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Recapitalisation of RRBs

  • 26 Mar 2020
  • 4 min read

Why in News

Recently, the Centre has approved a ₹1,340-crore recapitalisation plan for Regional Rural Banks (RRBs).

  • The move is crucial to ensure liquidity in rural areas during the lockdown due to the COVID-19 crisis.

Regional Rural Banks

  • RRBs are financial institutions which ensure adequate credit for agriculture and other rural sectors.
  • 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.
  • Stakeholders: 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.
  • The RRBs combine the characteristics of a cooperative in terms of the familiarity of the rural problems and a commercial bank in terms of its professionalism and ability to mobilise financial resources.
  • Each RRB operates within the local limits as notified by the Government.
  • The main objectives of RRBs are
    • To provide credit and other facilities to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs in rural areas.
    • To check the outflow of rural deposits to urban areas and reduce regional imbalances and increase rural employment generation.
  • The RRBs are required to provide 75% of their total credit as priority sector lending.

Key Points

  • This recapitalisation (a strategy of enhancing the financial base of an entity to overcome a rough financial situation) would improve their capital-to-risk weighted assets ratio (CRAR) and strengthen these institutions for providing credit in rural areas.
    • The step will help those RRBs which are unable to maintain a minimum CRAR of 9%, as per the regulatory norms prescribed by the RBI.
  • The release of the Rs. 670 crore as the central share funds will be contingent upon the release of the proportionate share by the sponsor banks.
  • 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.
    • The scheme for recapitalization of RRBs was extended up to 2019-20 in a phased manner post 2011.

Capital-to-risk Weighted Assets Ratio

  • CRAR or Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities.
  • It 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%.
  • However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CRAR of 9%.

Source: TH

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