RBI revises regulatory framework and prescription for declaring Financially Sound and Well Managed (FSWM) category UCBs

RBI on Thursday revised the regulatory framework for catogorisation of Urban Co-operative Banks (UCBs) based on net worth, CRAR, and reserve ratios and also a prescription for the declaration of Urban Cooperative Banks as Financially Sound and Well Managed (FSWM) category banks.

Based on the recommendations of the Expert Committee on Urban Co-operative Banks, the banking regulator issued detailed guidelines with respect to net worth and capital adequacy. This direction is applicable to all Primary (Urban) Co-operative Banks with effect from April 1, 2023.

The guidelines on Networth and capital adequacy are provided below:

Net Worth

UCBs shall have minimum net worth as under:

Tier 1 UCBs operating in a single district shall have a minimum net worth of ₹2 crores.

All other UCBs (of all tiers) shall have a minimum net worth of ₹5 crores.

UCBs that currently do not meet the minimum net worth requirement, as above, shall achieve the minimum net worth of ₹2 crores or ₹5 crores (as applicable) in a phased manner. Such UCBs shall achieve at least 50 percent of the applicable minimum net worth on or before March 31, 2026, and the entire stipulated minimum net worth on or before March 31, 2028.

Minimum capital to risk-weighted assets ratio (CRAR) requirement:

As per the direction of the banking regulator, UCBs shall maintain minimum CRAR as under;

Tier 1 UCBs shall maintain, as hitherto, a minimum CRAR of 9 percent of Risk Weighted Assets (RWAs) on an ongoing basis.

Tier 2 to 4 UCBs shall maintain a minimum CRAR of 12 percent of RWAs on an ongoing basis.

UCBs in Tier 2 to 4, which do not currently meet the revised CRAR of 12 percent of RWAs, shall achieve the same in a phased manner. Such UCBs shall achieve the CRAR of at least 10 percent by March 31, 2024, 11 percent by March 31, 2025, and 12 percent by March 31, 2026.

To declare UCBs as Financially Sound and Well Managed (FSWM) category banks, their capital adequacy ratio should be at least one percent above the minimum CRAR applicable to a UCB as of the reference date. Also, net non-performing Assets (NPAs) should not be more than three percent. They should have reported a Net profit for at least three out of the preceding four years. They should not have incurred a net loss in the immediately preceding year; RBI said. These norms are applicable with immediate effect.

UCBs can decide the eligibility to be classified as an FSWM under the revised criteria based on the assessed financials and findings of the RBI inspection report or audited financial statements, whichever is the latest. They may review the compliance with FSWM criteria every year at the Board level immediately after the audit of the financial statements and RBI inspection report as and when received. This process will be subject to supervisory review, RBI added.

According to new norms, the bank should not have defaulted on maintaining its Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) during the preceding year. The bank should have a sound internal control system with at least two professional directors on the board and a fully implemented core Banking Solution (CBS). Also, no monetary penalty should have been imposed on the bank for violation of RBI’s directives and guidelines during the last two financial years.

Revaluation Reserves

Revaluation reserves, arising out of change in the carrying amount of a bank’s property consequent upon its revaluation, may henceforth be reckoned as Tier 1 capital at a discount of 55 percent, subject to meeting certain conditions of RBI.