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What is revised regulatory framework for Urban Co-operative Banks (UCBs)?

Reserve Bank of India (RBI) has revised the regulatory framework for Urban Co-operative Banks (UCBs) based on the recommendations of the Expert Committee on Urban Co-operative Banks.

Expert Committee on Urban Co-operative Banks 

Reserve Bank of India (RBI) had constituted the Expert Committee on Urban Co-operative Banks on February 15, 2021, under the Chairmanship of Shri N. S. Vishwanathan, former Deputy Governor, RBI.

The Committee was constituted to examine the issues in urban co-operative banking sector, provide a medium-term road map, suggest measures for faster resolution of UCBs and recommend suitable regulatory / supervisory changes for strengthening the sector by leveraging the amendments to Banking Regulation Act, 1949 (As Applicable to Cooperative Societies). 

What were the recommendations of the Committee?

The Committee had a vision of turning UCBs into friendly neighborhood banks. Some of the important recommendations of the Committee were –

  1. Four-tiered regulatory framework based on size of deposits of the banks and their area of operations.
  2. Differentiated regulatory approach for key parameters such as net worth, Capital to Risk-weighted Assets Ratio (CRAR), branch expansion and exposure limits. 
  3. Membership in an Umbrella Organization (UO).

Which of the Committee’s recommendations have been accepted by RBI?

Categorization of UCBs (recommendation accepted)

Category of UCBs UCBs in the category
Tier 1 All unit UCBs and salary earner’s UCBs (irrespective of deposit size), and all other UCBs having deposits up to ₹100 crore
Tier 2 UCBs with deposits more than ₹100 crore and up to ₹1000 crore
Tier 3 UCBs with deposits more than ₹1000 crore and up to ₹10,000 crore
Tier 4 UCBs with deposits more than ₹10,000 crore

Minimum net worth (recommendation accepted with modification)

Category of UCBs Minimum net worth requirement
Tier 1 UCBs operating in single district ₹2 crore
All other UCBs (of all tiers) ₹5 crore

Those UCBs which do not meet the requirement, will be provided a glide path of 5 years to achieve the minimum net worth in a phased manner in such a way that 50% of minimum net worth is achieved in 3 years and remaining 50% in next 2 years.

As per the data reported by UCBs as on March 31, 2021, most of the banks already comply with the requirement.

Minimum capital to risk weighted assets ratio (CRAR) requirement (recommendation accepted with modification)

Category of UCBs Minimum CRAR requirement
Tier 1 Retained at 9%
Tier 2, Tier 3, and Tier 4 Revised to 12%
To be achieved in a phased manner –
10% by March 31, 2024
11% by March 31, 2025
12% by March 31, 2026

As per the data reported by the banks as on March 31, 2021, most of UCBs have CRAR more than 12% (1274 banks out of 1534). 

Branch Expansion (recommendation accepted with modification)

Automatic route is being introduced for branch expansion in the area of operation to those UCBs in all Tiers (except Salary Earners’ Banks) which meet revised Financially Sound and Well Managed (FSWM) criteria and they will be permitted to open new branches up to 10% of the number of branches at the end of previous financial year subject to minimum of one branch and a maximum of 5 branches.

Apart from the above, the branch expansion through the approval route under the existing framework will also continue. However, the process of granting approvals will be simplified to reduce the time taken for opening new branches.

LTV ratios for Housing Loan (recommendation partially accepted)

In respect of housing loans, the risk weights will be assigned on the basis of Loan to Value (LTV) Ratio alone which would result in capital savings. This will be applicable to all Tiers of UCBs.

Revaluation Reserves (recommendation accepted)

Revaluation Reserves will be considered for inclusion in Tier-I capital subject to applicable discount on the lines of scheduled commercial banks.

Umbrella Organization for UCB Sector (recommendation under further examination)

RBI has accorded regulatory approval for setting up of an Umbrella Organisation (UO) for UCB sector which will have a paid-up capital of ₹300 crore. Accordingly, National Cooperative Finance and Development Corporation Limited (NCFDC) has been incorporated, which is in the process of enrolling UCBs as members.

The Committee has also made certain recommendations regarding Umbrella Organization for UCB Sector which will be examined once the entity is fully operational.

Capital augmentation under Banking Regulation Act, 1949 (recommendation under further examination)

In order to examine the issues concerning recommendation for capital augmentation under the provisions of Section 12 of the Banking Regulation Act, 1949 (as applicable to co-operative societies), a Working Group comprising the representatives from RBI, Securities and Exchange Board of India (SEBI) and Ministry of Co-operation, Government of India has been constituted.


References

Reserve Bank of India. (2021, August 23). 'Report of the Expert Committee on Urban Co-operative Banks'. Retrieved from https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1185

Reserve Bank of India. (2022, July 19). 'List of recommendations1 of “Expert Committee on Urban Co-operative Banks”'. Retrieved from https://rbidocs.rbi.org.in/rdocs/content/pdfs/RRF19072022_A.pdf

Reserve Bank of India. (2022, July 19). 'Revised Regulatory Framework for Urban Co-operative Banks (UCBs)'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54059


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