The rural sector in the backbone of Indian Economy as over 40% of the Gross National Product is coming from this sector and priority sector credit is one of the strategic inputs for the successful implementation of Rural Development Schemes.

The Government of India had constituted a “Working Group on Rural Banks” headed by Mr. M. Narasimhan on July 1,1975 to study, in depth, the problem of devising alterna­tive agencies to provide institutional credit to rural people.

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 (RRB) were set up under the “Regional Rural Bank ordinance 1975, “promulgated by the President of India on 26th September 1975, it was subsequently replaced by the “Regional Rural Banks Act, 1976” on 9th Feb. 1976.

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.


The sponsoring bank provides assistance to the RRB in several ways such as (i) Sub­scription to its share capital (ii) Provision of managerial assistance (iii) Provision of other staff assistance (iv) Funds under Refinance Assistance (v) Investment guidance, etc.

These were provided on the basis of mutual agreement for the period of first-five years of its existence and financial assistance on the terms mutually negotiable. 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 Rs. 1 crore and the issued capital at Rs. 25 lakh. 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 Banks (Amendment) Act, 1987, which came into force on 28th September 1988 has enhanced the authorized capital of RRB to Rs. 5 crore and paid up share capital to Rs. 1 crore.


The general management of each RRB is vested with the Board of Directors. The board consists of 9 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.

Of the 9 Directors three are nominated by the Central Government, 2 by State Government and 3 by Sponsoring Bank for the 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 Board of Directors to a maximum of 15.

After the formation of NABARD in July 1982, most aspects relating to the RRBs are looked after by NABARD. The RBI as the Central Banking Authority continues to prescribe various policy objectives and guidelines for the RRBs.