REGIONAL RURAL BANKS
The Union government has asked sponsor banks to identify regional rural banks that can be listed on the exchanges based on defined criteria, reviving an earlier plan to come up with an initial public offering (IPO) of such lenders.
Sponsor banks were asked to identify such lenders Identification criteria-net worth 300 cr in last 3 years, operating profit before tax-15 cr in 3 of 5 years, CRAR above 9% in last 3 years, return on assets0.5% in 3 out of past 5 years, return in equity 10% in 3 out of past 5 years.
WHY IPO?
- The exercise is the next step to provide additional sources to RRBs to meet their regulatory capital requirement after the Reserve Bank of India in 2019, permitted such banks to issue perpetual debt instruments. The Center was also considering launching the IPO of RRB in 2019 as it was conducting a consolidation exercise.
- The government is also undertaking the exercise to restructurer RRBs to make them operationally viable
SHORTLISTING CRITERIA
- Sponsor banks are asked to identify RRBs with a minimum capital to risk-weighted asset ratio (CRAR) of 9 per cent in the past three years.
- These regional lenders must have reported an operating profit before tax of 15 cr in three out of the past five years.
- The identified RRBs must also have a return on equity of 10% and a return on assets of 0.5% in the past three out of five years.
- Any lender must not be under RBI prompt corrective action( PCA framework
- The guidelines have been finalized after seeking comments from the Department of Investment and Public Asset Management (DIPAM) and the RBI. The framework also suggests the formation of a committee to assess the capital requirements of RRBs.
- The RRBs have been asked to assess their capital requirement for at least three years considering factors such as business outlook, strategy, and risk appetite.
- This will have to be prepared by the capital planning committee-to be chaired by the RRB chairman – and prepare a proposal, including issue size, issuance of bonus shares or right issue if any.
- Another committee with representation from NABARD and the sponsor bank will decide the issue size and other offer-related proposals.
- The proposal will then be vetted by sponsor banks and be placed before the board of directors of RRB for in-principle approval.
- The Department of Financial Services will then consider it for approval, after which dialogue with state governments would be initiated on the future shareholding in RRBs
- The sponsor banks will have to hand hold RRB s for valuation of its shares, appointment of merchant bankers, share registrars, and brokers, among others, and also advise on employee stock options, private placement and issue size.
Important Terms
1) IPO: Initial public offering is the process by which a private company can go public by sale of its stocks to the general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.
Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital
2) Debt instruments: a debt instrument is a tool an entity can utilize to raise capital. It is a documented, binding obligation that provides funds to an entity in return for a promise from the entity to repay a lender or investor by the terms of a contract. Debt instrument contracts include detailed provisions on the deal such as collateral involved, the rate of interest, the schedule for interest p payments, and the timeframe to maturity if applicable Debt instruments are tools an individual, government entity, or business entity can utility obtaining capital. Debt instruments provide capital to an entity that promises to repay the capital over time. Credit cards, credit lines, loans, and bonds can all be types of debt instruments
Examples-commercial bills, treasury papers, corporate bonds, call money, and convertible debentures.
The higher the CRAR of a bank the better capitalized it is.
Why recapitalize RRBs?
- RRBs are primarily catering to the credit and banking requirements of the agriculture sector and rural areas with a focus on small and marginal farmers, micro & small enterprises, rural artisans and weaker sections of the society.
- A financially stronger and robust RRB 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).
- 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
Prompt corrective action (PCA framework):
The objective of the PCA framework is to enable supervisory intervention at an appropriate time and require the supervised entity to initiate and implement remedial measures promptly, to restore its financial health
It aims to check the problems of non-performing assets.
It is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble.
.The framework applies to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.
Payment banks and small finance banks are out of their ambit.
The new provisions will be effective from January 2022.
- Capital, Asset Quality, CRAR, NPA ratio, and Tier I Leverage Ratio will be the key areas for monitoring in the revised framework.
- However, the revised framework excludes return on assets as a parameter that may trigger action under the framework
4) Department of Investment and Public Asset Management (DIPAM)
- Department of Disinvestment was renamed as Department of Investment and Public Asset Management (DIPAM) on 14th April 2016.
- It is mandated to look into the matters relating to the management of Central Government investments in equity including disinvestment of equity in Central Public Sector Undertakings and sale of Central Government equity through offer for sale or private placement or any other model in the erstwhile Central Public Sector Undertakings.
- Public Sector Units (PSUs) for strategic sale were identified by NITI Aayog till now but from now onwards, DIPAM and NITI Aayog will jointly identify PSUs for strategic disinvestment.
Vision
Promote people’s ownership of Central Public Sector Enterprises to share in their prosperity through disinvestment.
- Efficient management of public investment in CPSEs for accelerating economic development and augmenting the Government’s resources for higher expenditure.
- They do not provide financial series to the general public. They deal with international finance for multinational corporations.
