State-run lenders will likely approach the central bank with a proposal that the credit risk weight requirement for regional rural banks (RRBs) for advances against gold ornaments and individual housing loans be brought on a par with that of public sector banks, banking sources told FE.
Currently, commercial banks, including the PSBs, assign greater risk weight to loans against gold than RRBs. However, their risk weight for individual housing loans is lower in certain categories than that of RRBs.
The risk weight is assigned to each asset held by a bank in accordance with the guidelines issued by the Reserve Bank of India (RBI). The weight is typically based on the element of risks involved in holding it by the bank. Risk-weighted assets are used to gauge the minimum amount of capital that banks must hold in order to reduce the chances of insolvency.
As the government intends to further strengthen the RRBs in a time-bound manner, given their crucial role in boosting credit flow in rural India, it “makes sense to align their credit risk weight with that of PSBs and other commercial banks”, said one of the sources. The Indian Banks Association may make such a request to the RBI, he added.
In case of individual housing loans up to Rs 75 lakh, banks have to assign a risk weight of 35-50%, depending on the loan-to-value ratio. Loans beyond Rs 75 lakh attract a risk weight of 50%. However, RRBs are supposed to assign a risk weight of 50% for such loans up to Rs 75 lakh, beyond which a weight of 75% is warranted.
While commercial banks have to assign risk weight of 125% for loans against gold, RRBs have to keep it at 50% for loans up to Rs 1 lakh and 100% beyond this limit, the source said.
In recent months, the finance ministry has stepped up efforts to modernise the RRBs, hoping to better utilise their reach within rural India for credit disbursement. Already, the ministry has issued guidelines to allow RRBs to list on the bourses and raise funds if they have net worth of at least Rs 300 crore over the previous three years and if they fulfil certain other criteria.
According to the draft guidelines issued by the finance ministry, such banks must also have a capital adequacy of 9% in each of the previous three years and recorded operating profit of at least Rs 15 crore for a minimum of three out of the preceding five years.
There should not be any accumulated loss and the RRB should have offered at least 10% return on equity in three out of the previous five years, according to the norms.
Currently, the country has 43 RRBs that are backed by 12 state-run banks (sponsor banks). Usually, the central government holds 50% in RRBs, while the relevant sponsor banks and state governments hold 35% and 15%, respectively.
The RRBs have 283 million depositors and 26 million borrowers. About 30 of the 43 RRBs collectively earned a net profit of Rs 1,682 crore in FY21.
RRBs, historically, have witnessed higher gross non-performing assets ratio than commercial banks. As of March 2021, while the GNPA ratio of commercial banks hit 7.3% of their advances, that of RRBs turned out to be higher at 9.4%, showed the RBI data.