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Recapitalization of Regional Rural Banks to improve CRAR

Why in news:

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.

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.

Why is it required?

  • 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.

What is CRAR?

Capital Adequacy Ratio (CAR)

CAR = (Tier I + Tier II Capital)/Risk Weighted Assets

• Expressed as a percentage of a bank’s risk weighted credit exposures.

• Measure of bank’s financial strength to ensure that banks have enough cushions to absorb losses before becoming insolvent and losing depositors’ funds.

• CAR is required to be 9% by RBI (based on BASEL III norms), where 7% has to be met by Tier 1 capital while the remaining 2% by Tier 2 capital.

What are Regional Rural Banks (RRBs)?

Set up on the recommendations of Narasimhan Committee on Financial Inclusion in 1976.

  • can only operate in the areas specified by GOI.
  • objective of providing credit to the agricultural and rural regions.
  • financial strength and expertise of commercial banks and Grassroot problem awareness of cooperative societies.
  • CRR and SLR limits apply
  • CAR — 9%
  • not allowed to borrow under the MSF window.

Shareholding: Union à50%, stateà15%, Sponsor bankà35%. vide amendment of 2015 to RRB act 1976. This encourages mergers among RRBs.

Problems of RRBs

  • Landscape change–> that were villages in 70s have now become small towns causing Private banks, State Cooperative Banks penetrating in rural areas
  • Even commercial banks such as SBI also serve the villagers via BCA (Banking correspondence agents).
  • Deposits are on the lower side thus excessively dependent on NABARD.
  • Debt Waivers by government especially before elections  Rise in NPAs

In this context, it was necessary to consolidate/merge various RRBs- to reduce their overhead expenses and make them more competitive. Therefore in 2005, Government of India started amalgamation of RRBs

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