Capital to risk-weighted assets ratio Current Affairs - 2020

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Recapitalization of Regional Rural Banks approved by Union Cabinet

The Union Cabinet under the chairmanship of PM Modi on March 25, 2020, approved the recapitalization of regional rural banks (RRB) to improve the capital to risk weighted assets ratio.

Highlights

The Committee approved the continuation of recapitalization of RRBs. In order to achieve this the GoI has provided a minimum regulatory capital for another, 2020-21. The recapitalization funds are being allocated to those banks that are unable to maintain minimum CRAR (Capital to Risk weighted Assets Ratio) of 9%. The CRAR for a bank is fixed by RBI.

Benefits

An improved CRAR will help the rural banks to meet their credit requirements in rural areas. The RRBs should allocate 75% of their credit to priority sector lending. The RRBs focus on small and marginal farmers, micro and small enterprises, weaker sections of the society and rural artisans

Scheme of Recapitalization

The Scheme of Recapitalization of RRBs was launched in 2011. It was launched on the recommendation of Dr K C Chakrabarty Committee.

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RBI Removes three Banks from PCA Framework

The Reserve Bank of India (RBI) has removed three banks, Dhanlaxmi Bank, Allahabad Bank and Corporation Bank from the PCA framework by moving them out of its weak-bank watchlist.

Basis for the decision of RBI

  • The government has infused fresh capital into various banks including some of the banks currently under the PCA framework. As part of the capital infusion, Corporation Bank had received Rs 9086 cr and Allahabad Bank had received 6896 cr.
  • Capital Infusion to both of these banks has shored up their capital funds and also increased their loan loss provision to ensure that the PCA parameters were complied with.
  • Dhanlaxmi Bank was taken out of the PCA framework, subject to certain conditions and it would be under continuous monitoring, as the bank is found to be not breaching any of the Risk Thresholds of the PCA framework.

Earlier in the year, the RBI had removed the Bank of India (BoI), Bank of Maharashtra (BoM) and Oriental Bank of Commerce (OBC) from the PCA framework. With the removal of Allahabad Bank and Corporation Bank from the list, five PSBs which includes United Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank and Dena Bank remain under the PCA framework.

PCA: Bone of Contention

The PCA framework had become a bone of contention between the government and the RBI. In India, PCA kicks in when banks breach any of the three key regulatory trigger points namely capital to risk-weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA) whereas globally PCA kicks in only when banks slip on a single parameter of capital adequacy ratio.

The government and independent directors of the RBI board, like S Gurumurthy, are in favour of this practice being adopted for the domestic banking sector as well.

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