Industry Odisha Bureau, Sep 07: Former RBI Governor C. Rangarajan has questioned ongoing Regional Rural Bank consolidation. Speaking in Chennai, he called the trend concerning. He said RRBs are losing their distinct local identity. Universal-bank mergers could eventually follow, he cautioned. Rangarajan also pressed the RBI to support Small Finance Banks. Just 11 SFBs exist, he noted, far too few. His comments revive debate over India’s rural-credit framework.
Rangarajan made the remarks at Equitas Small Finance Bank’s tenth-anniversary event. He questioned what had happened to Regional Rural Banks recently. States now typically have just one RRB each, he said. In one instance, a parent bank fully absorbed its RRB.
Government data shows RRBs numbered 196 in 2005. That figure fell to 82 by 2010 through early amalgamation. Subsequent phases reduced numbers further over two decades. The recent One State-One RRB policy brought the count to 28. This took effect from May 1, 2025, official records show. Authorities cite operational viability and economies of scale as reasons.
Rangarajan argued this rationale overlooks something important. RRBs were built to spread credit access evenly. Their regional character, he said, supported that founding mission. He traced this to broader financial-inclusion milestones over decades. These include nationalised banking, priority-sector lending and self-help groups.
He then shifted focus to Small Finance Banks and their constraints. SFBs, he argued, deserve a bigger role in rural finance. Yet only 11 exist under the current regulatory setup. That number falls short of unmet credit demand nationwide. SFBs must meet identical requirements as full-fledged universal banks. This limits incentives for entrepreneurs considering new SFB licences.
Importantly, Rangarajan did not object to SFBs seeking universal-bank status eventually. He said that ambition raises no inherent concern. What counts more, he stressed, is mandated-area performance. On that measure, he said SFBs have delivered strong results.
Rangarajan extended his critique into institutional philosophy more broadly. India’s typical response to financing gaps is launching new institutions. But new structures alone rarely solve underlying delivery problems, he warned. Outcomes depend heavily on the intent behind institutional management.
He closed with a pointed observation on self-help groups. Banks were initially reluctant to extend credit to SHGs. A circular he issued around 1993 changed that resistance. It allowed near-guaranteed lending arrangements for group-based credit. However, he said SHGs have since drifted from their purpose. Many now function as delivery tools for government schemes.
Taken together, Rangarajan’s remarks reflect a deeper structural tension. Efficiency-driven consolidation competes with locally rooted credit delivery models. His RBI appeal signals unresolved questions about India’s rural-banking architecture.
