Former Reserve Bank of India Governor C. Rangarajan has criticised the consolidation of Regional Rural Banks (RRBs), saying the move has undermined their local and regional character and could eventually lead to their merger with universal banks.

“What has happened to Regional Rural Banks?” Mr. Rangarajan asked while speaking at an event in Chennai marking the 10th anniversary of Equitas Small Finance Bank.

He said RRBs had now been merged, leaving one RRB for each State. In one case, he said, the parent bank had also absorbed the RRB.

“To me, this is a step in the wrong direction,” he said.

“It essentially loses the local and regional character of these banks, and ultimately they may get merged with the universal banks as well.”

RRBs were originally set up with the idea that their local character would help distribute credit more evenly, Mr. Rangarajan said. He also recalled that the evolution of credit provision to vulnerable and weaker sections had involved several institutional initiatives, including bank nationalisation, priority-sector credit, RRBs, Local Area Banks, self-help groups and, subsequently, small finance banks.

According to a July 2025 written reply in the Lok Sabha by Union Finance Minister Nirmala Sitharaman, the government has progressively consolidated Regional Rural Banks (RRBs) since 2005 to improve their operational viability and take advantage of economies of scale. In the first phase of amalgamation, between 2005 and 2010, the number of RRBs was reduced from 196 to 82, while subsequent phases brought the number down further. Under the latest ‘One State-One RRB’ phase, the number was reduced from 43 to 28, effective May 1, 2025.

Calls for incentives for small finance banks

Mr. Rangarajan also called on the Reserve Bank of India to consider ways to incentivise the setting up of small finance banks, saying their current numbers would not be sufficient to meet unmet credit needs.

“There is something we need to do about small finance banks. I believe small finance banks will have a role to play,” he said.

He said there were currently only 11 small finance banks, adding that this would not be enough to meet the unmet credit needs of the sector.

“But this is not going to meet what they call the unmet credit needs of this sector,” he said.

He said small finance banks today have an obligation to fulfil the same set of conditions as universal banks. Unless prospective promoters were motivated by other considerations, he said, there would be little incentive to set up such banks.

“So, I would appeal to the Reserve Bank of India to look at how to incentivise the setting up of small finance banks,” he said.

Mr. Rangarajan said the aspiration of small finance banks to eventually become universal banks was not a problem.

“There is nothing wrong with that. I am not complaining,” he said.

He added that the performance of SFBs in their mandated areas would count and said they had done extremely well in the areas in which they were required to work.

‘Creating an institution by itself is not the answer’

The former chairman of the Prime Minister’s Economic Advisory Council said India’s response to gaps in credit delivery had repeatedly been to create new institutions.

“Whenever we felt that something was not happening, we said, ‘We will create a new institution,’” he said.

But he cautioned that simply creating a new institutional structure would not necessarily solve the underlying problem.

“Creating an institution by itself is not the answer, because institutions can come and still the problems will continue,” he said.

He said the record of small finance banks showed that the spirit with which management took on the task was important.

SHGs have become ‘mere instruments’

Mr. Rangarajan also raised concerns about the evolution of self-help groups (SHGs).

He recalled that banks had initially been hesitant to lend to SHGs because it was not clearly defined what constituted a self-help group and they were not registered as societies. He said he had issued a circular in 1994 or 1993 allowing banks to provide credit to SHGs on what was almost like a common guarantee.

But he said the role of SHGs had subsequently changed.

“Now, virtually what has happened is that self-help groups have become mere instruments for fulfilling some of the government projects,” he said.

He said this was “contrary to the spirit with which the self-help organisations were established”.

Published – September 07, 2026 03:43 pm IST