A panel appointed by the RBI submits a report on urban cooperative banks (UCBs). Here’s what it suggests

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Today, the central bank said the committee has submitted its report, and a copy of it has been placed on the RBI website for comments from stakeholders and members of the public.

The committee suggested a four-tier structure for urban cooperative banks (UCBs) based on deposits. It also prescribed different capital adequacy and regulatory standards for them depending on their size.

UCBs can be divided into four categories – Tier-1 with deposits up to ??100 crores; Level 2 with deposits between ??100- ??1000 crore, level 3 with deposits between ??1000 crore to ??10,000 and Tier-4 with deposits of more than ??10,000 crore, the panel said.

The minimum ratio of capital to risk-weighted assets (CRAR) for cooperative banks could vary from 9% to 15% and for level 4 UCBs, the standards prescribed by Basel III.

The committee also prescribed separate limits for home loans, loans against gold ornaments and unsecured loans for the different categories of UCBs.

Regarding UCB consolidation, the panel said in the reports that the central bank should be broadly neutral on voluntary consolidation, except when suggested as a supervisory measure. “However, the RBI should not hesitate to use the compulsory merger route to resolve UCBs that do not meet prudential requirements after giving them the opportunity to come up with voluntary solutions,” he said.

The minimum capital stipulation provides an integrated size to a UCB.

In its recommendations on the resolution of UCBs, the committee said that under the Banking Regulation Act (BR), the RBI can prepare a plan for the compulsory merger or reconstruction of UCBs, like banking companies. .

This can be used when the required voluntary actions are not available or do not lead to the desired results.

The Supervisory Action Framework (SAF), the panel said, should follow a two-indicator approach – it should only consider the quality of assets and capital measured through NNPA and CRAR – instead of ‘triple indicators currently.

The goal of FAS should be to find a time-bound solution to a bank’s financial stress. If a UCB remains subject to more stringent SAF steps for an extended period of time, it could have a negative effect on its operations and could further erode its financial position, he said.

The panel further suggested that changes to the BR Act allowing the RBI to report certain securities issued by UCBs as covered by the Securities Contract Regulation Act in order to facilitate their listing and trading on a recognized exchange could. be made.

Until then, the RBI may consider allowing Tier 3 and 4 banks with the necessary technology and means to issue premium shares to people residing in their areas of operation under certain conditions, said. the panel.

Due to the lack of the desired level of regulatory comfort due to structural problems including “capital” and deficiencies in the statutory framework, the regulatory policies of cooperative banks have been restrictive with regard to their commercial operations, which, for some measure, has been one of the reasons affecting their growth.

With the enactment of the Banking Regulation (Amendment) Act 2020, regulatory gaps have been addressed to a very large extent.

According to the report, the committee noted that the UCB sector has been under pressure for some time. He considered that given the importance of the sector in promoting financial inclusion and given the large number of its clientele, “it is imperative that the strategies adopted for the regulation of the sector be thoroughly reviewed in order to improve its resilience and provide an environment conducive to its sustainable and stable growth in the medium term ”.

In the view of the committee, while it was possible that the structural factors resulting from the cooperative character underlying UCBs could still pose some challenges, the changes to the Banking Regulation Act largely fill the gaps in the banking system. legislative framework.

The panel suggested that recent changes to the BR law should be complemented by legislative empowerment for the listing of certain securities issued by UCBs.

Regarding home loans, the panel said that the maximum limit for home loans can be prescribed as a percentage of Tier 1 capital, subject to the monetary cap prescribed by the RBI for Tier 1 UCBs (but above the current ceiling) and the respective approved board of directors. ceiling for level 2 UCBs.

For Category 2 UCBs, home loan risk weighting may be prescribed based on loan size and loan-to-value ratio (LTV), in accordance with SCBs.

The panel also made recommendations regarding the loan against gold ornaments with the option of repayment in fine.

He also said that the umbrella organization (UO) should play a crucial role in strengthening the sector.

For this it must be a financially sound organization with adequate capital and a viable business plan. The minimum capital for the OU must be ??300 crore with CRAR and a regulatory framework similar to NBFC’s larger segment, the panel said.

In addition, in the long term, the OU could act as a self-regulatory body (SRO) for smaller UCBs.

The report indicated that there were two main sources of constraints due to which the sector underperformed.

The first set of factors is internal to the sector. Many UCBs are small and lack the capacity (financial or human resources) or inclination to provide technology-based financial services.

The second set of constraints is external to banks. These emanate from the rather restrictive regulatory environment in which they had to operate.

It was suggested that the licensing of new UCBs should be immediately opened. There are already over 1,500 UCBs. The committee suggested that existing UCBs could be allowed to expand their footprint.

The number of UCB borrowers is estimated at 67 lakh.

In February of this year, the RBI had established the Expert Committee on Primary (Urban) Cooperative Banks under the chairmanship of NS Vishwanathan, former Deputy Governor of the RBI.

(With PTI entries)

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