4-Tier Structure for Urban Cooperative Banks

Context: Recently, Reserve Bank-appointed committee has suggested a four-tier structure for the urban cooperative banks (UCBs) depending upon the deposits and prescribed different capital adequacy and regulatory norms for them based on their sizes.
Background

• The expert committee on Urban Co-operative Banks was set up on February 2021 under the chairmanship of former Deputy Governor of Reserve Bank of India (RBI), NS Vishwanathan.
• The expert committee on August 23 submitted its report in two parts. The first part of the report lays out the vision document for the UCBs and the second part talks about the committee’s recommendations on different aspects of strengthening and functioning of UCBs.

Commettiee Recommendations
The panel suggested that UCBs can be split into four categories: 

1. Tier 1 with deposits up to Rs 100 crore; 
2. Tier 2 with deposits of Rs 100-1,000 crore; 
3. Tier 3 with deposits of Rs 1,000-10,000 crore; and 
4. Tier 4 with deposits of over Rs 10,000 crore.

Framing Regulations to harness USP

• The committee suggests that the UCB sector displays extreme heterogeneity but has lacked financial resources, inadequate skilled human resources, and unprofessional board governance. 
• The regulatory architecture for these banks should harness their advantage of being run on cooperative principles while an imperative being created to get networked.
• The committee said, “Depending on the level of capital, the UCBs should be regulated and enabled to function on the lines of a Small Finance Bank or Universal Bank as the case may be.”

Expediting Umbrella Organisation

• An Umbrella Organisation (UO) was first mooted in 2006. The committee suggests it could be a game-changer and the National Federation of Urban Co-operative Banks and Credit Societies Ltd (NAFCUB) should expedite the process of setting it up.
• According to the committee, UO should be financially strong, well-governed by a professional board and senior management. 
• It also suggests that UO should provide cross liquidity and capital support to the UCBs when needed, the cloud services for facilitating IT-enabled operations by the member banks.
• The committee said, “Since aggregation of IT services will be a financial inclusion enabler and can also contribute to system-stability through standardisation of the IT interface, there is justification for RBI’s financial support to the UO.”
• The committee suggests the minimum capital of the UO should be Rs 300 crore with CRAR and regulatory framework akin to the largest segment of NBFCs. 
• It added it must be evaluated for quality of internal controls as it will also play the role of an SRO further suggesting that in the long run, the UO may take up a role of a self-regulatory organisation.

Enabling larger UCBs to raise capital

• According to the committee, the recent legislative changes have provided new instruments for raising capital through the issuance of shares. However, in the absence of a listing facility the securities issued by the UCBs do not have a secondary market through an exchange.
• The committee suggests that a mechanism for the issue of shares at a premium and facilitating the bilateral transfer of shares through the concerned bank needs to be put in place.
• The committee recommends, UCBs may be permitted to grant advances to subscribers of PCNPS perpetual non-cumulative preference shares) subject to the amount of loan being a limited multiple of the PNCPS subscribed to by the investor. The number of borrowers here shall not exceed 20 percent of the total borrowing members of the UCB.

Supervisory Action Framework (SAF)

• The committee says a twin indicator approach should be followed i.e. asset quality should be considered and capital measured through NNPA and CRAR. 
• The committee says the objective of SAF should be to find a time-bound remedy to the financial stress of a bank.

Resolution of UCBs

• In case of resolutions of UCBs, the committee suggests, compulsory amalgamation with another banking institution, Reconstruction through reconstitution of the capital, etc., allotment of shares/long term debt instruments of the transferee bank (acquiring bank) to the depositors/creditors/members without reducing their claims.

Continuation of TAFCUB

• The committee says that the TAFCUB (Task Force for Co-operative Urban Banks) as a forum for coordination should continue and the mandatory action based on objective criterion under the SAF should be taken by RBI.
• TAFCUB can recommend supervisory action in the case of Tier 1 and 2 banks.

Need of Reform
Restrictive Policies

• Owing to lack of the desired level of regulatory comfort on account of the structural issues including 'capital' and the gaps in the statutory framework, the regulatory policies for co-operative banks have been restrictive with regard to their business operations, which, to some extent, has been one of the reasons affecting their growth.
• With the enactment of the Banking Regulation (Amendment) Act, 2020, the statutory gaps have been addressed to a very large extent.

Financial Inclusion

• Given the importance of the sector in furthering financial inclusion and considering the large number of its customer base, it is imperative that the strategies adopted for the regulation of the sector are comprehensively reviewed so as to enhance its resilience and provide an enabling environment for its sustainable and stable growth in the medium term.