The draft report of the Reserve Bank of India's (RBI) internal working group on regional rural banks (RRB) has recommended a capital infusion of around Rs 3,050 crore in order to wipe out accumulated losses, provide for non-performing assets, and maintain 5 per cent capital to risk weighted asset ratio (CRAR). |
The capital to be infused is to be shared by the stakeholders (i.e., the central government, state governments and public sector banks) as per the respective proportions. |
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RRBs could be advised to maintain a level of capital adequacy of 5 per cent. About 100 RRBs fall short of 5 per cent CRAR. Over time, they may be expected to align themselves with the Basel I norms. |
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RRBs having CRAR more than 5 per cent and making profits in the last 3 years and having no accumulated loss may be allowed to raise funds by way of instruments in the nature of tier II capital also, suggested the report. |
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The group has suggested that RRBs be regulated and supervised by the RBI and not the National Bank for Agriculture and Rural Development (Nabard). |
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"There could be situations where potential conflicts of interest may arise between the supervisory and developmental functions of Nabard", said the report. |
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The report recommended a change in sponsor banks in some cases which will help in improving the performance of RRBs. |
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For this, new banks-both public and private sector banks- could be considered to become sponsor banks of RRBs. But the RRBs Act, 1976 does not specifically provide for the transfer of sponsorship from one sponsor bank to another. |
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According to the report a change in sponsorship may inter alia improve the competitiveness, work culture, management and efficiency of the concerned RRBs. |
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For those RRBs which do not turn around within a specified time limit, say 3 years, an exit route may be considered subject to extant legal provisions. The fact that there could be an exit route may be made explicit, said the report. |
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Chairmen of RRBs could be appointed from the open market through a transparent process, said the report. Currently chairmen are appointed from the sponsor bank leading to several potential areas of conflicts of interest. |
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The boards of RRBs could be broad-based through inducting professionals such as agricultural experts, bankers, management experts, etc. |
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RRBs may be encouraged to use new instruments like certificates of deposit / Inter-bank participation certificates etc. and increase their non-interest income, by distributing mutual fund/insurance policies. The branch network could be rationalised. |
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