Centre's fund infusion into RRBs to hinge on viability plan execution

Regional rural banks (RRBs) have been told to prepare a viability plan based on broad parameters such as credit expansion, business diversification, NPA reduction and improvement in corporate governance, among others. Based on this, the Centre will infuse Rs 1,361 crore in such lenders this year.

Financially-strong RRBs have been sent reminders to explore listing of their shares on the exchanges to raise capital. 

In FY22 and FY23, the Centre had decided to infuse capital to the tune of Rs 10,890 crore into RRBs. This is more than the total capital infusion of Rs 8,393 crore by all stakeholders from 1975 up to FY21.

The Centre’s share in the capital infusion is Rs 5,445 crore and the remaining would come from states and sponsor banks.

The Centre has 50 per cent stake in RRBs while sponsor banks and state governments own 35 per cent and 15 per cent in regional lenders, respectively.

Even as Rs 8,168 crore was infused in FY22, the balance support of Rs 1,361 crore would be released on “demonstrable improvement in the operational and governance reforms” according to the viability plan. The Centre has told this to the RRBs in a communication.

Any further recapitalisation will be linked to the performance of RRBs based on the monitorable parameters.

Turning around weak RRBs is the top-most priority of the Centre to push credit growth in rural areas through a wide network of these lenders. The government also plans to push its flagship insurance and social security schemes to PM Jan Dhan account holders in the next leg of financial inclusion.

Finance Minister Nirmala Sitharaman on Friday said attention needs to be given to RRBs. Such banks need more support from sponsor banks for digitisation and system upgradation, Sitharaman said.

RRBs will prepare targets based on parameters such as credit expansion, business diversification, NPA reduction, cost rationalisation, technology adoption or technology-enabled banking.

They would also include improvement in corporate governance and depend on key financial parameters such as advances, current account savings account (CASA), deposits, risk management, operations and technology as well as financial inclusion. These goals will have to be set using March 2022 as the base and targets for each year for the next three years.

A steering committee — headed by a chairman — will have to be formed to prepare the viability plan for RRBs. A monitoring committee, headed by the chief general manager of sponsor banks, will oversee the plan. The plan will then be reviewed by the Indian Banks Association (IBA), National Bank for Agriculture and Rural Development (NABARD) and the Department of Financial Services (DFS). The plan will have to be approved by the board of RRBs by September 30, and will be rolled out on October 2.

Besides, financially-sound RRBs have also been told to explore the initial public offering (IPO) route to raise resources. For this, sponsor banks have been asked to identify RRBs with minimum net worth of Rs 300 crore and minimum capital-to-risk weighted asset ratio (CRAR) of 9 per cent during the past three years.

These regional lenders must have reported an operating profit before tax of Rs 15 crore in three out of five years.

The identified RRBs must also have a return on equity (RoE) of 10 per cent and return on assets (RoA) of 0.5 per cent in the past three out of five years.

Any lender must not be under the RBI’s prompt corrective action (PCA) framework, Business Standard had reported in July.