The Cabinet Committee on Economic Affairs (CCEA) under the chairmanship of Prime Minister Narendra Modi continued the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs for another year after 2019-20 ie by 2020-21. Has given its approval to.
- Under this, the minimum regulatory capital will be given to those RRBs who are unable to maintain a ‘capital-risk weighted asset ratio (CRAR)’ of 9%, as mentioned in the regulatory norms specified by the Reserve Bank of India.
- The Cabinet Committee on Economic Affairs has also approved the use of Rs 670 crore (ie 50% of the total recapitalization support of Rs 1340 crore) as part of the central government’s plan for the recapitalization of RRBs. However, there will be a condition that the Central Government share will be released only if the proportionate stake is issued by the sponsor banks.
What will be its benefits?
- As per RBI guidelines, RRBs have to provide 75% of their total loans under PSL (Priority Sector Lending). RRBs are primarily catering to the credit and banking needs of the agricultural sector and rural areas with a focus on small and marginal farmers, micro and small enterprises, rural artisans and weaker sections of society. Better CRAR will enable banks to meet credit related needs.
- Apart from this, RRBs also provide loans to micro / small enterprises and small entrepreneurs in rural areas. On getting recapitalization or new capital support to increase ‘CRAR’, RRBs will be able to continue to provide these categories of borrowers continuous loans under their PSL target, hence they will continue to support rural livelihoods.
What is the capital-risk weighted asset ratio (CRAR)?
- One of the major consequences of the financial sector crisis of 2007 is that financial regulators or central banks were not very strict for financial institutions. The financial regulator or central bank found that the best way to ensure the non-failure of financial institutions, including commercial banks, is to tighten capital-risk readiness in these institutions.
- Capital Adequacy Ratio (CAR) or Capital-Risk Weighted Assets Ratio (CRAR) is the ratio measured by banks in terms of assets distributed (mostly debt) which means the bank must have higher capital to distribute higher assets.
- For example, if a bank has lent to the government by investing in government securities, it does not need to hold any capital because the debt risk for government securities is zero and hence, the risk weight for government securities is zero.
- But in case of risky assets, the bank has to carry a risk weight such that the risk weight for real estate is 300%. Here, if the CRAR is 9% (for a standard asset with a risk weight of 100%) then the bank will have to hold a 27% CRAR to loan the real state; For example, a bank should keep Rs 27 crore to give a loan of Rs 100 crore to the real estate sector.
The background
- Keeping in mind RBI’s decision to implement the disclosure criteria for RRB’s Capital-Risk Weighted Assets Ratio (CRAR) from March 2008, Dr K.C. A committee was formed under the chairmanship of Chakraborty.
- Based on the recommendations of the committee, the ‘Plan for the recapitalization of RRBs’ was approved by the Cabinet in its meeting held on 10 February 2011 to form contingency fund to meet the requirement of weak RRBs, especially in the Northeast region and Eastern region. Rs.2,200 crore to provide recapitalization assistance to 40 RRBs with an additional amount of Rs.700 crore.
- Therefore, based on the status of the CRAR of RRBs as on 31 March every year, the National Bank for Agriculture and Rural Development (NABARD) identifies the RRBs which have received recapitalization assistance to maintain the mandatory CRAR of 9%. Is required.
- After 2011, the plan for the recapitalization of RRBs with the financial assistance of Rs 2,900 crore was extended in a phased manner till 2019-20, which included a 50% stake of Rs 1,450 crore from the Government of India. It has now been extended for 2020-21.