In a bid to facilitate raising of capital funds (tier-I and tier- II) by UCBs for the purpose of compliance with the prescribed capital adequacy norms, the Reserve Bank of India (RBI) has decided to allow more instruments for the urban cooperative banks (UCBS). The central bank has announced this after examining the recommendations of the working group constituted under the chairmanship of N.S.Vishwanathan to examine the issues concerning raising of capital by UCBs and identifying alternate instruments / avenues for augmenting their capital funds.

The working group had members drawn from the urban co-operative banking sector and state governments. The group submitted its report in November 2006.

The UCBs are allowed to raise capital through all kinds of preference shares including perpetual non-cumulativeppreference shares (PNCPS), perpetual cumulative preference shares (PCPS), redeemable non-Cumulative preference shares (RNCPS), redeemable cumulative preference shares (RCPS)

While PNCPS would be eligible to be treated as Tier I capital, PCPS, RNCPS and RCPS would be eligible to be treated as tier-II capital. UCBs, however, are not permitted to subscribe to the preference shares of other UCBs.

The UCBs may be permitted to raise term deposits for a minimum period of not less than 5 years, which will be eligible to be treated as tier-II capital. As per the current regulatory prescriptions, borrowings from UCBs are linked to shareholdings of the borrowing members. At present, the shareholding requirement is 2.5% for secured borrowings and 5% for unsecured borrowings.

Taking into account the recommendation of the working group and the feedback received in this regard, it has been decided that the extant share linking norm may be applicable for member?s shareholdings upto the limit of 5% of the total paid up share capital of the bank Where a member is already holding 5% of the total paid up share capital of an UCB, it would not be necessary for him to subscribe to any additional share capital on account of the application of the extant share linking norms.

RBI has now decided that Tier II capital may further be divided into upper and lower tiers. PCPS, RNCPS and RCPS would be treated as upper Tier II capital. Long Term Deposits would be treated as lower Tier II capital. PNCPS should not exceed 20 % of Tier I capital (excluding PNCPS). Long term deposit should not exceed 50 % of Tier I capital and that total tier-II should not exceed tier-I capital.