Govt revives IPO plans for RRBs, asks sponsor banks to identify candidates

The Union government has asked sponsor banks to identify regional rural banks (RRBs) that can be listed on the exchanges based on defined criteria, reviving an earlier plan to come up with initial public offering (IPO) of such lenders.

All RRBs are presently unlisted. Sponsor banks — that hold about 35 per cent in RRBs — have been asked to handhold regional lenders at all stages from identification of merchant bankers to the conclusion of IPO. While the Centre holds 50 per cent in RRBs, state governments own the remaining 15 per cent.

The exercise to nudge RRBs to come up with IPOs is seen providing liquidity and an avenue for raising capital from the market.

The exercise is the next step to provide additional sources to RRBs to meet their regulatory capital requirement after the Reserve Bank of India (RBI), in 2019, permitted such banks to issue perpetual debt instruments. The Centre was also considering launching IPOs of RRBs in 2019 after the conclusion of its consolidation exercise in the regional rural banking space that saw the number of such lenders reduce from 196 in 2005 to 43 in FY21.

The government is also undertaking the exercise to restructure RRBs in order to make them operationally viable. Post two straight years of losses in FY19 and FY20, RRBs reported a consolidated net profit of Rs 1,682 crore in FY21. Of the 43 RRBs, 30 posted a net profit in FY21. However, 17 RRBs out of 43, carried accumulated losses of Rs 8,264 crore as on March 31, 2021.

To shortlist candidates for IPO, sponsor banks have been asked to identify RRBs with minimum net worth of Rs 300 crore, and 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 Rs 15 crore in three out of five years. The identified RRBs must also have a return on equity (RoE) of 10 per cent and return on assets (RoA) of 0.5 per cent in the past three out of five years. Any lender must not be under the RBI’s prompt corrective action (PCA) framework.

Identification criteria

• Net worth: Rs 300 crore in last 3 years
• Operating profit before tax: Rs 15 crore in 3 of 5 years
• CRAR above 9% in last 3 years
• Return on assets: 0.5% in 3 out of past 5 years
• Return on equity: 10% in 3 out of past 5 years

The largest regional rural bank in India is Baroda UP Bank with a balance sheet of Rs 75,381 crore in FY22, followed by Karnataka Gramin Bank with a business of Rs 55,865 crore, and Aryavart Bank with Rs 48,649 crore as on March 2021. All these three banks do not meet the return on asset requirement of 0.5 per cent.

These guidelines have been finalised after seeking comments from the Department of Investment and Public Asset Management (DIPAM) and the RBI. The framework also suggests formation of committees to assess 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 a Capital Planning Committee — to be chaired by the RRB chairman — and prepare a proposal, including issue size, issuance of bonus shares, or rights issue if any. Another committee with representation from NABARD and 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 (DFS) will approve it, after which a dialogue with state governments would be initiated on the future shareholding in RRBs.

The sponsor banks will have to handhold RRBs for valuation of its shares, appointment of merchant bankers, share registrars, brokers, among others, and also advise on employee stock options, private placement, and issue size.