A
period
Before 27.93
7.67 75.86 2.4469 R
After 3Z.0U

Source of Sum of Sum of Mean F0.05,

d.f F Hi, R/A
variance Squares Squares Square (1,6)
Between columns ssc (2-l)=l 1217.71 1217.71
Rows SSR (8-2)=6 353.39 58.898 20.67 > 5.99 R
Total SST (8-l)=7 1571.1

The calculated value of statistics | t | = 75.86 is greater than the table value
t 0.05, 6=2.447. So, Ho is rejected at 5% level of significance, which signifies
that there is a significant difference in the Investment- deposit ratio of RRBs in
India a after amalgamation.

The calculated value of statistics F=20.67 is greater than the table value F 0.05,
(1,6)-= 5.99, which si^iifies that there is significant difference in variability of
the Investment-deposit ratio of RRBs in India after amalgamation.

The RRBs following the trend set by the- commercial banks increased the- share
of investment assets in the portfolio.

The monetary credit policy of 2002-03 announced that the RRBs should
maintain their entire SLR holdings in the form of Government and other
approved securities by converting existing deposits with sponsor banks.
Accordingly RRBs have rapidly expanded their Investment in Government
Securities in the recent years. Investment-Deposit Ratio of the RRBs has
steadily elimbed up from veiy low levels.

102
 5.14.4 (Credit + Investment) Deposit Ratio
Table 27
(Credit + Investment) Deposit Ratio before Amalgamation
Year (Credit + Investment) Deposit Ratio
2001-02 58.20
2002-03 70.90
2003-04 75.30
2004-05 90.70

Table 28
(Credit + Investment) Deposit Ratio after Amalgamation
Year (Credit + Investment) Deposit Ratio
2005-06 113.40
2006-07 104-.30-
2007-08 106.40
2008-09 107.20
1
(Creo'1t+!ni?estmefit) DeprositRaticf
120
•^
100 /4l3.4
104.3 106.4 107.2

80 *!n T

75.3
6Q 70 9
58.2
40

20

. . .
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
-•—(Credit + Investment)
Year Deposit Ratio

Ho - There is no significant difference in (credit+ Investment) Deposit ratio

of RKBs in India atler amalgamation.
Hi - There is a significant difference in (credit+ Investment) Deposit ratio of
RRBs in India after amalgamation.

103
 Amalgamation
^ SD |t| 10.05,6 HoR/A
period
n,x 7,0.
9.879 4.876 2.45 R
After 107.83

Source of Sum of Sum of Mean F0.05,

d.f F HoR/A
variance Squares Squares Square (1,6)
Between
columns
ssc (2-l)=l 23T8.8T 23i"8.8r
23.76 > 5.99 R
Rows SSR (8-2)=6 585.55 97.592
T^tal &ST \o-lj-r 29G4.36

The calculated value of statistics | t | = 4.876 is greater than the table value
10.05, 6=2.447. So, Ho is rejected at 5% ievel of significance, which signifies
that there is significant difference in the (Credit + Investment) deposit ratio of
RRBs in India after amalgamation. The (Credit + Investment) deposit ratio has
increase from 58.26% in 2001-02 to 107.20% in 2008-09.

The calculated value of statistics F=23.76 is greater than the table value F 0.05,
(1, 6) = 5.99, which signifies that there is significant difference in variability of
the Credit + Investment Deposit ratio of RRBs in India after amalgamation.
Credit given to- priorit^^ sector constitute a greater percentage than to
non-priority sector.

5.14.5 Ratio^ of Deposits to Total Liabilities

Table 29
Ratio of Deposits to Total Liabilities before Amalgamation
Year Deposits to Total Liabilities Ratio
2001-02 92.54
2002-03 85.19
2003-04 87.20
2004-05 75.89

104
 Table 30
Ratio of Deposits to Total Liabilities after Amalgamation

Year Deposits to Total Liabilities Ratio

2005-06 75.87
2006-07 74.68
2007-08 77.64
2008-09 77.67

Deposits to Total Liabilities Ratio

100
so
m 92.54
85.19 -87:2- —^—•-
70
'WM'—Tsm—wm—^^^**^—^^^^^®^
60
50
40
30
20
n

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-48 2008-09

Year -«—Deposits to Total
Liabilities Ratio

Ho - There is no significant difference in Deposits to total Liabilities ratio of

RRBs in India after amalgamation

Hi - There is a significant difference in Deposits to total Liabilities ratio of

RRBs in India after amalgamation

Amalgamation
U SD Itj . 10.05,6 HoR/A
period > • 1

Before 85.21
5.02 2.46 2.4469 R
A.fter 7-6.47

105
 Sum of Sum of Mean F0.05,
Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 152.77 152.77
Rows SSR (8-2)=6 150.93 25.155 6.07 > 5.99 R
Total SST (8-l)=7 303.7

The calculated value of statistics 1 t 1 = 2.46 is greater than the table value
t 0.05, 6=2.447. So, HQ is rejected at 5% level of significance, which signifies
that there is significant difference in the deposits to total liabilities ratio of
RRBs in India after amalgamation.

The calculated value of statistics F = 6.07 is gi'eater than the table value F 0.05,
(1, 6) = 5.99. So, Ho is rejected at 5% level of significance, which signifies that
there is significant difference in variability of Deposits to total Liabilities ratio
of RRBs in India after amalgamation.

5.14.6 Ratio of Term Deposits to Total Deposits

Table 31
Term Deposits to Total Deposits Ratio before Amalgamation
Year Term Deposits to Total Deposits Ratio
2001-02 82.15
2002-03 81.79
2003-04 80.67
2004-05 45.29

Table 32
Term Deposits to Total Deposits Ratio after Amalgamation

Year Term Deposits to Total Deposits Ratio

2005-06 40.86
2006-07 38.78
2007-08 40.40
2008-09 38.02

106
 Term neposiUs tbTofal'Deposits Ratio
90
80
82.15 81.79 80.K
70
60
50
40 45.29
40-86 38.78 40.4 -^8.02
30
20

to

200f-02 2d02-0J 2003-04: 2004^)5 2005-06 2006-07 2007^-08^ 2008-09

Year -Term Deposits to Total

Deposits Ratio

Ho - There is no significant difference in Term Deposits to Total Deposits

ratio of RRBs in India after amalgamation.

Hi - There is a significant difference in Term Deposits to Total Deposits ratio

of RRBs in India after amalgamation.

Amalgamation
^ SD |t| 10.05,6 HoIt'A
period
Before 72.48
12.86 3.63 2.4469 R
After 39.52

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 152.77" 152.77
Rows SSR (8-2)=6 150.93 25.155 13.14 > 5.99 R
Total SST (8-l)=7 303.7

The calculated value of statistics | t | = 3.63 is greater than the table value
10.05, 6=2.447. So, Ho is rejected at 5% level of significance, which signifies
that there is significant difference in the Term deposits to total Deposits ratio of
RRBs in India after amalgamation.

107
The calculated value of statistics F = 13.14 is gi-eater than the table value
F 0.05, (1, 6) = 5.99, which signifies that there is significant difference in
variability of the Deposits to total Liabilities ratio of RRBs in India after
amalgamation.

The RRBs deposit services form a major facility for rural population since
scheduled commercial banks after do not have many branches in these areas.
The extent to which clients opt for term deposits provides an indication of the
acceptance of RRBs by the public as a safe and convenient place for their
savings. RRBs have not been much successful in mobilising long-term deposits
from the public. This is largely due to the lack of marketing efforts on the part
ofRRBs.

5.14.7 Ratio of Priority Sector Advances to Total Advances

Table 33
Ratio of Priority Sector Advances to Total Advances before Amalgamation

Year Priority Sector Advances to Total Advances Ratio

2001-02 77.49
2002-03 79.87
2003-04 81.72
2004-05 79.33

Table 34
Ratio of Priority Sector Advances to Total Advances after Amalgamation

Year Priority Sector Advances to Total Advances Ratio

2005-06 80.87
2006-07 82.18
2007-08 82.90
2008-09 83.30

108
 Priority sector advances to- TotaJ-atSvances Ratio-
84
83
83.3
82
81
80
79
79.33
78
77
77.49
76
7t
74
2001-02 2002-03 2003-04 2004-06 2006-06 2006-07 2007-08 2008-09

Year Priority sector advances

to Total advances Ratio

Ho - There is no significant difference in priority sector advances to total

advances ratio of RRBs in India after amalgamation.

Hi - There is a significant difference in priority sector advances to total

advances ratio-of RRBs iiiTttdia'after amalgamation.
Amalgamation
1* SD |t| 10.05,6 HoR/A
period
Before 79.60
1.44 2.66 2.4469 R
After 82.31

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 14.69 14.69
Rows SSR (8-2)=6 12.52 2.087 7.04 > 5.99 R
Total SST (8-l)=7 27.21

The calculated value of statistics | t | = 2.66 is greater than the table value
t 0.05, 6=2.447. So, Ho is rejected at 5% level of significance, which signifies
that there is significant difference in the priority sector advances to total
advances ratio of RRBs in India after amalgamation.

The calculated value of statistics F = 7.04 is greater than the table value F 0.05,
(1,6) = 5.99, which signifies that there is significant difference in variability of

109
the Deposits to Priority Sector advanced to Total Advances Ratio of RRBs in
India after amalgamation.

Loans issued to priority sector constitute a greater percentage than the loans
provided to Non-Priority Sector after amalgamation. Loans to the priority
sector has recorded a- significant groMh.

5.14,8 Ratio of Term Loan to Total Advances

Tafel<^35
Ratio of Term Loan to Total Advances before Amalgamation
Year Term Loan to Total Advances Ratio
2001-02 19.07-
2002-03 16.99
2003-04 15.54
2004-05 17.43

Table 36
Ratio of Term Loan to Total Advances after Amalgamation

Year Term Loan to Total Advances Ratio

2005-06 19.22
2006-07 18.03
17.75
2008-09 16.63

Term loan to Total advances Ratio

25

20

15
T&:g3"
15.54
10

1 i 1 1 ) 1 1

2001-02 2002-03 2003-04= 2004-05 2005^06^ 2006^7 2007-08 2008-09

Year -Term loan to Total

advances Ratio

110
 Ho - There is no significant difference in term loan to total advances ratio of
RRBs in India after amalgamation.

Hi - There is a significant difference in term loan to total advances ratio of

RRBs in India after amalgamation.

Amalgamation
period ^ SD Itl t 0.05,6 HoR/A

Before 17.26
1.27 0.72 2.4469 A
After 17.91

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 19.85 19.85
Rows SSR (8-2)=6 9.28 1.547 12.83> 5.99 R
Total SST (8-l)=7 10.57

The calculated value of statistics | t | = 0.72 is less than the table value
t 0.05, 6=2.447. So, HQ is accepted at 5% level of significance, which signifies
that there is no significant difference in the Term loan to total advances ratio of
RRBs in India after amalgamation.

The calculated value of statistics F = 12.83 is gi'eater than the table value
F 0.05, (1, 6) = 5.99, which signifies that there is significant difference in
variability of the Ratio of Term Loan to Total Advances of RRBs in India after
amalgamation.

RRBs need to provide a greater amount of term loans to boost the agricultural
sector.

11
 5.14.9 Ratio of Interest Income to Total Assets
Table 37
Ratio of Interest Income to Total Assets before Amalgamation
Year Interest Income to Total Assets Ratio
2001-02 9.14
2002-03 8.65
2003-04 7.88
2004-05. 7.29

Table 38
Ratio of Interest Income to Total Assets after Amalgamation
Year Interest Income to Total Assets Ratio
2005-06 6.82
2006-0? 6.73
2007-08 6.98
2008-09 7.16

Interest Income to Total Assets Ratio

9.14
-^msr
-^88-
7.29 B.flfl 7.16
-%M- -67f3-

200t-02 2002-03 2003^4 2004^5 2005-06 2006-07 2007-08 2008-09

Year Interest Income to
Total /Assets Ratio

Ho There is no significant difference in Interest Income to total assets ratio

of RRBs in India after amalgamation.

Hi There is a significant difference in Interest Income to total assets ratio of

RRBs in India after amalgamation.

112
 Amalgamation
fi SD |t| 10.05,6 HoR/A
period
Before 8.24
0.85 2.20 2.4469 A
After 6.92

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 3.475 ' 3.475
Rows SSR (8-2)=6 2.105 0.35 9.929 > 5.99 R
Total SST (8-l)=7 5.58

The calculated value of statistics | t | = 2.20 is less than the table value
10.05, 6=2.447. So, HQ.IS accepted at 5% level of significance,, which signifies
that there is no significant difference in the Interest Income to total assets ratio
of RRBs in hidia after amalgamation.

The calculated value of statistics F = 9.929 is greater than the table value
F 0.05, (1, 6) = 5.99.which signifies tliat there is significant difference in
variability of the Ratio of Interest Income to Total Assets of RRBs in India
after amalgamation.

5.14.10 Ratio of Net Interest Margin to Total Assets

Table 39
Ratio of Net Interest Margin to Total Assets before Amalgamation

Year JVetlnterest Margin, to Total.Assets .Ratio

2001-02 3.28
2002-03 3.13
2003-04 3.10
2004-05 3.23

113
 Table 40
Ratio of Net Interest Margin to Total Assets after Amalgamation

Year N€t Iiit«f£st Margin t«-Total Assets Ratio

2005-06 3.18
2006-07 3.22
2007-08 3.18
2008-09 3.24

Net Interest margin to Total Assets Ratio

3.25- 3.2^

3.2 \ ^^2^\ / - ^ ^ /^^'^

\ / ^^-'^ ^"^ \.. /
\ / 3.18 3.18

^ 1- X13"^^~"-^V
3;1
3,05 T

2G0m)2 2002-03 2003-04 2 0 0 M 5 2005-06 2006-07 2007-08 2008-09

-•— Net Interest margin to
Year Total Assets Ratio

Ho There is no significant difference in Net Interest margin to total assets

ratio of RRBs in India after amalgamation.

H, There is a significant difference in Net Interest margin to total assets

ratio of RRBs inTiidia after amalgamation.
Amalgamation
^ SD |t| 10.05,6 HoR/A
period
Before 3.19
0.064 0.44 2.4469 A
After 3.21

Sum of Sum of Mean FO.OS,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-i)=l 0:005 • 0.005
Rows SSR (8-2)=6 8.976 1.496 0.0033 <5.99 A
Total SST (8-lH -8.971

114
The calculated Value of statistics | t | = 0.44 is less than the table value
t 0.05, 6=2.447, So, HQ is accepted at 5% level of significance, which signifies
that there is no significant difference in the Net Interest margin to total assets
ratio of RRBs in India after amalgamation. RRBs rates vary between 12 to 14
percent and some RRBs given 11 to 13 percent.

The calculated value of statistics F = 0.0033 is less than the table value F 0.05,
(1, 6) = 5.99, which signifies that there is no significant difference in variability
of the Ratio of Net Interest Margin to Total Assets of RRBs in India after
amalgamation.

5.14.11 Ratio of Non Interest Income to Total Assets

Table 41
Ratio of Non Interest Income to Total Assets before Amalgamation

Year Non Interest Income to total Assets Ratio

2001-02 0.66
2002-03 0.68
2003-04 1.00
2004-05 0.59

Table 42
Ratio of Non Interest Income to Total Assets after Amalgamation
Year Non Interest Income to total Assets Ratio
2005-06 0.48
2006-07 0.51
2007-08 0.53
2008-09 0.55

115
 Non interest incomB^ltrtotal Assets Ratio
1.2

/ l \
0.8

0.6 0.66 " 0.68

0.59 0.55
0.4 0-51' 0i53:
0.48

0.2

\ T" -T

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year Non Interest Income
to total Assets Ratio

Ho - There is no significant difference in Non Interest Income to total assets

ratio of RRBs in India after amalgamation.

H] - There is a significant difference in Non Interest Income to total assets

ratio of RRBs in India after amalgamation.
Amalgamation
^ SD |t| 10.05,6 HoR/A
Period
Before 0.73
0.13 228 2.4469 A
After 0.52

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 0.092 0.092
Rows SSR (8-2)=6 0.1029 0.0172 5.35 <5.99 A
Total SST (S-r)=7 0:1949

The calculated value of statistics | t | = 2.28 is less than the table value
10.05", 6=2.447". S'o, Ho is accepted" at 5%' level" of signiffcance, which signifies
that there is no significant difference in the Non Interest Income to total assets
ratio of RRBs in India after amalgamation.

The calculated value of statistics F = 5.35 is less than the table value F 0.05,
(1,. 6) = 5.99, which signifies that there is no significant difference in variability

116
of the Ratio of Non-Interest Income to Total Assets of RRBs in India after
amalgamation.

5.14.12 Ratio of Intermediation cost to Total Assets

Table 43
Ratio of Intermediation cost to Total Assets betore Amalgamatibn

Year Intermediation cost to total Assets Ratio

ZUU1-UZ 2:7-5-

2002-03 2.83

2003-04 2.73

2004-05 2.66

Table 4'4
Ratio of Intermediation cost to Total Assets after Amalgamation

Year Intermediation cost to Total Assets Ratio

2005-06 2.81

2006-07 2.77

2007-08 2.42

2008-09 2.15

Intermediation cost.to Total Assets Ratio

2.5

2
2.15
1.5

0.5

2001- 2002-^ 2003- 2004- 2005- 2006- 2007- 2008-

02 03 04 05 06 07 08 09
-Intermediation cost to
Year total Assets Ratio

117
 Ho - There is no significant difference in Intermediation cost to total assets
ratio of RRBs in India after amalgamation.

Hi - There is a significant difference in Intermediation cost to total assets

ratio of RRBs in India after amalgamation.
Amalgamation
fi SD lt| 10.05,6 HoR/A
Period
Before 2.74
0.226 1.25 2.4469 A
After 2.54

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 0.08 0.08
Rows SSR (8-2)=6 0.308 0.51 1.57 <5.99 A
Total SST (8-l)=7 0.388

The calculated value of statistics | t | = 1.25 is less than the table value
t 0.05, 6=2.447. So, HQ is accepted at 5% level of significance, which signifies
that there is no significant difference in the Intermediation cost to total assets
ratio of RRBs in India after amalgamation.

The calculated value of statistics F = 1.57 is less than the table value F 0.05,
(1,6) = 5.99, which signifies that there is no significant difference in variability
of the Ratio of Intermediation Cost to Total Assets of RRBs in India after
amalgamation.

5.14.13 Ratio of Wage bills cost to Intermediation cost

Table 45
Ratio of Wage bills cost to Intermediation cost before Amalgamation
Year Wage bills cost to Intermediation cost Ratio
2001-02 86.52
2002-03 86.91
2003-04 82.45
2004-05 77.58

118
 Table 46
Ratio of Wage bills cost to Intermediation cost after Amalgamation
Year Wage bills eest t^-InterHiediation-eost-Ratio
2005-06 78.40
2006-07 75.82
2007-08 73.82
2008-09 72.34

Wage bills cost to Intermediation cost Ratio

1QQ
90
80
70
^mm—^sBSt-82.45
-77:38 5**-
7532 73:82. 72, 34^
60
30
40
30
20
10

2001^02 2002=03. 2003^04 2004-05- 2005:06. 2006,07; 2007.-08.; 2008^09

V\feige bills cost to
Year Intermediation cost Ratio

Ho There is no significant difference in Wage bills cost to Intermediation

cost ratio of REBs in India after amalgamation.

Hi There is a significant difference in Wage bills cost to Intermediation cost

ratio of RRBs in India after amalgamation.
Amalgamation
t^ SD |t| 10.05,6 HoR/A
period
Before 83.37
3.594 3.33 2.4469 R
After 75.10

Source of Sum of Sum of Mean F0.05, Ho

d.f F
variance Squares Squares Square (1,6) R/A
Between columns ssc (2-l)=l 136.79 136.79
Rows SSR (8-2)=6 77.48 12.91 10.595 > 5.99 R
T<5tal SST /.Q„13=7 . 214.2749

iry'
The calculated value of statistics | t | = 3.33 is greater than the table value
t 0.05, 6=2.447. So, HQ is rejected at 5% level of significance, which signifies
that there is significant difference in the wage bills cost to Intermediation cost
ratio of RJRBs in India after amalgamation. Wage bill cost has slightly
decreased from 86.52% in 2001-02 to 72.34% in 2008-09.

The calculated value of statistics F = 10.595 is greater than the table value
F 0.05, (1, 6) = 5.99, which signifies that there is significant difference in
variability of Ratio of Wage Bills Cost to Intermediation Cost of RRBs in India
after amalgamation.

5.14.14 Ratio of Wage bills to Total Expenses

/> Table 47
Ratio of Wage bills to Total Expenses before Amalgamation
Year Wage bills to Total expenses Ratio
2001-02 26.39
2002-03 28.37
2003-04 29.06
2004-05 29.76

Table 48
Ratio of Wage bills to Total Expenses after Amalgamation

Year Wage bills to Total expenses Ratio

2005-06 32.89
2006-07 31.94
2007-08 27.22
2008-09 24.39

120
 Wage biiis to Totrai Expenses Ratfo

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Wage bills to total
Year expenses Ratio

Ho - There is no significant difference in Wage bills to total expenses ratio of

RRBs in India after amalgamation.

Hi - There is a significant difference in Wage bills to total expenses ratio of

RRBs in India afieraTtmigamalioh'.
Amalgamation
^ SD |t| 10.05,6 HoR/A
period
Before 28.395
3.013 0.336 2.4469 A
After 29.11

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 1.02 1.02
Rows SSR (8-2)=6 54.48 9.08 0.11 <5.99 A
Total SST (8-l)=7 55.4964

The calculated value of statistics 1 t | = 0.336 is less than the table value
t0.05:, 6?=2,44.7. So, Ho is-accepted, at 5.%-level of significance, which, signifies,
that there is no significant difference in the wage bills to total expenses ratio of
RRBs in India after amalgamation.

121
The calculated value of statistics F = 0.11 is less tlian the table value F 0.05,
(1,6) = 5.99, which signifies that there is no significant difference in variability
of the Ratio of Wage Bills to Total' Expenses of RRBs in India after
amalgamation.

5.1415 Ratio ef Wage bills to totallaGome

Table 49
Ratio of Wage bills to total Income before Amalgamation
Year Wage bills to Total Income Ratio
2001-02 22.72
2002-03 24.95
2003-04 24.15
2004-05 24.87

Table 50
Ratio of Wage bills to total Income after Amalgamation
Year Wage bills to Totailucome Ratio
2005-06 28.23
2006-07 26.76
2007-08 21.84
2008-09 18.69

Wage Bills to Total Income Ratio

^ft

25 - » _^..^''^8.23 * \
.---^ *- ^ -^ 2676 \ .
2*-95 24.15 24:87 ^^,.^^
20 - 22 T*
21.84 '-^>»

•!«; - 18.69

in -

0 - I 1 1 i i 1

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year Wage bills to total

income Ratio

122
 Ho - There is no significant difference in Wage bills to total hicome ratio of
RRBs in India after amalgamation.

Hi - There is a significant difference in Wage bills to total Income ratio of

RRBs in India after amalgamation
Amalgamation
^ SD lt| t 0.05,6 HoR/A
period
Before 24.17
3.20 0.128 2.4469 A
After 23.88

Source of Sum of Sum of Mean F0.05, Ho

d.f F
variance Squares Squares Square (1,6) R/A
Between columns ssc (2-l)=l 0.17 0.17
Rows SSR (8-2)=6 261.52 43.59 0.0039 <5.99 A
Total SST (8-l)=7 261.6875

The calculated value of statistics | t | = 0.128 is less than the table value
t 0.05, 6=2.447. So, Ho is accepted at 5% level of significance, which signifies
that there is no significant difference in the wage bills to total hicome ratio of
RRBs in India after amalgamation.

The calculated value of statistics F = 0.0039 is less than the table value F 0.05,
(1,6) = 5.99, which signifies that there is no significant difference in variabilit}'
of the Ratio of Wage Bills to Total Income of RRBs in India after
amalgamation.

5.14.16 Ratio of Burden to Total Assets

Table 51
f'^" Ratio of Burden to Total Assets before Amalgamation
Year Burden to Total Assets Ratio
2001-02 2.04
2002-03 2.11
2003-04 1.68
2004-05 2.03

123
 Table 52
Ratio of Burden to Total Assets after Amalgamation
Year Bardeat^ Total'Assets Ratio-
2005-06 2.30
2006-07 2.22
2007-08 1.84
,^
2008-09 1.55

Burden to Total Assets Ratio

2.5 -,

2 -
—^ ^--"ziT"^"^^
2 11 " \ ^ ^
2.04
1.84^^^^-^,^
1.5 -
1.68
1.55

1 -

0.5 -

0 -
2001-02 2002-03 2003-04 2004-05 ^005-06 2006-07 2007-08 2008-09
— Burden to Total
Year Assets Ratio

Ho - There is no significant difference in burden to total assets ratio of RRBs

in India after amalgamation.
HI - There is a significant difference in burden to total assets ratio of RRBs
in India after amalgamation.

Amalgamation
\s. SD |t| 10.05,6 HoR/A
Period
Before 1.97
0.28 0.0506 2.4469 A
After 1.98

Source of Sum of Sum of Mean F0.05,

d.f F HoR/A
variance Squares Squares Square (1»6)
Between columns ssc (2-l)=l 0.0025 0.0025
Rows SSR (8-2)=6 0.471 0.0785 0.0318 <5.99 A
Total . SSI (ja-L)=7 . 0.4735

124
The calculated value of statistics | t | = 0.0506 is less than the table value
t 0.05, 6=2.447. So, Ho is accepted at 5% level of significance, which signifies
that there is no significant difference in the Burden to total Assets ratio of
RRBs in India after amalgamation.

The calculated value of statistics F = 0.0318 is less than the table value F 0.05,
(1,6) = 5.99, which signifies that there is no significant difference in variability
of the Ratio of Burden to Total Assets of RRBs in India after amalgamation.

5.14.17 Ratio of Burden to Interest Income

Table 53
(^ Ratio of Burden to Interest Income before Amalgamation

Year Burden to Interest Income Ratio

2001-02 20.96

2002-03 23.14

2003-04 20.28

2004-05 26.56

Table 54
Ratio of Burden to Interest Income after Amalgamation

Year Burden to Interest Income Ratio

2005-06 31.47

2006-07 30.29

2007-08 24.29

2008-09 20.10

125
 35
Burden to Interest income'Ratio"
30

25

20
20.96 20.28 20.1
15

10

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Burden to Interest
Year Income Ratio

Ho - There is no significant difference in Burden to Interest Income ratio of

KKBs in India after amalgamatibn.

Hi - There is a significant difference in Burden to Interest Income ratio of

KRBs in India after amalgamation;
Amalgamation
^i SD |t| 10.05,6 HoR/A
Period
Before 22.74
4.27 1.27 2.4469 A
After 26.56

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 29.295 • 29.295
Rows SSR (8-2)=6 109.635 18.2725 1.60 <5.99 A
Total SST (8-l)=7 138.93

The calculated value of statistics | t | = 1.27 is less than the table value
t 0.05,. 6=2.447. So, Ho, is accepted at 5% level of significance,, which signifies
that there is no significant difference in the Burden to Interest Income ratio of
RRBs in India after amalgamation.

The calculated value of statistics F = 1.60 is less than the table value F 0.05,
(1,6) = 5.99, which signifies that there is no significant difference in variability
of the Ratio of Burden to In tere^tlncome of RRBs in India after amaigamation.

126
 5.14.18 Ratio of Operating profits to total Assets
Table 55
( Ratio of Operating profits to Total Assetis before Amaigamailon
Year Operating profits to Total Assets Ratio
2001-02. 1.14
2002-03 0.87
2003-04 1.15
200'4'-05" r.oo

Table 56
Ratio of Operating profits to Total Assets after Amalgamation
Year Operating profits to Total Assets Ratio
2005-06 0:74-
2006-07 0.64
2007-08 0.89
2008-09 1.01

Operating Prefits to Total Assets Ratio

14 n

1-2 -

\' 1.14^ s. y^.15^~^^^ ^

N^/ 1 \ *--''l.01
0.8 -
0.87 V - ^ y "-^^
0.6 - 0.74^"""-^
0^4=
0.4 -.

0.2 -

n -
200 t-o;2 2002-03 2003-04 2004-05 2005-06 2006^)7 20074)8 2008-09
—•—Operating-prcffits to^
Year Total Assets Ratio

Hn There is no significant difference in Operating profits to total Assets

ratio of RRBs in India after amalgamation.

H, There is a significant difference in Operating profits to total Assets

ratio of RRBs in India after amalgamation.
 Amalgamation
l^ SD |t| t 0.05,6 HoR/A
Period
Before 1.04
0.15 2.074 2.4469 A
After 0.82

Sum of Sum of Mean F0.05,

Source of variance d.f F HoR/A
Squares Squares Square (1,6)
Between columns ssc (2-l)=l 0.0968 0.0968
Rows SSR (8-2)=6 0.1324 0.0220 4.4 <5.99 A
Total SST (8-l)=7 0.2292 0.0327

The calculated value of statistics | t | = 2.074 is less than the table value
t 0.05, 6=2.447. So, HQ is accepted at 5% level of significance, which signifies
that there is no significant difference in the Operating profits to total Assets
ratio of RRBs in India after amalgamation.

The calculated value of statistics F = 4.4 is less than the table value F 0.05,
(1,6) = 5.99, which signifies that there is no significant difference in variability
of the Ratio of Operating Profits to Total Assets of RRBs in India after
amalgamation.

5.15 Regression Analysis

Ho: There is no influence of LIQ, LOTA, INTA and OE on NITA
Hi: There is influence of LIQ, LOTA, INTA and OE on NITA ^ ^
Model Summary

Std.Error Change Statistics

R Adjusted
Model R of The R Square F Sig.F
Square R Square dfl df2
Estimate Change Change Change
1 .997' .993 .984 .125172 .993 107.793 4 3 .001
a. Predictors: (Constant), oe, liq, lota, inta

128
 ANOVA"
Sum of Mean
Model df F Sig.
Squares Square
1 Regression 6.756 4 1.689 107.793 001a
Residual .047 3 .016
Total 6.803 7
a. Predictors: (Constant), oe, liq, lota, inta
b. Dependent Variable: nita

Coefficients"
Unstandardized Standardized CoIIinearity
Correlations
Coefficients Coefficients Statistics
ITIUUCI t Sig.
Std. Zero-
B Beta Partial Part Tolerance VIF
Error order
1 (Constant) 11.689 .571 20.487 .000
Iota -.009 .015 -.066 -.624 577 -.848 -.339 -.030 .206 4.859
inta -.059 .010 -.727 -5.963 -.009 -.982 -.960 -.286 .155 6.456
liq -1.669 .496 -.299 -3.368 043 -.881 -.889 -.162 .292 3.419
oe .011 .024 .047 .468 .672 -.842 .261 .002 .224 4.455

a. Dependent Variable: nita

CoIIinearity Diagnostics"

Eigen Condition Variance Proportions

Model Dimension
Value Index (Constant) Iota inta liq oe
1 1 4.919 1.000 .00 .00 .00 .00 .00
2 .064 8.794 .03 .00 .16 .00 .00
3 .11 21.081 .00 .39 .04 .30 .00
4 .004 34.270 .42 .45 .78 .53 .00
5 .002 50.295 .55 .16 .02 .17 1.00
a. Depe ndent Variab^e: nita

129
 Model Summary

Std. Error Change Statistics

R Adjusted
Model R of The R Square F Sig.F
Square R Square dfl do
Estimate Change Change Change
1 .996^ .992 .989 .103853 .992 312.865 2 5 .000
a. Predictors: (Constant),liq, inta
ANOVA"

Sum of Mean
Model df F Sig.
Squares Square
1 Regression 6.749 2 3.374 3.12865 .000'
Residual .054 5 .011
Total 6.803 7
a. Predictors: (Constant), liq, inta
b. Dependent Variable: nita

Coefficients"
Unstandardized Standardized Collinearity
Coefficients Coefficients Statistics
ITIUUCI t Sig.
Std.
B Beta Tolerance VIF
Error
1 (Constant) 11.757 .262 44.944 .000
inta -.062 .005 -.764 -11.689 .000 .371 2.692
liq -1.537 .365 -.275 -4.212 .008 .371 2.692
a. Dependent Variable: nita
Collinearity Diagnostics"

Eigen Condition Variance Proportions

Model Dimension
Value Index (Constant) inta liq
1 1 2.935 1.000 .00 .00 .00
2 .059 7.054 .13 .41 .00
3 .006 21.860 .86 .58 1.00
a. Dependent Variable: nita

130
Observations:
1) R^ is 99.2% which means the present model has accounted for 99.2%
variance in NITA which means it is good model.
2) P < 0.05, which indicates that the model is significant.
3) As P < 0.05, we reject the null hypothesis at 5% level of significance.
4) The standardized Data co-efficient indicates that a unit change in inta and
liq has an effect on NITA. So there is an influence of inta and liq on nita
which can be explained by the following regression equation:-
NITA = 11.757 - 0.62 (inta) - 1.537 (liq) + Cj

13]
 CHAPTER 6
CONCLUSION AND SUGGESTIONS

6.1 Conclusion
The real growth of Indian economy lies in the emancipation of rural masses
from poverty, unemployment and other socio-economic backwardness. RRBs
were established by the government of Lidia to develop the rural economy.

RRBs are well positioned to play a major role in financial inclusion particularly
in areas / regions with high rates of financial exclusion. RRBs were originally
created to cater to neglected sections / areas as they were expected to have
sound financial management combined with local feel and familiarity.

The number of branches has significantly increased from 14390 to 15181 over
the period of the study. The increase over the period was 1.05 times.

Loss making RRBs declined and profit making RRBs have increased after
amalgamation. 15% of RRBs were loss making in 2001-02 but the number
decreased to 7% in 2008-09. This proves that amalgamation has been beneficial
to RRBs.

Significant improvement was witnessed over the period of study in terms of

number of districts covered. RRBs covered 511 districts as on 31st March,
2002 which increased to 616 as on 31st March, 2009. The increase over the
period was 1.20 times.

Both owned funds and borrowed funds have constantly increased over the
period of study. It can be observed from the above table that borrowed funds
constitute a greater percentage than the owned funds during the post
amalgamation period.

132
The deposit mobilized by the bank has increased from 44539 crores in the year
2001-02 to 120189 crores in 2008-09. The increase over the period was 2.7
times.

There has been consistent growth in the sphere of Investment activity. It has
been observed that the amount of Investment of the bank has increased from
30532 crore in the year 2001-02 to ?65910 crore in 2008-09. The year 2008-09
registered the highest growth of hivestment of 35.72% over the previous year.

Loans issued to priority sectors constitute a greater percentage than the loans
provided to the non-priority sector. Loans to the priority sector has increased
from 77.49% in 2001-02 to 83.30% in 2008-09.

Short-terra loans have increased from ?3095 crores in 2001-02 to ?22851

crores in 2008-09. The disbursement of term loan for agriculture and alHed
activities by the RRBs is also encouraging. It has increased from ?871 crores in
2001-02 to ?3648 crores in 2008-09. The increase over the period was 4.18
times.

Loans provided by the RRBs to various groups have been increasing year after
year. The loans to rural artisans have increased from ?181 crores in 2001-02 to
?552 crores in 2008-09. The increase over the period was 2.3 times. The loans
to small scale Industry have increased from ?70 crores in 2001-02 to 670 crores
in 2008-09. The loans to Retail Trade have increased from 1123 crores in 2001-
02 to 2370 crores in 2008-09. The loans to self-help gi'oups have increased
from 310 crores in 2001-02 to 2388 crores in 2008-09. The loans to other
priority sectors have increased from 8102 crores in 2001-02 to 3662 crores in
2008^09.

133
Loans to Agricultural Sectors has increased after amalgamation. It is clearly
observed that preference has been given to priority sectors. This indicates that
RRBs have fiilfilled the purpose of their existence.

NetNPA of RRBs have reduced from 11.53% in 2001-02 to 4.84% in 2004-05.

But after amalgamation the Net NPA's have fiirther reduced from 3.92% to
1.76%). This shows that amalgamation has been beneficial for RRBs to reduce
their NetNPA.

Accumulated loss of RRBs have reduced from 66% in 2001-02 to 44% in

2004-05. But after amalgamation the losses have further reduced from 44% to
21%). This shows that amalgamation has been beneficial for RRBs to reduce
their accumulated losses.

Net worth of RRBs has increased from 34% in 2001-02 to 56% in 2004-05. But
after amalgamation, the Net worth has further increased from 56%o to 79%.
This shows that amalgamation has been beneficial for RRBs in increasing the
Net worth of RRBs.

Credit Deposit Ratio has steadily increased after amalgamation. Investment

Deposit Ratio has steadily climbed up from very low level. Not only did the
share of investments in government securities increase beyond the SLR norms,
simultaneously there was a diversion of an increasing share of the investment
portfolio into other approved securities such as PSU bonds and debentures.
Credit given to priority sector constituted a gi'eater percentage than non-priority
sector. The term deposits have decreased after amalgamation. This is an
indication that RRBs have not been much useful in mobilising term deposits.
This is largely due to the lack of marketing efforts on the part of RRBs. Also in
the case of term loans, RRBs need to make more efforts to increase term loans.
The interest income will also rise. The wage bill cost has reduced considerably
which is a good indicator.

134
 It was found that a unit change in investment as percentage to total assets and
liquidity as percentage to total assets has an effect on Net Income as percentage
to total assets which can be explained by the regression equation:

J^ITA= 11.757 - 0.62 (inta) - 1.537(Uq)+ei

6.2 Suggestions
As RRBs operate with branches in remote interior and tribal-dominated areas,
they have a special role to play in financial inclusion RRBs are the best suited
vehicles to widen and deepen the process of financial inclusion. However,
almost care must be taken to ensure that in the process of fulfilling the socio-
economic objective of financial inclusion, RRBs do not again fall into the
vicious circle of deteriorating financial performance and deviation from their
mandate. RRBs should be provided adequate promotional and developmental
assistance to contribute substantially to financial inclusion in a way that the
business generated out of inclusion efforts add positively to their performance.

In the present economic environment where the financial support of the

Government can no longer be taken for granted, RRBs need to achieve a stable
and healthy financial profile, so that they can continue to serve their clients in a
sustainable manner. While sustainability demands that financial health take
precedence over other objectives, it is apparent that it can also come about
through timely and efficient lending to increase outreach if portfolio quality is
maintained through a mixture of secured and diversified lending.

There is a need for financial inclusion of the rural community for India's
development and ICT can play an important role in this endeavor. There should
be integrated framework for the use of the ICT for delivery of rural services in
a cost-effective, financial viable and sustainable manner. With a view to
facilitate the seamless integration of RRBs with the main payment system,
there is a need to provide computerisation support to them, Banks are eligible

135
 for support from the financial Inclusion funds on a matching contribution of
50% in regard to districts other than tribal districts and 75% in case of branches
located in tribal districts under the Tribal sub plan.

RRBs operating in predominantly tribal areas and having high levels of

exclusion may prepare annual credit plans having a separate component for
excluded groups which would integj-ate credit provision with promotional
assistance such as agricultural services for the farm and non-farm sectors
development and formation and strengthening of producers organizations like
dairy cooperatives. Refinance and promotional support may be provided by
NABARD to RRBs on a large scale for implementation of these credit plans.

•'The merged RRBs have become lai-ge size entitles. It is necessary to strengthen
Jheir Boards of Management, viz. introduction of new liability and credit
products, investment decisions, improving market orientation in raising and
deployment of resources, non-fund based business, career progression, transfer
policy etc.

In order to build up the sldlls and expertise of the persomiel of RRBs,

NABARD, sponsor banks and RRB managements should play a critical role in
HR development and in implementation of the reform package. Special priority
to RRBs should be given to train their staff through the training institutions like
the Bankers Institute of Rural Development (BIRD) at Luclcnow and the
Regional Training colleges at Mangalore and Bolpur specially set up for
meeting the training requirements of RRBs. NABARD should design suitable
training programmes to enable RRBs to meet the challenges in the post merger
environment. This training may also cover members of the Board of the RRBs

/ RRBs should concentrate on asset quality and earnings. With the increasing
competition among banks to meet customer expectations, RRBs should offer a
broader range of deposits, investments and credit products through diverse

136
distribution channels including Automatic Teller Machines, telephone, internet
etc.

In order to reduce the cost of funds to RRBs and for opening other avenues of
Income, the following suggestions aimed at facilitating financial viability may
be implemented:-

One way of reducing the cost of funds could be a reduction in the borrowing
rate of RRBs. In this connection, the sponsor banks which are charging 8.5
percent may reduce the lending rate by at least 2 percent.

RRBs should be allowed to levy a nominal once and for all evaluation fees on
all term loan borrowers on the basis of the total project outlay.

In cases where the existing area of operation does not provide adequate
business potential for reaching the viability level, their area may be extended to
cover adjoining districts.

RRBs should extend their services into unbanked areas. They should increase
their term deposits and term loans thi'ough effective marketing.

Project lending will help RRBs to build up their loan business. From this point
of view, sponsor banks as well as the Agriculture Refund and Development
Corporation should ensure that RRBs become participants under their vaiious
rural schemes and extend the needed technical assistance in preparing the
schemes.

RRBs should be encouraged to develop more sophisticated methods of credit

delivery to meet the changing needs of farming; and most of all, there should
be greater coordination between district planning authorities, panchayati raj
institutions and the banks operating in rural areas. Only then will the RRBs
fulfill the promise that is so essential for rural development.

137
The RRB staff are required locally and their postings or transfers are within the
banks area of operation which is ordinarily a districts or two. The need for
maintaining the local ethos makes it imperative that the emoluments and
services conditions of the RRB staff should be in line with those of state
government staff in comparable cadres who constitute bulk of the salaried
people in the area and with whom the former have to establish a close rapport
for their day to day work. Therefore, the emoluments of the staff should be
continued to be determined with due regard to the state government scales. It is
obvious that the terms of service and facilitates available to the government
staff may differ from state to state. However the terms and service conditions
of the staff of RRBs operating within a state have to be uniform.

RRBs face many problems in finding suitable staff and in giving them adequate
training. The sponsor banks are in a good position to assist RRBs in this
respect. The key personnel should continue to be provided by sponsor banks till
RRBs are in a position to develop their own personnel through suitable training
and otherwise to take over the relevant responsibilities. Li this context, training
of RRB personnel assumes gi^eat importance. While the SBI has set up
separable training centres for the RRB staff, sponsor banks should conduct
special courses for the RRB staff at centres meant for their staff. However, the
existing arrangement cannot be said to be adequate. Facilities for recruitment
and training and technical assistance should continue to be provided by the
sponsor bank, on the same terms for a period of 10 years for each RRB.
Thereafter, any arrangement of assistance of this type can be decided upon by
mutual agreement between the sponsor bank and the RRB.

Being institutions devoting exclusive attention to the weaker sections, RRBs

have to be treated on a special and different footing in facilitating their
operations. As of now certain facilities are available to RRBs such as
concessional refinance from the RBI, lower standards of liquidity, slightly

138
higher rates of interest on deposits etc. These should be continued and the
classification of RRBs as scheduled banks should not be allowed to come in the
way.

RBI, NABARD and sponsor banks seem content with issuing of circulars and
conducting mandatory inspections without ensuring compliance of the
guidelines issued by them and rectification of irregularities noticed during
inspections. These institutions should see that proper compliance by RRBs take
place. /

RRBs should really be strengthened and provided with more resources. And
most certainly they should be kept apart from a profit-oriented corporate
motivation that would reduce their capacity to provide much needed financial
services to the rural areas, including agriculture. Ideally, the best use of the
resources raised by RRBs through deposits would be through extensive cross-
subsidisation. This, in turn, really requires an apex body that would cover and
oversee all the RRBs, something like a National Rural Bank of India.

139
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• A.S. Chawla (1987) "Nationalisation and Growth of Indian Banking", Deep

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• Angadi, V.B (1983) "Banks Advances to Priority Sectors - An enquiry into

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• Athanasoglou Panayiotis P. Brissimis Sophocles N. and Delis Matthalos D.

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140
Bhatt, N and Y S P Thorat (2001) "India's Regional Rural Banks: The
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www.sbbj.cora
www.sbhy.cora

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