Four-tier differentiated regulatory prescription for Urban Cooperative Banks

The Reserve Bank of India (RBI) on Tuesday issued final guidelines for urban cooperative banks (UCBs), accepting the NS Vishwanathan committee’s recommendation to implement a four-tiered regulatory framework, among others. The four-tiered regulatory framework is based on the size of deposits of the banks and their area of operations.

The major recommendations which have been accepted are as follows:

A minimum net worth of Rs 2 crore for Tier 1 UCBs operating in a single district and Rs 5 crore for all other UCBs.

[The category of Tier 1 UCBs includes all unit UCBs and salary earner’s UCBs as well as all other UCBs having deposits up to Rs 100 crore].

The minimum capital adequacy ratio (CAR) for Urban Cooperative Banks (UCBs) with deposits above Rs 100 crore hiked to 12 per cent from the earlier floor of 9.0 per cent so as to strengthen their capital structure.

RBI has provided a glide path till March 2026 to meet the revised CRAR norm in phases for UCBs that don’t meet it currently. Accordingly, these banks will have to achieve a CRAR of 10% by the financial year ended March 31, 2024, 11% by March 31, 2025; and 12% by March 31, 2026.

It has been decided to introduce an automatic route for branch expansion to UCBs which meet the revised Financially Sound and Well Managed (FSWM) criteria and permit them to open new branches up to 10% of the number of branches as at the end of the previous financial year. While the branch expansion proposals under the prior approval route will also continue to be examined as hitherto, the process will be simplified to reduce the time taken for granting approvals for opening new branches.

In respect of housing loans, it has been decided to assign the risk weights on the basis of the 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.

In order to examine the issues concerning recommendation for capital augmentation under the provisions of Section 12 of the Banking Regulation Act, 1949 (as amended) (as applicable to co-operative societies), a Working Group comprising the representatives from RBI, SEBI, and Ministry of Co-operation, Government of India has been constituted.

The Committee has also made certain recommendations regarding Umbrella Organization for UCB Sector which will be examined once the entity is fully operational.