India’s urban co-operative banks will have to abide by a new four-tiered regulatory framework, announced the Reserve Bank of India on 19 July.
The new system is based on recommendations from a committee headed by former RBI deputy governor N S Vishwanathan, which looked for ways to strengthen the sector.
It will allow differentiation between different co-operative banks based on deposits, net worth, capital to risk-weighted assets ratio (CRAR), branch expansion and exposure limits.
The committee also recommended a new umbrella organisation for the sector – the National Cooperative Finance and Development Corporation Limited (NCFDC), which has already been incorporated and is now enrolling members.
“It has been decided to adopt a simple four-tiered regulatory framework with differentiated regulatory prescriptions aimed at strengthening the financial soundness of the existing UCBs,” said a statement from RBI. “Specifically, a minimum net worth of ₹2 crore for Tier 1 UCBs operating in single district and ₹5 crore for all other UCBs (of all tiers) has been stipulated.
“This is expected to strengthen the financial resilience of the banks and enhance their ability to fund their growth. As per the data reported by UCBs as on March 31, 2021, most of the banks already comply with the requirement. The UCBs which do not meet the requirement, will be provided a glide path of five years with intermediate milestones to facilitate smooth transition to revised norms.”
The regulator also announced that the CRAR requirement for Tier 1 banks would be retained at the present prescription of 9% under current capital adequacy framework based on Basel I.
Meanwhile, the minimum CRAR was revised to 12% for Tier 2, Tier 3 and Tier 4 UCBs, a move the bank said was aimed at strengthening their capital structure.
“The increase in CRAR requirement is reasonable as these UCBs do not have full capital charge for market risk and currently maintain no capital charge for operational risk”, it said, adding that 1,274 banks out of 1,534 of UCBs had CRAR more than 12%, as per March 2021 data.
Another changes the introduction of an automatic route for branch expansion to UCBs that meet the revised financially sound and well managed (FSWM) criteria. RBI will 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,” said RBI.
With regards to housing loans, RBI decided to assign the 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.
Earlier in July RBI fined three UCBs for deficiencies in regulatory compliance.