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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


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