RBI panel proposes 4-tier regulatory framework for urban cooperative banks

A Reserve Bank of India (RBI) committee has recommended a four-tier regulatory framework for urban cooperative banks (UCBs) based on the size of deposits and their area of operations.

The differentiated regulatory approach was mainly recommended for key parameters such as net worth, capital to risk-weighted assets ratio (CRAR), branch expansion and exposure limits, according to the central bank.

The categorisation

Under the revised approach, Tier 1 category will consist of all unit and salary earner’s UCBs, irrespective of deposit size, the central bank said. This category will also include all other UCBs having deposits of up to Rs 100 crore, the regulator said. The second tier, or Tier 2, will consist of UCBs with deposits of more than Rs 100 crore and up to Rs 1,000 crore.

The third tier, or Tier 3, will be UCBs with deposits of more than Rs 1,000 crore and up to Rs 10,000 crore. The fourth tier, or Tier 4, will consist of UCBs with deposits of more than Rs 10,000 crore.

The minimum net worth of Rs 2 crore is stipulated for Tier 1 UCBs operating in a single district and Rs 5 crore for all other UCBs under all tiers.

The UCBs that do not meet the requirement will be provided a glide path of five years to achieve the minimum net worth of Rs 2 crore or Rs 5 crore in a phased manner in such a way that 50 percent of the minimum net worth is achieved in three years and remaining 50 percent in the next two, the RBI said.

The minimum CRAR requirement for Tier 1 banks is retained at the present prescription of 9 percent under the current capital adequacy framework based on Basel I. For Tier 2, 3 and 4 UCBs, while retaining the current capital adequacy framework, it has been decided to revise the minimum CRAR to 12 percent to strengthen their capital structure, the central bank has said.

The increase in CRAR requirement is “reasonable” as these UCBs do not have a full capital charge for market risk and maintain no capital charge for operational risk, the regulator said, stating that most UCBs had CRAR more than 12 percent as on March 31, 2021.

Those banks that do not meet the revised CRAR will be provided with a glide path of three years. These banks will have to achieve a CRAR of 10 percent by FY24, 11 percent by FY25 and 12 percent by FY26.

The RBI has been tightening its grip on regulated entities, specifically cooperative banks, to ensure that appropriate corporate governance practices are followed.

The bankruptcy of erstwhile Punjab & Maharashtra Cooperative Bank (PMC) had prompted the regulator to announce tighter regulations for these lenders.

In February 2021, the RBI constituted an expert committee on UCBs under the chairmanship of NS Vishwanathan, a former RBI deputy governor, to examine the issues facing the urban cooperative banking sector, provide a medium-term road map, suggest measures for faster resolution of UCBs and recommend regulatory changes for strengthening the sector.

Membership of an Umbrella Organization (UO) also formed a vital part of the recommendations, the RBI said.

Branching out

For UCBs that meet the revised financially sound and well-managed (FSWM) criteria, the RBI has decided to introduce an automatic route for branch expansion.

These UCBs can open up to 10 percent of the number of branches at the end of the previous financial year. The process to open new branches will be simplified to reduce the time taken for approvals, the regulator said.

With respect to housing loans, there will be assigned risk weights on the basis of loan to value (LTV) ratio alone, which would result in capital savings. This will be applicable to all tiers of UCBs.

Revaluation reserves will be considered for inclusion in Tier-I capital, subject to an applicable discount on the lines of scheduled commercial banks.

Whenever a UCB transits or intends to transit to a higher tier, an appropriate glide path shall be provided.

The committee has also made certain recommendations regarding umbrella organization for the UCB sector which will be examined once the entity is fully operational.