Beyond RRB Amalgamation Myths

Publication Date: 17 Mar 2007
Published by: The Economic Times
Document Type: Magazine Article

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Debunking myths on regional rural banks amalgamation

This article argues that the logic of regional rural banks (RRBs) amalgamation is based on a series of myths. It states that RRB efficiency could be increased by deregulating interest rates on small-value loans and privatization.

RRBs are important instruments of financial inclusion in India. The government has initiated the process of RRB amalgamation, believing this would enable RRBs to function better in a competitive environment by leveraging economies of scale and reducing transaction costs. However, the paper disagrees with this logic, arguing that RRBs do not or are unable to:

• Face competition in their designated market segment;
• Achieve economies of scale, since large customers prefer commercial banks;
• Reduce transaction costs, because they face excessive political interference.

Recommendations to make RRBs more efficient and viable include:

• Decontrol of interest rates on small loans;
• Privatization of RRBs;
• Selling off better performing RRBs to commercial investors;
• Bundling low-performance RRBs with high-performance ones.