RBI Expert Committee suggests setting up of Umbrella Organisation and 4-tier structure to regulate UCBs

The committee said that the UCBs have the potential to be the harbinger of economic empowerment of a large number of financially excluded persons in the country.

The expert committee on Urban Co-operative Banks was set up on February 2021 under the chairmanship of former Deputy Governor of Reserve Bank of India (RBI), NS Vishwanathan.

The expert committee on August 23 submitted its report in two parts. The first part of the report lays out the vision document for the UCBs and the second part talks about the committee’s recommendations on different aspects of strengthening and functioning of UCBs.

The central bank has invited comments from stakeholders till September 30, 2021.

The committee said that the UCBs have the potential to be the harbinger of economic empowerment of a large number of financially excluded persons in the country.

However, the committee noted that the number of borrowers of UCBs is 67 lakh, which is a large number but not in the context of a very large number of persons yet to have access to formal credit.  What has been achieved is not enough either from the standpoint of potential or need.

According to the committee, there are multiple factors resulting in sub-optimal performance of the UCB sector of which some are endogenous and some external.

Committee Recommendations

Framing Regulations to harness USP

The committee suggests that the UCB sector displays extreme heterogeneity but has lacked financial resources, inadequate skilled human resources, and unprofessional board governance. The regulatory architecture for these banks should harness their advantage of being run on cooperative principles while an imperative being created to get networked.

The committee said, “Depending on the level of capital, the UCBs should be regulated and enabled to function on the lines of a Small Finance Bank or Universal Bank as the case may be.”

Expediting Umbrella Organisation

An Umbrella Organisation (UO) was first mooted in 2006. The committee suggests it could be a game-changer and the National Federation of Urban Co-operative Banks and Credit Societies Ltd (NAFCUB) should expedite the process of setting it up.

According to the committee, UO should be financially strong, well-governed by a professional board and senior management. It also suggests that UO should provide cross liquidity and capital support to the UCBs when needed, the cloud services for facilitating IT-enabled operations by the member banks.

The committee said, “Since aggregation of IT services will be a financial inclusion enabler and can also contribute to system-stability through standardisation of the IT interface, there is justification for RBI’s financial support to the UO.”

The committee suggests the minimum capital of the UO should be Rs 300 crore with CRAR and regulatory framework akin to the largest segment of NBFCs. It added it must be evaluated for quality of internal controls as it will also play the role of an SRO further suggesting that in the long run, the UO may take up a role of a self-regulatory organisation.

Enabling larger UCBs to raise capital

According to the committee, the recent legislative changes have provided new instruments for raising capital through the issuance of shares. However, in the absence of a listing facility the securities issued by the UCBs do not have a secondary market through an exchange.

The committee suggests that a mechanism for the issue of shares at a premium and facilitating the bilateral transfer of shares through the concerned bank needs to be put in place.

The committee recommends, UCBs may be permitted to grant advances to subscribers of PCNPS perpetual non-cumulative preference shares) subject to the amount of loan being a limited multiple of the PNCPS subscribed to by the investor. The number of borrowers here shall not exceed 20 percent of the total borrowing members of the UCB.

Categorisation of UCBs

The committee said, based on the cooperativeness’ of the banks, availability of capital, and other factors, UCBs may be categorised into the following four tiers for regulatory purposes:

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

The committee says a twin indicator approach should be followed i.e. asset quality should be considered and capital measured through NNPA and CRAR. The committee says the objective of SAF should be to find a time-bound remedy to the financial stress of a bank.

Resolution of UCBs

In case of resolutions of UCBs, the committee suggests, compulsory amalgamation with another banking institution, Reconstruction through reconstitution of the capital, etc., allotment of shares/long term debt instruments of the transferee bank (acquiring bank) to the depositors/creditors/members without reducing their claims.

Continuation of TAFCUB

The committee says that the TAFCUB (Task Force for Co-operative Urban Banks) as a forum for coordination should continue and the mandatory action based on objective criterion under the SAF should be taken by RBI.

TAFCUB can recommend supervisory action in the case of Tier 1 and 2 banks.