Paper

India's Regional Rural Banks: The Institutional Dimension of Reforms

What is the key to success for the reform of Regional Rural Banks?

This paper states that political support for the reform process is a key determinant of the extent to which the Regional Rural Banks (RRBs) can be turned around. It:

  • Discusses the role of institutions and incentives in shaping the performance of development finance programmes;
  • Highlights the impact of institutional arrangements facing key stakeholders;
  • Argues that the reforms introduced since 1993 have not adequately addressed the incompatibility of these incentives, and provides recommendations for getting the incentives right;
  • Draws some general policy implications.

The paper argues that:

  • Where political leaders can become allies, reforms can transform failing programmes into models of success, as has been the case for Indonesia of BRI Unit Desas;
  • Efforts to reform the RRBs have had a limited impact because reformers have paid little attention to the institutional dimensions of the problems facing the banks;
  • Few efforts were made to redesign the perverse institutional arrangements that gave rise to incompatible incentive structures for key stakeholders, such as politicians, policy makers, stockholders, bank staff, and clients.

The paper recommends that the next leg of reforms should focus on aligning the incentives of these stakeholders by giving greater importance to the internal organisational context as well as the larger policy environment within which the RRBs operate.

About this Publication

By Bhatt, N. & Thoratt, Y.
Published