Experts say the Reserve Bank of India’s move to provide rural cooperative banks (RCBs) with new fundraising choices will help them improve their capital ratios and increase rural lending. Several bankers and experts told Moneycontrol that better access to capital will allow BCRs to develop new products and expand their digital infrastructure to meet changing customer demands and expectations.
These banks must also make certain prominent disclosures, particularly those indicating that the instruments through which the funds are raised are not fixed deposits. . The short-term cooperative credit structure is divided into three levels: Primary Agricultural Credit Societies (PACS) at the village level, Central Cooperative Banks at the district level (DCCB) and State Cooperative Banks at the district level. State (StCB). The government, together with RBI, is working to increase the flow of credit to agriculture and other priority sectors.
RCBs can generate funds by selling preferred shares and debt securities to people in their region of operation or to existing shareholders, according to a notice issued by the RBI on April 19. Such fundraising could help rural banks strengthen their capital adequacy ratio, an indicator of soundness expressed as the ratio of capital to risk-weighted assets. Lenders must meet certain conditions, such as not using their fixed deposit rate as a benchmark, so that potential investors are well aware of the risk involved in buying new instruments.
“By bringing this notification, the RBI has rightly allowed these lenders to expand their liability. This is an enabling provision that gives these lenders greater access to funding from other sources,” said a senior official at a public financial institution, speaking on condition of anonymity. “In the 1960s and 1970s, these banks extended 60 to 70 percent of credit to the agricultural sector, and now that share has dropped drastically to 15 percent,” the official said. “These players are not as skilled as public sector banks and lag far behind smaller financial banks in terms of digital infrastructure. Better access to finance will also help close this gap.
Resurgent India is a Gurugram-based investment bank focusing on Micro, Small and Medium Enterprises (MSMEs), Corporates and Banks in the areas of raising funds through the sale of shares and instruments of debt. Experts said the regulator may need more clarification to gauge the market’s response and that more clarity will emerge once these banks tap into the debt market.
Experts said the BCRs can use the additional funds to play the role of rural economic recovery in the country by boosting credit growth. With better access to funds, BCRs are likely to lend to their clients at lower rates. “The latest RBI regulations will act as a great enabler to provide more credit to rural areas on better terms and at competitive rates, which in turn will support faster development of the rural economy,” said Jyoti Prakash Gadia, Managing Director of Resurgent India.
“The call option mentioned for raising additional debt, through the capital market, is for a minimum of 10 years, compared to five years for regular commercial banks. This means that these banks will have to continue to insure servicing their debt for a minimum period of 10 years, which can sometimes be difficult,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap, a Mumbai-based debt advisory firm. was mentioned in the RBI circular, Srinivasan said, adding that the investor base might be limited at first.
Moreover, dual regulation could also be difficult, experts said. PACs have strong political patronage, which can also pave the way for corruption and cross-party ties if access to more funds becomes easy. “For that, it might be prudent for the RBI to take them completely under its control,” said another senior banker at a public bank.
Summary of news:
- The RBI’s decision to allow the new fundraising options to rural cooperative banks will help them improve their capital ratios and expand their lending.
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