Urban Co-operative Banks would have a four-tiered regulatory structure, says RBI

20 Jul 2022 , 08:48 AM

A four-tiered regulatory framework with differentiated regulatory prescriptions will be implemented by the Reserve Bank in an effort to improve the financial soundness of the current urban cooperative banks (UCBs).

For Tier-I UCBs operating in a single district, the banking regulator has set a minimum net worth requirement of Rs2 crore, and Rs5 crore for all other UCBs (of all tiers). This is anticipated to increase the banks’ capacity to finance their growth and raise their financial resilience. In its statement, RBI said.

According to the information provided to RBI by the USBs, the majority of UCBs have already complied with the requirement as of March 2021. According to the RBI, those who don’t satisfy the criterion will be given a glide path of five years with interim milestones to help them migrate smoothly to the new standards.

All unit UCBs, salary earner UCBs (regardless of deposit size), and all other UCBs with deposits up to Rs100 crore are included in Tier 1 UCBs; Tier 2 UCBs would be those with deposits over Rs100 crore and up to Rs1,000 crore; Tier 3 UCBs would be those with deposits over Rs1,000 crore and up to Rs10,000 crore; Tier 4 UCBs would be those with deposits over Rs10,000 crore. The new regulatory prescriptions are based on the advice of the expert committee on urban cooperative banks, which former deputy governor N. S. Vishwanathan chaired and was established in February 2021.

The RBI has made the decision to offer UCBs that satisfy the updated Financially Sound and Well Managed (FSWM) standards an automatic path for branch expansion. This will allow them to open up to 10% more branches than they had at the end of the previous financial year.

In order to save on capital, it has been determined to allocate risk weights for mortgage loans only based on the Loan to Value (LTV) Ratio. According to RBI, this will be applicable to all UCB Tiers.

Under the existing Basel I-based capital adequacy regime, the minimum CRAR requirement for Tier 1 banks is maintained at the current prescription of 9 percent. It has been determined to increase the minimum capital to risk-weighted assets ratio (CRAR) for Tier 2, Tier 3, and Tier 4 UCBs to 12% while maintaining the current capital adequacy framework. This will improve their capital structure.

Since these UCBs do not retain a capital charge for operational risk and do not have a full capital charge for market risk, RBI stated that the rise in CRAR requirements is justified. According to data provided by the banks as of March 31, 2021, the majority of UCBs (1274 banks out of 1534) have CRAR levels above 12%.

Additionally, the banks that do not achieve the new CRAR will be given a glide path of three years to do so gradually. As a result, these banks must attain a CRAR of 10% by the fiscal year ending March 31, 2024, 11% by the end of March 31, 2025, and12% by the end of March 31, 2026.