The government has approved capital infusion to the tune of Rs 1,340 crore for Regional Rural Banks (RRBs) on 25 March 2020. The decision was taken by the Cabinet Committee on Economic Affairs to help these banks maintain the Reserve Bank mandated 9% capital adequacy ratio (CAR) or the ratio of a bank’s capital to its risk. Out of the total proposed amount the central government will contribute Rs 670 crore while the RRBs sponsor banks would provide the remaining Rs 670 crore. With this, the process of recapitalization of RRBs by providing minimum regulatory capital has been extended for another year up to 2020-21.
 
What
  1. The reason for the infusion was to ensure financially stronger and robust RRBs with improved CAR to enable them to meet the credit requirement in the rural areas.
  2. These banks, which are classified as scheduled commercial banks, were created in 1975 to serve rural areas with basic banking and financial services.
  3. While the Centre contributed 50% towards their initial capital, certain public sector banks or sponsor banks put in 35% and state governments provided the remaining 15% to start up the RRBs. In its 2019-20 budget, the government had earmarked Rs 236 crore for the capitalisation of RRBs.
  4. Before that, in 2015, the government had passed the Regional Rural Banks (Amendment) Bill to enhance the authorised and issued capital of RRBs.
  5. The scheme for recapitalisation of RRBs was started in 2010-11 and was extended upto 2019-20 in a phased manner with a financial support of Rs. 2,900 crore with 50% Government’s share of Rs. 1,450 crore. Out of Rs. 1,450 crore, an amount of Rs. 1,395.64 crore has been released to RRBs, up to 2019-20 so far.
  6. At present there are 45 operational RRBs, which the Centre had planned to bring down to 38 through mergers with their sponsor banks to improve efficiency and bring in economies of scale.
  7. The National Bank for Agriculture and Rural Development (NABARD) periodically reviews their financial performance through empowered committee (EC) meetings at the state level.
Flashback
  1. National Bank for Agriculture and Rural Development (NABARD) was established on 12 July 1982 by an Act of the Parliament. 
  2. NABARD, as a Development Bank, is mandated for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas, and for matters connected therewith or incidental thereto.