Skip to main content

When are UCBs placed under SAF? What are its implications?

We sometimes come across news headlines about some Primary (Urban) Co-operative Banks (UCBs) being placed under all-inclusive directions by Reserve Bank of India (RBI). When can all-inclusive directions be imposed under Supervisory Action Framework (SAF)? What is SAF and what does it mean for UCBs placed under SAF?

What is Supervisory Action Framework (SAF)?

Supervisory Action Framework (SAF) envisages initiation of corrective action by the Primary (Urban) Co-operative Banks (UCBs) and / or supervisory action by Reserve Bank of India (RBI) on breach of the specified thresholds (triggers) in respect of the specified financial parameters / indicators. 

To which banks is SAF applicable?

The SAF applies to all UCBs operating in India.

What parameters are considered under SAF?

For the purpose of SAF, the following 3 financial parameters / indicators are considered –

  1. Asset Quality – indicated by Net NPA Ratio
  2. Profitability – indicated by profit / loss
  3. Capital – indicated by CRAR 

How are these indicators measured?

  • Net Non-Performing Assets (NNPA) ratio – the percentage of net NPAs to net advances.
  • Capital to Risk-Weighted Asset Ratio (CRAR) – the percentage of Capital to total risk-weighted assets.

What are the thresholds for invocation of SAF?

The breach of thresholds for any of the indicators of asset quality, profitability or capital may result in invocation of SAF.

Parameter Indicator Specified Threshold
Asset Quality Net NPA Ratio Net NPAs exceed 6% of net advances
Profitability Profit / Loss Losses for 2 consecutive financial years or accumulation of losses on balance sheet
Capital CRAR CRAR falls below 9%

Although supervisory action taken will primarily be based on the criteria specified under SAF, RBI will not be precluded from taking appropriate supervisory action in case stress is noticed in other important indicators / parameters or in case of serious governance issues.

What is the data point for assessing the thresholds?

Supervisory action will normally be initiated on the basis of the financial position of UCBs as assessed during the statutory inspection. However, action may also be taken on the basis of the reported / audited financial position which may be subsequently reviewed, if necessary, on the basis of the statutory inspection findings.

What actions are taken by RBI in respect of UCBs placed under SAF?

When an UCB is placed under SAF, depending on the severity of stress, RBI may take one or more of the following actions –

Breach of threshold for Asset Quality

  1. Advising the UCB to submit a Board-approved Action Plan for reducing its Net NPAs below 6%.
  2. Advising the Board of Directors of the UCB to review the progress under the Action Plan on quarterly / monthly basis.
  3. Advising the UCB to submit the post-review progress report to RBI.
  4. Restriction on declaration / payment of dividend / donation without prior approval of RBI.
  5. Curtailment of sanction / renewal of credit facilities to sectors / segments having high proportion of NPAs / defaults.
  6. Reduction in exposure limits for fresh loans and advances.
  7. Restriction on fresh loans and advances carrying risk-weights more than 100%.

Breach of threshold for Profitability

  1. Advising the UCB to submit a Board-approved Action Plan for restoring the profitability and / or wiping out the accumulated losses.
  2. Advising the Board of Directors of the UCB to review of progress under the Action Plan on quarterly (or more frequent) basis.
  3. Prohibition on declaration / payment of dividend / donation.
  4. Restriction on incurring capital expenditure beyond a specified limit, without prior approval of RBI.
  5. Measures for reduction in interest and operating / administrative expenses.

Breach of threshold for Capital

  1. Advising the UCB to submit a Board-approved Action Plan for increasing the CRAR to 9% or above within 12 months.
  2. Advising the Board of Directors of the UCB to review the progress under the Action Plan on quarterly / monthly basis and submit the post-review progress report to RBI.
  3. Seeking a Board-approved proposal for merging the UCB with another bank or converting itself into a credit society.
  4. Prohibition on declaration / payment of dividend / donation.
  5. Restriction on incurring capital expenditure beyond a specified limit, without prior approval of RBI.
  6. Measures for reduction in interest and operating / administrative expenses.
  7. Reduction in exposure limits for fresh loans and advances.
  8. Restriction on fresh loans and advances carrying risk-weights beyond the specified limit
  9. Restriction on expansion of size of the balance sheet.
  10. Restriction on fresh borrowings, except for meeting temporary liquidity mismatches.
  11. Prohibition on sanction / disbursal of fresh loans and advances other than loans against collateral security of term deposits / NSCs / KVPs / insurance policies.
  12. Prohibition on expansion of size of the deposits.

RBI will not be precluded from taking any supervisory actions other than those indicated above, based on merits of each case.

When are all-inclusive directions imposed on UCBs?

UCBs whose financial conditions continue to severely deteriorate are brought under All Inclusive Directions (AID) under Section 35A of the Banking Regulation Act, 1949 (as applicable to co-operative societies), which entails, inter-alia complete prohibition on accepting fresh deposits and grant of fresh loans, besides restricting repayment of deposits to a specified ceiling. 

The banks under AID are monitored closely with an advise to either have robust revival plan or explore possibilities of merger / conversion to a Co-operative Society. 

The Action Plan for revival consists of action in one or more of the following areas –

  • NPA recovery
  • Capital augmentation through contribution from existing members or by making new members
  • Capital infusion by Central / State government
  • Cost cutting measures like rationalizing branch network, reducing staff expenses and other overheads, implementing VRS, etc.

In the absence of any significant development on revival / merger front and in the event of the financials continuing to deteriorate / be precarious, the bank's licence is cancelled to arrest further worsening, in the interest of the bank’s depositors.

However, notwithstanding the above, a bank is placed under direction only when there are clear indications of failure on the part of bank to quickly respond to the deterioration faced due to financial stress and there is a serious concern of deposits likely to be favourably withdrawn thereby putting common public at loss.


References

Reserve Bank of India. (2018, January 15). 'Functions and Workings of RBI'. Retrieved from https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RWF15012018_FCD40172EE58946BAA647A765DC942BD5.PDF

Reserve Bank of India. (2020, January 06). 'Supervisory Action Framework for Primary (Urban) Co-operative Banks (UCBs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11779&Mode=0


Follow at - Telegram   Instagram   LinkedIn   Twitter   Facebook

Comments

Popular Posts

Highlights of RBI Annual Report 2023-24 – Chapter 7 to 12

Reserve Bank of India (RBI) has published its annual report for the financial year 2023-24. In a series of articles, we will go through the highlights of the report. This is the fifth and last article in the series.  Chapter 7 – Public Debt Management Ways And Means Advances (WMA) limit for the Government of India (GoI) for H1:2023-24 (April to September 2023) was fixed at ₹1,50,000 crore and for H2:2023-24 (October 2023 to March 2024) was fixed at ₹50,000 crore. RBI issued an ultra-long security of 50-year tenor aggregating ₹30,000 crore to cater to the growing needs of long-term institutional players. Issuance of Sovereign Green Bonds (SGrBs) for an aggregate amount of ₹20,000 crore included maiden issuance of 30-year (₹10,000 crore) SGrB in addition to 5-year (₹5,000 crore) and 10-year (₹5,000 crore) SGrBs. A new 3-year benchmark security was introduced as part of government market borrowing programme during H1:2023-24.  The basket of products offered through the ‘Retail ...

RBI’s Monetary Policy (August 06, 2025): In A Nutshell

The bi-monthly monetary policy of Reserve Bank of India (RBI) was announced on August 06, 2025. Here are some of the highlights of the monetary policy announcement. Rates   Change Rate Policy repo rate Unchanged 5.50% Standing deposit facility (SDF) rate 5.25% Marginal standing facility (MSF) rate 5.75% Bank rate 5.75% Monetary policy stance Monetary policy stance unchanged as ‘neutral’. Domestic Economy  Real GDP growth for 2025-26 is projected at 6.5%. CPI headline inflation declined for the eighth consecutive month to a 77-month low (since January 2019) of 2.1% in June, driven primarily by a sharp decline in food inflation. Food inflation recorded its first negative print since February 2019 at (-) 0.2% in June. CPI inflation for 2025-26 is projected at 3.1%. India’s current account deficit (CAD) moderated to 0.6% of GDP in 2024-25 from 0.7% of GDP in 2023-24 due to robust services exports and strong remittances receipts despite higher merchandise trade deficit. As on Augus...

What is Financial Inclusion (FI) Index?

Achieving complete financial inclusion is one of the important goals of the nations and central banks across the world. But how do we measure the extent to which the population of the country is financially included? Well, there is an index in India for this. What is Financial Inclusion (FI) Index? The composite Financial Inclusion (FI) Index was constructed by Reserve Bank of India (RBI) in August 2021, to capture the extent of financial inclusion across the country. FI-Index has been conceptualised as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with Government and respective sectoral regulators.   What are the parameters of FI-index? The FI-index comprises of three broad parameters (comprising of 97 indicators) with different weights assigned to each parameter. Ease of Access (35%) Availability and usage of services (45%) Quality of services (20%) The 'Quality' parameters captures the qua...

Co-Lending Arrangements (CLAs)

Reserve Bank of India (RBI) has issued directions on co-lending arrangements which will replace the existing guidelines on co-lending by banks and Non-Banking Financial Companies (NBFCs) to priority sector. What is Co-Lending Arrangement (CLA)? Co-Lending Arrangement (CLA) refers to an arrangement, formalised through an ex-ante agreement, between a regulated entity (RE) which is originating the loans (‘originating RE’) and another RE which is co-lending (‘partner RE’), to jointly fund a portfolio of loans, comprising of either secured or unsecured loans, in a pre-agreed proportion, involving revenue and risk sharing. To whom shall the directions be applicable? The directions shall be applicable to CLAs entered into by the following REs – Commercial Banks (excluding Small Finance Banks, Local Area Banks and Regional Rural Banks) All-India Financial Institutions Non-Banking Financial Companies (including Housing Finance Companies) Which lending arrangements are exempt from the applicabil...

Pre-payment Charges on Loans

Reserve Bank of India (RBI) has issued directions on pre-payment charges on loans. What issues were observed by RBI during supervisory reviews? Divergent practices were observed amongst Regulated Entities (REs) with regard to levy of pre-payment charges in case of loans sanctioned to Micro and Small Enterprises (MSEs) which lead to customer grievances and disputes.  Certain REs were found to include restrictive clauses in loan contracts / agreements to deter borrowers from switching over to another lender, either for availing lower rates of interest or better terms of service. To whom shall the directions be applicable? The directions shall apply to all commercial banks (excluding payments banks), co-operative banks, Non-Banking Financial Companies (NBFCs) and All India Financial Institutions (AIFIs). To which loans shall the direction be applicable? The directions shall be applicable to all floating rate loans and advances sanctioned or renewed on or after January 01, 2026. Which ...