The Centre has approved a 1,340-crore recapitalisation plan for regional rural banks (RRBs) in which 670 crores will be provided by Centre and remaining by sponsor banks.
- It simply means capitalising the bank again.
- It involves financial infusion into the banks which are growing weak with stressed assets through replacing debt with equity or vice versa.
About Regional Rural Banks:
- They are financial institutions which ensure adequate credit for agriculture and other rural sectors .
- They were set up on the basis of the recommendations of the Narasimham Working Group (1975), and after the legislations of the Regional Rural Banks Act, 1976.
- The first Regional Rural Bank “Prathama Grameen Bank” was set up on October 2, 1975.
- 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.
- RRBs may have branches set up for urban operations and their area of operation may include urban areas too.
- The main objectives of RRBs are -
- To provide credit and other facilities‚ especially to the small and marginal farmers‚ agricultural labourers artisans and small entrepreneurs in rural areas
- To bridge the credit gap in rural areas,
- To check the outflow of rural deposits to urban areas
- To reduce regional imbalances and increase rural employment generation
- The RRB’s have also been brought under the ambit of priority sector lending on par with the commercial banks
- The Regional Rural Banks (Amendment) Act, 2015 was passed to strengthen the RRBs.
- The Act raises the amount of authorised capital to Rs 2,000 crore and states that it cannot be reduced below Rs One crore.
- The Act allows RRBs to raise capital from sources other than the existing shareholders - central and state governments, and sponsor banks.
- Here, the combined shareholding of the central government and the sponsor bank cannot be less than 51%.
Rationale of Recapitalisation:
- At a time of lockdown due to the COVID-19 crisis, financially stronger rural banks could be crucial to ensuring liquidity in rural areas.
- Recapitalisation will help improve their Capital to risk weighted assets ratio (CRAR) , thereby strengthening them.
- 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 capital adequacy ratio is calculated by dividing a bank's capital by its risk-weighted assets.
- They make sure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose depositors’ funds.
- Generally, a bank with a high capital adequacy ratio is considered safe and likely to meet its financial obligations.
- They ensure the efficiency and stability of a nation’s financial system by lowering the risk of banks becoming insolvent.
Also read: Banks Announce Share Swap Ratios (Summary)
Image Source: Wikipedia