CRAR and Bank Capitalization

Subject: Economy

Context:

Despite a large part of the Atmanirbhar Bharat package relying on aggressive lending by banks, the government does not see an immediate need for equity infusion in the public sector banks (PSBs), as their capital to risk weighted asset ratio (CRAR) is expected to stay above the regulatory requirements

Concept:

CRAR

• Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assetsand current liabilities.
• It 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%.
• However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.

Recapitalization

• Bank recapitalization, means infusing more capital in state-run banks so that they meet the capital adequacy norms.
• The government, using different instruments, infuses capital into banks facing shortage of capital.
• In compliance with RBI guidelines which are based on Basel norms requiring banks to maintain certain amount of capital reserves, the government, which is also the biggest shareholder, infuses capital in banks by either buying new shares or by issuing bonds.
• As the state-run banks were struggling to deal with burgeoning NPAs, the government from time-to-time kept on announcing recapitalization to keep the banks afloat.