Report by RBI-appointed Expert Committee on UCBs released on Aug 23

IIMB congratulates N.S. Vishwanathan, the Chair of the Expert Committee on Primary (Urban) Co-operative Banks and currently Senior Fellow at the Centre for Public Policy at IIMB, and Prof. M.S. Sriram, Chairperson and faculty member at CPP, for their report on Urban Cooperative Banks, released on Monday (Aug 23). 

The committee, under the chairmanship of N.S. Vishwanathan, has proposed a four-tier structure for urban cooperative banks or UCBs based on the size of deposits and capital availability, among other factors.

Congratulating N.S.Vishwanthan and M.S. Sriram, Professor Rishikesha T Krishnan, Director, IIM Bangalore, said: “It’s a privilege to have Mr Vishwanathan with us at the Centre for Public Policy. I am sure the new framework for Urban Co-op Banks will make a significant difference. I hope the government/ RBI accept the recommendations.”

The eight-member Expert Committee on UCBs has examined issues and provided a road map for strengthening the sector. Harsh Kumar Bhanwala, the former Chairman of NABARD, Mukund M Chitale- Chartered Accountant, retired IAS officers NC Muniyappa and RN Joshi, MS Sriram- Professor at IIM Bangalore, Jyotindra M. Mehta- President of NAFCUB (National Federation of Urban Cooperative Banks and Credit Societies), and Neeraj Nigam- Chief General Manager-in-Charge of RBI’s Department of Regulation have been named members of this expert committee.

Report summary

Large urban cooperative banks (UCBs) should be allowed to function along the lines of small finance banks (SFBs) and universal banks, a Reserve Bank of India (RBI)-appointed expert panel said in a report.

The committee under the chairmanship of former RBI deputy governor N.S. Vishwanathan proposed a four-tier structure for urban cooperative banks or UCBs based on the size of deposits and capital availability, among other factors.

In its report released on Monday, the committee said tier-3 urban cooperative banks with deposits of  ₹1,000 crore to ₹10,000 crore must function like SFBs if they meet a capital adequacy ratio of 15%. The loan portfolio of tier-3 urban cooperative banks shall conform to the stipulations made for SFBs, it added.

Tier-4 UCBs, with deposits of over  ₹10,000 crore, should be allowed to function like universal banks if they meet the 9% capital adequacy ratio requirement, leverage ratio and has a fit and proper board and chief executive. The urban cooperative banks will have operational freedom for branch expansion and authorized dealer licence on a par with universal banks.

Smaller UCBs with deposits of up to  ₹100 crore will be categorized as tier-1 UCBs and those with deposits of  ₹100-1,000 crore will be categorized as tier-2 UCBs.

The committee also proposed the setting up of an umbrella organization (UO) with a minimum capital of  ₹300 crore and a regulatory framework similar to non-banking financial companies. “In the long run, the UO may take up the role of a self-regulatory organization for smaller UCBs, where the UO could run an independent audit/inspection and supervisory division that may conduct both offsite and onsite supervision,” it said.

The recent banking regulation amendment has empowered RBI to declare certain securities issued by urban cooperative banks under the Securities Contract Regulation Act to facilitate listing and trading in recognized stock exchanges. The committee has recommended that until such time, RBI may consider allowing banks in tier-3 and tier-4 cities with the necessary technology and wherewithal to issue shares at a premium to people residing in their areas of operation, subject to certain conditions.

The committee has also allowed UCBs to grant advances to subscribers of perpetual convertible preference shares (PCNPS) subject to the amount of loan being a limited multiple of the PNCPS subscribed to by the investor. The number of such borrowers and other nominal members with credit facility shall not exceed 20% of the total borrowing members of the UCB.

The expert panel constituted by the central bank said the supervisory action framework should adopt a twin indicator approach, wherein asset quality will be calculated on the basis of net non-performing assets and capital will be measured by capital adequacy ratio. The central bank said the objective of the framework should be to find a time-bound remedy to the financial stress of a lender.

Read the full report here: