Context:

The Cabinet Committee on Economic Affairs has given its approval for continuation of the process of recapitalization of Regional Rural Banks for those RRBs which are unable to maintain minimum Capital to Risk weighted Assets Ratio (CRAR).

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).
• 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 approved the scheme of Recapitalization of RRBs, 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.
• 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.