The Union Cabinet today approved the recapitalization of Regional Rural Banks (RRBs) to improve their Capital to Risk Weighted Assets Ratio CRAR) in the following manner:

(a)   Share of Central Government i.e. Rs.1,100 crore will be released as per provisions made by the Department of Expenditure in 2010-11 and 2011-12. However, release of Government of India share will be contingent on proportionate release of State Government and Sponsor Bank share.

(b)   A capacity building fund with a corpus of Rs.100 crore to be set up by Central Government with NABARD for training and capacity building of the RRB staff in the institution of NABARD and other reputed institutions. The functioning of the Fund will be periodically reviewed by the Central Government. An Action Plan will be prepared by NABARD in this regard and sent to Government for approval.

(c)   Additional amount of Rs.700 crore as contingency fund to meet the requirement of the weak RRBs, particularly those in the North Eastern and Eastern Region, the necessary provision will be made in the Budget as and when the need arises.

Background:

The Regional Rural Banks (RRBs) were established in 1975 with the objective to create an alternative channel to 'cooperative credit structure' with a view to ensure sufficient institutional credit for rural and agriculture sector. The RRBs are integral segment of the Indian banking system with focus on serving the rural areas. As on date 82 RRBs are functioning in the country.

RRBs are jointly owned by Government of India, the State Government concerned and the Sponsor Banks. The issued capital of RRBs is subscribed by Central Government, State Government and sponsor banks in the proportion of 50%, 15% and 35%, respectively.

Subsequent to review of the financial status of RRBs by the Union Finance Minister in August, 2009, it was felt that a large number of RRBs had a low Capital to Risk weighted Assets Ratio (CRAR). A committee was therefore constituted in September, 2009 under the Chairmanship of Dr K C Chakrabarty, Deputy Governor, RBI to analyse the financials of the RRBs and to suggest measures including re-capitalisation to bring the CRAR of RRBs to at least 9% in a sustainable manner by 2012. The Committee had submitted its report in May, 2010. The committee has inter-alia recommended the following:

i.                    RRBs to have CRAR of at least 7% as on 31^st March 2011 and at least 9% from 31^st March 2012 onwards.

ii.                  Recapitalisation requirement of Rs. 2,200.00 crore for 40 of the 82 RRBs. This amount is to be released in two installments in 2010-11 and 2011-12.

iii.                The remaining 42 RRBs will not require any capital and will be able to maintain CRAR of at least 9% as on 31^st March 2012 and thereafter on their own.

iv.                A fund of Rs. 100 crore to be set up for training and capacity building of the RRB staff.

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