The Reserve Bank of India (“RBI”) vide Press Release: 2022-2023/561 dated July 19, 2022 has released the Revised Regulatory Framework for Urban Co-operative Banks (“UCBs”) (“Revised Framework”).

Background:

With a view to comprehensively decipher problems and prospects of UCBs, the RBI in February 2021 constituted an Expert Committee (“Committee”) under the chairpersonship of RBI’s ex-Deputy Governor Shri N. S. Vishwanathan. 

The Committee, after consulting stakeholders and members of public, recommended several changes in respect to, inter-alia, the regulatory framework, capital requirement, Capital to Risk-weighted Assets Ratio (“CRAR”), branch expansion and exposure limits.

Key Aspects of Revised Framework:

Following is a list of key recommendations accepted by RBI in the Revised Framework:

• Regulatory Framework: With the aim to strengthen the financial soundness of existing UCBs, a four-tier regulatory framework, depicted as follows, has been prescribed:

a) Tier 1 will consist of all unit UCBs, salary earner’s UCBs irrespective of deposit size, and all other UCBs having deposits up to Rs.100 crore; 

b) Tier 2 will consist of UCBs with deposits of more than Rs. 100 crore and upto Rs.1000 crore;

c) Tier 3 will consist of UCBs with deposits of more than Rs. 1000 crore and upto Rs.10,000 crore;

d) Tier 4 will consist of deposits of more than Rs.10,000 crore.

• Minimum Net Worth: A minimum pecuniary threshold related to net worth has been stipulated as Rs.2 crore for Tier 1 UCBs operating in single district and Rs.5 crore for all other tiers of UCBs. The UCBs have been provided a timeline of five years to comply with these norms in a phased manner in such a way that 50% of minimum net worth is achieved in the 1st three years and remaining 50% in next two years. 
• Capital Adequacy Ratio: The Tier 1 UCBs are required to maintain a minimum CRAR of 9%. For Tier 2, Tier 3 and Tier 4 UCBs, the minimum CRAR has been set at 12%. 

    UCBs are required to comply with the aforementioned CRAR requirement in a phased manner within a period of three years.

• Branch Expansion: The UCBs which meet revised financially sound and well managed (FSWM) criteria are now allowed to open new branches up to 10% of the number of branches as at the end of the previous financial year through automatic route.
• Sectoral Exposure Ceilings: All UCBs are required to assign the risk weights based on Loan to Value Ratio only in respect of housing loans. The other exposure and loan limits for UCBs would continue. 
• Umbrella Organization: The RBI has given regulatory clearance for the creation of an umbrella organization with a paid-up capital of Rs. 300 crore in the UCB sector. As a result, National Cooperative Finance and Development Corporation Limited has been established and is now accepting members from UCBs.
• Capital augmentation: A working Group comprising the representatives from RBI, Securities and Exchange Board of India (“SEBI”) and Ministry of Co-operation, Government of India has been constituted for examining the issues concerning recommendation for capital augmentation under the provisions of amended Section 12 of the Banking Regulation Act, 1949.

Please find a copy of the Press Release, here.

This update has been contributed by Ayush Chaturvedi (Associate) and Vallari Dronamraju (Associate).

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