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RBI stipulates four-tier regulatory structure for urban co-op banks

On Tuesday, RBI said it has decided to adopt a simple four-tiered regulatory framework with differentiated regulatory prescriptions to strengthen the financial soundness of the existing UCBs (Photo: Mint)Premium
On Tuesday, RBI said it has decided to adopt a simple four-tiered regulatory framework with differentiated regulatory prescriptions to strengthen the financial soundness of the existing UCBs (Photo: Mint)

The Reserve Bank of India (RBI) on Tuesday prescribed a four-tier regulatory structure for urban cooperative banks (UCBs), accepting the recommendation of an expert committee constituted last year to suggest changes aimed at strengthening the sector.

The Reserve Bank of India (RBI) on Tuesday prescribed a four-tier regulatory structure for urban cooperative banks (UCBs), accepting the recommendation of an expert committee constituted last year to suggest changes aimed at strengthening the sector.

In February last year, RBI constituted the committee headed by former deputy governor N S Vishwanathan to examine issues in the urban cooperative banking sector, provide a medium-term road map and suggest measures for faster resolution of UCBs, among others. After the committee submitted the report, the RBI invited comments in August 2021.

In India, only the financial cooperatives licensed to undertake banking business are regulated and supervised by RBI. The banks in the rural cooperative sector are supervised by the National Bank For Agriculture And Rural Development (NABARD), although regulated by the RBI, the committee had said in its August 2021 report.

On Tuesday, RBI said it has decided to adopt a simple four-tiered regulatory framework with differentiated regulatory prescriptions to strengthen the financial soundness of the existing UCBs. All unit UCBs and salary earners’ UCBs, irrespective of deposit size, and all other UCBs with deposits of up to 100 crore will be part of tier one. Urban cooperative banks with deposits of more than 100 crore and up to 1,000 crore will be part of tier two. Those with deposits of over 1,000 crore and up to 10,000 crore will be classified as tier three, while tier four would comprise UCBs with deposits of over 10,000 crore.

Specifically, the regulator has stipulated a minimum net worth of 2 crore for tier one UCBs operating in a single district and 5 crore for all other UCBs of all tiers.

“This is expected to strengthen the financial resilience of the banks and enhance their ability to fund their growth," RBI said.

As on 31 March 2021, most of these banks already comply with the requirement of minimum net worth, and RBI said that UCBs which do not meet the requirement would get a glide path of five years with intermediate milestones to achieve it.

RBI also retained the minimum capital adequacy ratio requirement for tier one banks at the present level of 9%.

For urban cooperative banks of all other tiers, while retaining the current capital adequacy framework, RBI said it has decided to revise the minimum capital adequacy ratio to 12% to strengthen their capital structure.

Most UCBs, 1,274 of the total 1,534, have a capital adequacy ratio of over 12% as on 31 March 2021.

RBI said that banks that do not meet the revised capital adequacy requirements could do it in tranches over three years.

ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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