RBI devises 4-tier regulatory framework for Urban cooperative banks

A Reserve Bank of India (RBI) panel has chalked out a four-tier regulatory framework for urban cooperative banks (UCBs) based on the size of deposits and their area of operations. 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. 

The RBI formed the Expert Committee on UBCs last year on February 15 under the Chairmanship of former Deputy Governor N. S. Vishwanathan. The committee was made to look into the issues in the urban co-operative banking sector, provide a medium-term road map, suggest measures for faster resolution of UCBs and recommend suitable regulatory/ supervisory changes for strengthening the sector. 

Categorisation of UCB’s done in four parts Tier 1, tier 2, tier 3, and tier4. Specifically, a minimum net worth of ₹2 crores for Tier 1 UCBs operating in a single district and ₹5 crores for all other UCBs (of all tiers) has been stipulated. This is expected to strengthen the banks’ financial resilience and enhance their ability to fund their growth, the RBI said. 

The minimum CRAR requirement for Tier 1 banks is retained at the present prescription of 9 percent under the current capital adequacy framework based on Basel I. For Tier 2, 3, and 4 UCBs, while retaining the current capital adequacy framework, it has been decided to revise the minimum CRAR to 12 percent to strengthen their capital structure. 

Further, the Reserve Bank has decided to introduce an automatic route for branch expansion to UCBs which meet the revised Financially Sound and Well Managed (FSWM) criteria and permit them to open new branches up to 10 percent of the number of branches as at the end of the previous financial year. This is aimed at boosting growth opportunities in the sector.