The spotlight of forthcoming Union Budget will be on regional rural banks and cooperative banks. Finance Minister P Chidambaram is expected to announce a detailed restructuring package for 196 RRBs and 2,104 urban cooperative banks and reposition them to step up credit flow into the rural sector. The government is also set to redefine the role of Nabard in the Budget.

In his earlier stint as a finance minister, Chidambaram mooted the idea of local area banks. However, the concept of LAB did not work well. This time he is expected to reposition RRBs and cooperative banks and recapitalise sick banks.

The performance of RRBs deteriorated in 2002-03, with the number of loss-making banks increasing to 40 from 29 a year ago. The combined net profit of 196 RRBs declined by 14.64 per cent to Rs 519 crore (Rs 5.19 billion) compared with Rs 608 crore (Rs 6.08 billion) in the previous fiscal.

There are 196 RRBs with 14,390 branches, spread across 511 districts in 26 states. Their outstanding deposits and advances as on end-March 2003 were Rs 50,098 crore (Rs 500.98 billion) and Rs 22,158 crore (Rs 45,000 crore and Rs 19,000 crore).

The finance ministry is likely to kick off a consolidation process of RRBs by creating six zonal banks to be sponsored by six big public sector banks.

Under the present structure, sponsor banks have a 35 per cent stake RRBs, while the Centre holds 50 per cent and respective state governments 15 per cent.

There could be fine-tuning in the stake holding pattern too. RRBs were established in 1975 with the objective of providing banking services in rural areas. Their main customers are peasants, artisans and landless labourers.

Urban cooperative banks are registered under Cooperative Societies Acts of state governments and they are required to allocate 60 per cent of their total advances to priority sector, which includes small business enterprises, cottage and small-scale industries to housing.

In March 2002, there were 30 state cooperative banks (847 branches), 368 district cooperative banks (12,652 branches) and about 99,000 primary cooperative societies.

The government had planned to bring in cooperative banks under the ambit of regulations for commercial banks by amending the Banking Regulation Act. However, the Bill seeking the amendment was not passed in Parliament as it faced stiff resistance from some quarters.

The Budget is expected to announce a fund for recapitalising weak cooperative banks. It will also announce measures to strengthen the effectiveness of Nabard and create a framework for raising its refinancing operations manifold.