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Recapitalisation of RRBs

Topics Covered: Inclusive development and issues arising from it.

Recapitalisation of RRBs

What to study?

For Prelims: What are RRBs? What is CRAR?

For Mains: Significance of the recapitalisation, the need for it.

 Context: The Cabinet Committee on Economic Affairs has given its approval for continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs for another year beyond 2019-20, that is, up to 2020-21.

This is for those RRBs which are unable to maintain minimum Capital to Risk weighted Assets Ratio (CRAR) of 9%, as per the regulatory norms prescribed by the Reserve Bank of India.

Why this is necessary?

  • A financially stronger and robust Regional Rural Banks with improved CRAR will enable them to meet the credit requirement in the rural areas.
  • With the recapitalization support to augment CRAR, RRBs would be able to continue their lending to these categories of borrowers under their PSL target, and thus, continue to support rural livelihoods.

Background:

The recapitalisation process of RRBs was approved by the cabinet in 2011 based on the recommendations of a committee set up under the Chairmanship of K C Chakrabarty.

The National Bank for Agriculture and Rural Development (NABARD) identifies those RRBs, which require recapitalisation assistance to maintain the mandatory CRAR of 9% based on the CRAR position of RRBs, as on 31st March of every year.

What is Capital to Risk Weighted Assets Ratio (CRAR)?

The CRAR, also known as the Capital Adequacy Ratio (CAR), is the ratio of a bank’s capital to its risk. It is a measure of the amount of a bank’s core capital expressed as a percentage of its risk-weighted asset.

It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

Why CRAR was enforced?

The enforcement of regulated levels of this ratio is intended to protect depositors and promote stability and efficiency of financial systems around the world. It determines the bank’s capacity to meet the time liabilities and other risks such as credit risk, operational risk, etc.

The Basel III norms stipulated a capital to risk weighted assets of 8%.

However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CRAR of 9%.

What are RRBs?

Regional Rural Banks were set up on the basis of the recommendations of the Narasimham Working Group (1975), and after the legislation of the Regional Rural Banks Act, 1976.

The first Regional Rural Bank “Prathama Grameen Bank” was set up on 2nd October, 1975.

The equity of a regional rural bank is held by the Central Government, concerned State Government and the Sponsor Bank in the proportion of 50:15:35.

Insta Link:

Prelims Link:

  1. Stakeholders in RRBs.
  2. RRBs vs Urban cooperative banks.
  3. BASEL norms- important targets.
  4. Where is Basel?
  5. CRAR vs Leverage ratio.
  6. What is priority sector lending?

Mains Link:

Recapitalisation will help banks maintain their capital adequacy ratio. Banks’ capacity to lend will increase, but that does not mean lending will increase. Comment.

Sources: pib.