33 regional rural banks (RRBs) of the country are to receive capital infusion from the government so as to increase their capital risk weighted assets (CRAR) ratio to 9% by 2012.
CRAR ratio is an indicative of a bank's strengths in terms of capital. The finance ministry had been planning to provide capital infusion to these banks since the last six months. The plan finally got validation during the budget presentation on 26th Feb 2010. The exact size of the assistance to e provided has not been disclosed as yet.
The Finance Minister stressed that RRBs play a very important role in credit provision to the rural economy. Since Indian economy comprises of rural part as a major chunk, thus the need financing these RRBs validates itself.
India has 84 RRBs in totality out of which 33 qualify for the recapitalization process. The CRAR has been considered as a qualifying criterion. These 33 banks have CRAR less than 7% as on March 2008. 22 banks have CRAR less than 1%.
According to NABARD Chairman UC Sarangi, the capital support may not take place by March 2010, as was indicated by finance ministry in the draft. Fresh capital infusion will help RRBs expand the credit flow to poorer sections, especially the farm sector Mr. Sarangi said.
The last time capital was infused into these RRBs was in 2006-07. The government had then infused fresh capital into 27 RRBs which were having negative net worth to enable them to reach the positive CRAR level.
The package then received was of Rs 1,796 crore.