Recapitalization of Regional Rural Banks (RRBs)

  • Category
    Economy
  • Published
    31st Mar, 2020

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 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.

Context

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 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.

About

  • The Regional Rural Banks (RRBs) were established in 1975 under the provisions of the Ordinance promulgated on 26th September, 1975 and Regional Rural Banks Act, 1976.
  • The objective is to develop the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto.
  • As per RBI guidelines, the RRBs have to provide 75% of their total credit under PSL (Priority Sector Lending).

Priority Sector Lending:

  • Priority sector lending focuses on the idea of directing the lending of the banks towards few specified sectors and activities in the economy
  • Private Sector Lending comprises the following:
    • Agriculture (which includes the sub-categories namely Farm credit, Agriculture Infrastructure and Ancillary activities).
    • Micro, Small and Medium Enterprises
    • Export Credit
    • Education
    • Housing
    • Social Infrastructure
    • Renewable Energy
    • Others
  • RRBs are primarily catering to the credit and banking requirements of agriculture sector and rural areas with focus on small and marginal farmers, micro & small enterprises, rural artisans and weaker sections of the society.
  • In addition, RRBs also provide lending to micro/small enterprises and small entrepreneurs in rural areas. 
  • As per the law, the Centre holds 50 percent stake in Regional Rural Banks, while 35 percent and 15 percent shares are with the concerned sponsor banks and state governments respectively.

Highlights:

  • The CCEA also approved utilization of Rs 670 crore as central government share for the scheme of Recapitalization of RRBs (i.e. 50% of the total recapitalization support of Rs 1340 crore), subject to the condition that the release of Central Government's share will be contingent upon the release of the proportionate share by the sponsor banks.
  • The capital will be used for those RRBs that are unable to maintain minimum Capital to Risk weighted Assets Ratio (CRAR) of 9 percent, as per the regulatory norms prescribed by the Reserve Bank.

    Capital to Risk (Weighted) Assets Ratio (CRAR):

    • Capital to Risk (Weighted) Assets Ratio (CRAR) is also known as Capital adequacy Ratio, the ratio of a bank’s capital to its risk.
    • The Capital to risk-weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk.
    • The higher the CRAR of a bank the better capitalized it is.
    • CRAR is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
      • The Basel III norms stipulated a capital to risk-weighted assets of 8%.
      • In India, scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12% as per RBI norms.
    • In this system, the funded and non-funded items and other off-balance sheet exposures are assigned weights according to the risk perception and banks are required to maintain unimpaired minimum capital funds to the prescribed ratio on the risk-weighted assets.
    • The notional amount of each asset is multiplied by the risk weight assigned to the asset to arrive at the risk-weighted asset number.

    • The Cabinet has also approved extension of scheme for Rebate of State and Central Taxes and Levies on Export of Garments and Made-ups from April 1 onwards till the scheme is merged with Remission of Duties and Taxes on Exported Products.
    • This will give some relief to the exporters, who are badly hit by the coronavirus outbreak.

    Significance of the move:

    • A financially stronger and robust Regional Rural Banks with improved CRAR will enable them to meet the credit requirement in the rural areas.
    • The move was taken to indirectly provide credit to farmers, small scale industries, rural artisans and entrepreneurs hit by the coronavirus outbreak.

© 2020 Basix Education Pvt. Ltd. All Rights Reserved