The Reserve Bank of India (RBI) on Tuesday issued final guidelines for urban cooperative banks (UCBs), accepting the NS Vishwanathan committee’s recommendation to implement a four-tiered regulatory framework, among others.
“While examining the recommendations, the committee’s vision of turning UCBs into friendly neighbourhood banks and the heterogeneity of the sector have been duly kept in view. In order to make the sector more robust and support its orderly growth, the capital requirements have been suitably recalibrated,” the RBI said.
The RBI added that a suitable glide path has been provided for a non-disruptive transformation of the sector. The measures for strengthening the sector are also being supplemented by offering more operational flexibility to strong UCBs to serve their desired role in credit intermediation.
The four-tiered regulatory framework with differentiated regulatory prescriptions is aimed at strengthening the financial soundness of the existing UCBs. The RBI has stipulated a minimum net worth of Rs 2 crore for Tier 1 UCBs operating in a single district and Rs 5 crore for all other UCBs. The category of Tier 1 UCBs includes all unit UCBs and salary earner’s UCBs as well as all other UCBs having deposits up to Rs 100 crore.
As per the data reported by UCBs as on March 31, 2021, most of them already comply with the requirement. UCBs which do not meet the requirement will be given a glide path of five years with intermediate milestones to transition to the revised norms.
The minimum capital to risk-weighted assets ratio (CRAR) requirement for Tier 1 banks was retained at 9% under the current capital adequacy framework based on Basel I. For Tier 2, Tier 3 and Tier 4 UCBs, while retaining the current capital adequacy framework, the RBI has revised the minimum CRAR to 12% so as to strengthen their capital structure.
Tier 2 UCBs are those with deposits of more than Rs 100 crore and up to Rs 1,000 crore, Tier 3 UCBs have deposits of more than Rs 1,000 crore and up to Rs 10,000 crore, while Tier 4 UCBs are those with deposits of over Rs 10,000 crore.
“The increase in CRAR requirement is reasonable as these UCBs do not have full capital charge for market risk and currently maintain no capital charge for operational risk,” the RBI said. As per data reported as on March 31, 2021, 1,274 banks out of 1,534 have CRAR more than 12%. UCBs that do not meet the revised CRAR will be given a glide path of three years for meeting the new requirements. Such banks will have to achieve a CRAR of 10% by March 31, 2024, 11% by March 31, 2025, and 12% by March 31, 2026.
Revaluation reserves will be considered for inclusion in tier-I capital for UCBs, subject to applicable discount, on the lines of scheduled commercial banks.
The RBI has activated the automatic route for branch expansion for UCBs which meet the revised financially sound and well managed (FSWM) criteria and permitted them to open new branches up to 10% of the number of branches as at the end of the previous financial year. This step is aimed at boosting growth opportunities in the sector. While the branch expansion proposals under the prior approval route will also continue to be examined, the process will be simplified to reduce the time taken for granting approvals for opening new branches.
In respect of housing loans, the central bank has decided to assign risk weights on the basis of loan to value (LTV) ratio alone, which would result in capital savings for all tiers of UCBs.
Two areas remain where the RBI feels the need for further consideration – capital augmentation under the provisions of Section 12 of the Banking Regulation Act and an umbrella organisation for the UCB sector. To examine issues concerning the first, a working group comprising representatives from the RBI, the Securities and Exchange Board of India (Sebi) and the ministry of co-operation has been constituted. The Vishwanathan committee’s recommendations regarding the umbrella organisation will be examined once the entity is fully operational, the RBI said.
RBI imposes restrictions on two co-operative banks
Customers of Karnataka-based Sri Mallikarjuna Pattana Sahakari Bank Niyamita and Maharashtra-based Nashik Zilla Girna Sahakari Bank will not be able to withdraw funds from their accounts with the RBI imposing restrictions on the lenders in wake of their deteriorating financial positions. The restrictions on Sri Mallikarjuna Pattana Sahakari Bank Niyamita, Maski (Karnataka) and Nashik Zilla Girna Sahakari Bank will remain in force for six months, as per two statements issued by the central bank.