RBI announces 4-tiered regulatory framework for UCB

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

Background

• 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.

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.