The Reserve Bank of India on 19th July 2022, has adopted a four-tiered regulatory framework for urban co-operative banks based on size of deposits of the banks and their area of operations. RBI constituted an expert committee to examine the issues in urban co-operative banking sector, provide a medium term road map, suggest measures for faster resolution of UCBs and recommend suitable regulatory/ supervisory changes for strengthening the sector.
The Committee, inter alia, recommended a four-tiered regulatory framework based on size of deposits of the banks 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. Membership in an Umbrella Organization (UO) also formed a vital part of the recommendations.
The major recommendations which have been accepted are as follows:
- 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. 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.
- The minimum CRAR requirement for Tier 1 banks is retained at the present prescription of 9% under current capital adequacy framework based on Basel I. For Tier 2, Tier 3 and Tier 4 UCBs, while retaining the current capital adequacy framework, it has been decided to revise the minimum CRAR to 12% so as to strengthen 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.
- In order to boost growth opportunities in the sector, it has been decided to introduce 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 Loan to Value (LTV) Ratio alone which would result in capital savings. This will be applicable to all Tiers of UCBs.
- The Committee has also made certain recommendations regarding Umbrella Organization for UCB Sector which will be examined once the entity is fully operational.
