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States holding up plan to recapitalize regional rural banks by Remya Nair & Anup Roy

The Union government’s plan to recapitalize 40 of the 82 regional rural banks (RRBs) is at risk as some of the state governments are either delaying or refusing to pay their share of money. Due to this, the government has only been able to recapitalize around 12 RRBs, with the stakeholders collectively infusing Rs. 300 crore.

The cabinet had approved the Rs. 2,200 crore recapitalization plan of 40 RRBs in February, with the centre’s 50% share coming to Rs. 1,100 crore.

“Capital for RRBs has to come from the central government, sponsor banks and state governments in the ratio of 50:35:15. The sponsor banks are not a problem but the state governments are not releasing their share of funds,” said a finance ministry official, who did not want to be identified. “The central government will only release the funds after the sponsor banks and the state governments bring in their share. We need to capitalize five RRBs in Rajasthan but the state government has refused to contribute (its) share.”

The 16,000 RRB branches constitute more than half the network of commercial banks in rural areas and lend more than 80% of the credit that goes to the priority sectors, according to government estimates.

Bankers and an official from the National Bank for Agriculture and Rural Development (Nabard) confirmed that the reluctance of state governments is causing delays in the recapitalization process.

“With the exception of Rajasthan, all state governments have in principle agreed to part with their share, though there are delays,” said a Nabard official.

A committee constituted under the chairmanship of Reserve Bank of India (RBI) deputy governor K.C. Chakrabarty had recommended that the capital to risk-weighted assets ratio (CRAR) for RRBs be increased to 9% by 31 March.

Of the 12 RRBs that have been capitalized, three are in Madhya Pradesh, two each in Jharkhand, Maharashtra and Jammu and Kashmir, and one each in Puducherry, Karnataka and Assam.

To address the problem of providing sufficient capital to RRBs, the finance ministry is exploring the possibility of allowing them to raise money through tier II capital. RRBs can issue bonds that the sponsor banks could then subscribe to.

“RRBs play an important role in financial inclusion and need to be capitalized. So we are looking at alternative sources of funding,” the finance ministry official said. “Commercial banks have tier I and tier II capital. Why can’t RRBs raise tier II capital, which sponsor banks can subscribe (to). This will also ensure greater participation by the sponsor banks in running RRBs.”

“Alternative routes of capital infusion could be considered but it needs to be a policy level decision at the government level,” the Nabard official said.

Considering alternative capital infusion techniques is a good move, said a chief executive of a public sector bank, the sponsor of one of the RRBs in Rajasthan. “This will reduce the dependence on state governments,” he said.

A senior official belonging to a large Mumbai-based bank said it would be interested in subscribing to RRB bonds.

“We will see about that,” said the executive director. “It looks like a good option.”

Two other bankers said there were some problem with recapitalization of RRBs and some state governments are not willing to come forward to recapitalize them.

“State governments have not recapitalized the banks after their formation, so there’s a bit of a problem,” said a senior banker with a public sector lender.

Another banker said the recapatilization issue was most acute for large RRBs. Smaller RRBs are swift in manoeuvring their credit needs and don’t expand their business much.

However, raising bonds is a short-term measure, bankers said. With increasing financial inclusion needs, RRBs will have to play a larger role and need to be capitalized, they said.

As per RBI guidelines, public sector banks need to formulate financial inclusion plans for all RRBs sponsored by them and develop an “effective monitoring mechanism so that targets assigned to the RRBs are achieved meticulously”.

The government has been pushing for greater integration of RRBs with commercial banks for seamless banking transactions. In a circular issued earlier this month, the government asked sponsor banks to treat cheques and ATM services provided by RRBs at par with their own and integrate the core banking solutions (CBS) of RRBs with their network.

An RBI panel had recommended all RRBs be moved into the CBS network by September. RBI’s annual report released on 25 August said out of 82 RRBs, CBS has been fully implemented in 45, and it is in progress in the rest of them.

All this pushes up RRB capital needs in the long run and a viable alternative is needed to recapitalize them, bankers said.

It also put the onus of performance of RRBs on the sponsor bank by stating that this should be reviewed on a quarterly basis by the sponsor banks and holding the chief of the sponsor bank accountable for the performance of the RRBs.