RBI announces 4-tiered regulatory framework for UCB
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.