Banking Sector Reforms

[pib] Capital to Risk Weighted Assets Ratio (CRAR)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Regional Rural Banks (RRBs), CRAR

Mains level : Recapitalization of RRBs

The Cabinet Committee on Economic Affairs has given its approval for continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs which are unable to maintain minimum Capital to Risk weighted Assets Ratio (CRAR) of 9%, as per the regulatory norms prescribed by the RBI.

What is CRAR?

  • CRAR also known as Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk.
  • CRAR 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%.
  • 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.
  • It is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk.
  • RBI tracks CRAR of a bank to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements.
  • The higher the CRAR of a bank the better capitalized it is.

Why recapitalize RRBs?

  • RRBs are primarily catering to the credit and banking requirements of agriculture sector and rural areas with focus on small and marginal farmers, micro & small enterprises, rural artisans and weaker sections of the society.
  • A financially stronger and robust RRB with improved CRAR will enable them to meet the credit requirement in the rural areas.
  • As per RBI guidelines, the RRBs have to provide 75% of their total credit under PSL (Priority Sector Lending).
  • In addition, RRBs also provide lending to micro/small enterprises and small entrepreneurs in rural areas.
  • With the recapitalization support to augment CRAR, RRBs would be able to continue their lending to these categories of borrowers under their PSL target, and thus, continue to support rural livelihoods.

Back2Basics

Regional Rural Banks (RRBs)

  • RRBs are Scheduled Commercial Banks operating at regional level in different States of India. They are recognized under the Regional Rural Banks Act, 1976 Act.
  • 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 covering one or more districts in the State.

Their functions

RRBs also perform a variety of different functions. 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 etc.
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