House economists at the State Bank of India (SBI) have called for a slew of reforms to incentivise regional rural banks, including granting them on-tap licence for conversion into Small Finance Banks (SFBs).

In September 2018, the Reserve Bank of India (RBI) allowed urban cooperatives and microfinance lenders to convert themselves into SFBs.

Leading Regional Rural Banks (RRBs) are much bigger than most of the SFBs. even today, according to a mere Rs 33,240 crore. At the note by Soumya Kanti Ghosh, the group chief economic adviser at SBI.


Stating that it is a fallacy to use outcome-based interventions as a yardstick for rule-based regulatory intervention in RRBs, Ghosh said that allowing RRBs to convert themselves into SFBs will create a level playing field across RRBs, UCBS and SFBs given the fast- paced changes taking place in the banking space.

CUBS are Urban Cooperative Banks. The largest RRB is Baroda UP Bank with a Rs 72,015 crore-balance sheet and is much bigger than the largest SFB AU Small Finance Bank which has business deposits and advances size of only Rs 70,588 crore as of March 2021. The second largest RRB is Karnataka Gramin Bank with Rs 54,856 crore of business while the second largest SFB Equitas has third slot is Aryavart Bank (Rs 48,649 crore) while the business of the third largest SFB Ujjivan SFB is at Rs 27,630 crore, according to the report. From a modest beginning of six RRBs with 17 branches covering 12 districts in December 1975, their number increased to 196 RRBs in 1987 but remained at the same level till 2005.

The government initiated large scale reforms that coupled with capital in fusion, helped them turn profitable. However, in FY05, 42 percent of the RRBs still carried legacy losses. To improve their operational viability and to take advantage of economies of scale, the government initiated a further consolidation programme in FY06 and as a result, the number of RRBs declined from 196 in 2005 to 43 in FY21. After two consecutive years of losses in fiscal 2019 and 2020, RRBs, as a whole, reported a consolidated net profit of Rs. 1,682 crore in FY21. Even as 30 of the 43 RRBs posted net profit, 17 car rides accumulated losses of Rs 8,264 crore in FY21.