Capital To Risk Weighted Assets Ratio

Capital to Risk Weighted Assets Ratio

Context

The Cabinet Committee on Economic Affairs, chaired by Prime Minister has given its approval for continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs for another year beyond 2019-20, that is, up to 2020-21 for those RRBs which are unable to maintain minimum Capital to Risk weighted Assets Ratio (CRAR) of 9%, as per the regulatory norms prescribed by the Reserve Bank of India.

Benefits

A financially stronger and robust Regional Rural Banks with improved CRAR will enable them to meet the credit requirement in the rural areas.
As per RBI guidelines, the RRBs have to provide 75% of their total credit under PSL (Priority Sector Lending). RRBs are primarily catering to the credit and banking requirements of agriculture sector and rural areas with focus on small and marginal farmers, micro & small enterprises, rural artisans and weaker sections of the society. In addition, RRBs also provide lending to micro/small enterprises and small entrepreneurs in rural areas. With the recapitalization support to augment CRAR, RRBs would be able to continue their lending to these categories of borrowers under their PSL target, and thus, continue to support rural livelihoods.

About CRAR

CRAR also known as Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk.
CRAR is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
The Basel III norms stipulated a capital to risk-weighted assets of 8%.
In India, scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12% as per RBI norms.
It is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk.
RBI tracks CRAR of a bank to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements.
The higher the CRAR of a bank the better capitalized it is.

Source:PIB