From UPSC perspective, the following things are important :
Prelims level : CRAR, PCGS
Mains level : Asset reconstructions post NPA buzz
As part of Aatmanirbhar Bharat Abhiyan, announced by the Government, the Partial Credit Guarantee Scheme (PCGS) 2.0 was launched to provide Portfolio Guarantee for purchase of Bonds or Commercial Papers (CPs) with a rating of AA and below issued by NBFCs/HFCs/ MFIs by Public Sector Banks (PSBs).
Try this PYQ:
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen? (CSP 2015)
(a) India’s GDP growth rate increases drastically
(b) Foreign Institutional Investors may bring more capital into our country
(c) Scheduled Commercial Banks may cut their lending rates
(d) It may drastically reduce the liquidity to the banking system
About Partial Credit Guarantee Scheme (PCGS)
- Under the scheme, any PSB can purchase securities (minimum rating of ‘AA’) of financially-sound non-banking finance companies.
- The objective is to address temporary asset-liability mismatches of otherwise solvent NBFCs/Housing finance companies (HFCs) without having to resort to distress sale of their assets to meet their commitments.
- The government will provide a one-time, six months’ partial credit guarantee to public sector banks for first loss of up to 10%.
- Also, these NBFCs/HFCs are mandated that the CRAR (capital to risk-weighted assets ratio) shall not go below the regulatory minimum while exercising of the option to buy back the assets.
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.