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RBI announces 4-tiered regulatory framework for UCB

Published: 9th Dec, 2022


Recently, the Reserve Bank of India (RBI) announced a four-tiered regulatory framework for the categorization of Urban Co-operative Banks (UCBs).


  • The Reserve Bank of India had constituted the Expert Committee on Urban Co-operative Banks.
  • to examine the issues in the urban cooperative banking sector
  • to review regulatory/ supervisory approach for strengthening the sector
  • Based on the recommendations of the Expert Committee, it has been decided to adopt a four-tiered regulatory framework, as against the existing two-tiered framework, for the categorization of UCBs.
  • Commencement: The instructions shall be applicable with immediate effect.
  • Applicability: This circular applies to all Primary (Urban) Co-operative Banks.

Why it was needed?

  • The element of heterogeneity in the cooperative sector demands a tired structure to:
  • balance the spirit of mutuality and co-operation among UCBs of all sizes
  • spread their area of operation and undertake more complex business activities
  • The categorization may be used for differentiated regulatory prescriptions aimed at strengthening the financial soundness of the UCBs.

UCBs have been categorized into the following four tiers for regulatory purposes:

  • Tier 1: All unit UCBs and salary earners’ UCBs (irrespective of deposit size), and all other UCBs having deposits up to Rs 100 crore
  • Tier 2: UCBs with deposits of more than Rs 100 crore and up to Rs 1000 crore
  • Tier 3: UCBs with deposits of more than Rs 1000 crore and up to Rs 10,000 crore
  • Tier 4: UCBs with deposits of more than Rs 10,000 crore

Net worth and capital adequacy:

  • RBI also has come out with norms pertaining to the net worth and capital adequacy of these banks.
  • Tier 1 UCBs operating in a single district should have a minimum net worth of ?2 crores.
  • For all other UCBs (in Tier 1, 2, and 3) tiers), the minimum net worth should be ?5 crores.
  • The UCBs, which currently do not meet the revised minimum net worth requirement, will have to achieve the minimum net worth of ?2 crores or ?5 crores (as applicable) in a phased manner.

Minimum capital to risk-weighted assets ratio:

  • The central bank also prescribed minimum capital-to-risk weighted assets ratio requirements for UCBs.
  • Tier 1 UCBs have to maintain a minimum capital to risk-weighted assets ratio of 9 per cent of Risk Weighted Assets (RWAs) on an ongoing basis.
  • Tier 2 to 4 UCBs have to maintain a minimum capital to risk-weighted assets of 12 per cent of RWAs on an ongoing basis.

About Co-operative Banks:

  • They are distinct from commercial banks, were born out of the concept of co-operative credit societies where members from a community group together to extend loans to each other, at favorable terms.
  • Co-operative Banks are broadly classified into Urban and Rural co-operative banks based on their region of operation.
  • They are registered under the Co-operative Societies Act of the State concerned or under the Multi-State Co-operative Societies Act, 2002.
  • The Co-operative banks are governed by the:
    • Banking Regulations Act, 1949
    • Banking Laws (Co-operative Societies) Act, 1955

Issues in UCBs

  • Recent Failures: Cooperative banks in India have been struggling to survive for the last few years. The issue came into the limelight after the Punjab and Maharashtra Cooperative (PMC) bank fiasco.
  • Dual control: For years, such banks have escaped scrutiny despite failures and frauds due to dual regulation by the state registrar of societies and the RBI.
  • Sinking balance sheet: Sharper decline is seen both in terms of loans and deposits.
  • Declining number of UCBs: After liberalization in licensing policy in 1993, nearly one-third of the newly licensed ones became financially unsound within a short period.
  • Diminished share in agricultural lending: Despite their crucial role in agricultural sector, its share in total agricultural lending diminished considerably over the years from as high as 64% in 1992-93 to just 11.3 % in 2019-20.
  • Large share of rural cooperatives: They make up 65% of the total size of all cooperatives taken together.

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