UNION CABINET APPROVES RECAPITALISATION OF RRBs

Home » UNION CABINET APPROVES RECAPITALISATION OF RRBs

Focus: GS-III Indian Economy

The Centre has approved a ₹1,340-crore recapitalisation plan for regional rural banks (RRBs) to improve their Capital-to-Risk weighted Assets Ratio (CRAR), strengthening these institutions that are critical to the provision of credit in rural areas.
On 25th march 2020, the Cabinet Committee on Economic Affairs gave its nod for an outlay of ₹670 crore as the central share for the scheme on the condition that the release of the funds will be contingent upon the release of the proportionate share by the sponsor banks, an official statement said.

This would provide minimum regulatory capital for one more year viz. up to 2020-21 for those RRBs that are unable to maintain the minimum CRAR of 9%. This has been an ongoing scheme since 2011.
The RRBs are required to provide 75% of their total credit as priority sector lending with primary focus on agricultural credit, including small and marginal farmers, as well as micro entrepreneurs and rural artisans.
At a time of lockdown due to the COVID-19 crisis, financially stronger rural banks could also be crucial to ensuring liquidity in rural areas.

Regional Rural Banks (RRBs) are Indian Scheduled Commercial Banks (Government Banks) operating at regional level in different States of India.
They have been created with a view of serving primarily the rural areas of India with basic banking and financial services.
However, RRBs may have branches set up for urban operations and their area of operation may include urban areas too.
The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State.

RRBs perform various functions in following heads:

Providing banking facilities to rural and semi-urban areas.
Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc.
Providing Para-Banking facilities like locker facilities, debit and credit cards, mobile banking, internet banking,UPI etc.
Small financial banks.

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 banking regulator tracks a bank’s CAR to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements.
Higher CRAR indicates a bank is better capitalized.

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.
The capital to risk-weighted assets ratio is calculated by adding a bank’s tier 1 capital and tier 2 capitals and dividing the total by its total risk-weighted assets.

That is:

Tier 1 CRAR =( Eligible Tier 1 capital funds)= (Credit Risk RWA + Market Risk RWA + Operational Risk RWA)

Total CRAR= (Eligible Total capital funds)÷ (Credit Risk RWA + Market Risk RWA + Operational Risk RWA)