Context: Recently, the Centre has approved a Rs1,340-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.
Significance of the Recapitalisation

• This Recapitalisation 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.

Background behind Recapitalisation of RRBs

• 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.

About 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.
• 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.

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.

About 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%.