Basel-I norms for RRBs

In order to bring regional rural banks (RRBs) within the internationally accepted Basel-I framework, Reserve Bank of India (RBI), through its Annual Policy Statement, has announced the introduction of capital to risk-weighted assets ratio norms (CRAR) for RRBs in a phased manner. A time-table for this purpose would be announced in consultation with National Bank for Agriculture and Rural Development (NABARD).

RRBs are a special category of banks which aim to combine the local feel and familiarity of the co-operatives with the business capabilities of commercial lenders. The capital issued by a RRB is suscribed by the central government, state government and a sponsor bank which is generally a public sector bank.

The current move by RBI is consistent with the recommendations of the committee for financial sector assessment (CFSA), chaired by RBI deputy governor Rakesh Mohan. While acknowledging that RRBs do not present a systemic risk owing to their small size, the report raised concerns about asset quality of RRBs and their poor loan recovery performance.

CFSA had also observed that there is a need to draw up a roadmap for ensuring that only licensed banks operate in the co-operative space and banks which fail to obtain a license by 2012 should not be allowed to operate. RBI said it would work out a roadmap for achieving this objective in a non-disruptive manner in consultation with NABARD.

To promote financial inclusion, RBI, again in consultation with NABARD, will work out a policy to assist RRBs adopting Information and Communication Technologies (ICT) solutions to reach out to more customers.

Also with the objective of achieving greater financial inclusion, a working group will be constituted to examine the business correspondent (BC) model and suggest measures, to enlarge the category of persons that can act as BCs. Under the BC model, banks outsource lending and deposit-taking activities to non-government organizations and micro-finance institutions set up as societies, trusts, Section 25 companies, post offices, co-operative societies and more recently retired bank employees, ex-servicemen and retired government employees.

Through its annual policy statement RBI also announced that with 156 RRBs integrated into 45 new RRBs sponsored by 20 banks in 17 States, the process of amalgamation for RRBs is almost complete.

The process of recapitalization of RRBs with a negative net worth is also complete except for one RRB in Uttar Pradesh. As on March 31, 2009, 26 RRBs were fully recapitalised with an amount of Rs 1,783 crore and one RRB has been partially recapitalised with an amount of Rs 13 crore.

RBI’s Mid-Term Review of October 2008 had proposed to allow RRBs greater flexibility in opening new branches as long as they made profits and their financials improved. The RRBs have obtained 345 licenses for opening branches in the financial year 2008-09 and have opened 316 branches in the same period.