Context: Based on the recommendations of N. S. Vishwanathan Committee, Reserve Bank of India (RBI) has recently released the Revised Regulatory Framework for Urban Co-operative Banks (UCBs).

Key features of the new regulatory framework for UCBs

Four-tiered regulatory framework

• Adoption of a simple four-tiered regulatory framework with differentiated regulatory approach to strengthen the financial soundness of the existing UCBs.

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.

Categorisation of 4 -tiers

Tier 1:

• Net worth: Rs 2 Cr for UCBs operating in single districts else Rs. 5 Cr;

• CRAR: 9% under current capital adequacy framework based on Basel-1 rules;

Tier 2:

• Net worth: Rs. 5 Cr;

• CRAR: 12%;

Tier 3:

• Net worth: Rs. 5 Cr;

• CRAR: 12%;

Tier 4

• Net worth: Rs. 5 Cr;

• CRAR: 12%;

Banks that do not meet the revised CRAR will be provided with a three-year performance record.

• These banks will need to achieve CRAR of 10% by FY24, 11% by FY25 and 12% by FY26.

Introduction of automatic route for branch expansion

• RBI will offer automated route for branch expansion to UCBs which meet the revised Financially Sound and Well Managed (FSWM) criteria.

• Under this, UCBs can open new branches up to 10% of the number of branches as at the end of the previous financial year. 

Housing loans

• RBI will assign the risk weights on the basis of loan-to-value (LTV) ratio alone which would result in capital savings. (Applicable to all tiers)

Capital-To-Risk Weighted Assets Ratio (CRAR)/Capital Adequacy Ratio (CAR):

• It measures a bank's financial stability by measuring its available capital as a percentage of its risk-weighted credit exposure.

• Used to determine the minimum amount of capital that must be held to reduce the risk of bankruptcy.

• The purpose of the ratio is to help banks protect their depositors and promote financial health.

• It is expressed as a percentage. 

• Under Basel III norm, the current minimum requirement of the CRAR is 10.5%.

Formula:

• Capital-To-Risk Weighted Assets = (Tier 1 Capital + Tier 2 Capital / Risk-Weighted Assets)

Tier 1 Capital: core capital of a bank.

• It needs to absorb losses without stopping operations.

• It includes equity and disclosed reserves.

Tier 2 Capital: supplementary capital of a bank.

• It is less secure than Tier 1 Capital.

• It includes undisclosed reserves and subordinated debt.

Urban Co-operative Banks (UCBs)

• It refers to primary cooperative banks located in urban and semi-urban areas.

• The earliest known mutual aid society in India was the "Anyonya Sahakari Mandali", organized in 1889 in the former princely state of Baroda.

• The Cooperative banks are governed by the Banking Regulations Act, 1949 and Banking Laws (Cooperative Societies) Act, 1955.

As per Banking Regulation Act, 1949, a UCB (or primary co-operative bank) means a co-operative society, other than a primary agricultural credit society, whose,

• i) Primary business is a transaction of banking business.

• ii) Paid-up share capital and reserves of which are not less than 1 lakh rupees.

• They are registered under the Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, 2002.

Features

• These banks are owned and controlled by the members;

• A significant portion of annual profits or surpluses is usually directed towards the creation of reserves;

• Played a significant role in the financial inclusion of unbanked rural masses.

Categorization of UCBs

• UCB are categorized in two Tiers based on branch networks, area of operation and the level of deposits.

Tier I UCBs:

• Banks having deposits below Rs.100 crore operating in a single district,

• Banks with deposits below Rs.100 crore operating in more than one district.

However,

• branches of such banks should be in contiguous districts and

• deposits and advances of branches in one district separately should constitute at least 95% of the total deposits and advances respectively of the bank.

• Banks with deposits below Rs.100 crore, whose branches were originally in a single district but subsequently, became multi-district due to reorganisation of the district

• All other UCBs are categorized as Tier – II.

Challenges

• Changes in the financial industry and the evolution of microfinance, FinTech companies, payment gateways, social platforms, e-commerce companies and NBFCs are challenging the continued existence of UCBs.

• Management collapses caused people to gradually lose confidence in cooperative banks.

• Agricultural loans have fallen sharply over the years, from 64% in 1992-1993 to just 11.3% in 2019-20.

• After the 1993 license policy liberalization, almost a third of newly licensed became financially unstable.

• In 2005, weaker ones were merged by RBI.

• Loss of bilateral control and placing all UCBs and multi-state cooperatives under RBI control.