RBI allows UCBs to refund share capital to members

The Reserve Bank of India (RBI) plans to permit Urban Co-operative Banks (UCBs) refund the share capital to their members, or nominees/ heirs of deceased members, on demand, subject to conditions, as per its draft guidelines for issue and regulation of share capital and securities by UCBs.

Also, UCBs issuing regulatory capital instruments such as preference shares and debt instruments may be required to get a specific sign-off from the investors that they have understood the features and risks of the instruments.

On refund of share capital, the RBI said UCBs can do so only if their capital to risk-weighted assets ratio (CRAR) is 9 per cent or above, both as per the latest audited financial statements and the last CRAR as assessed bythe central bank during statutory inspection.

Banks’ CRAR

The central bank emphasised that the refund should not result in the CRAR of the bank falling below regulatory minimum of 9 per cent.

For the purpose of computing CRAR, accretion to capital funds after the balance sheet date, other than by way of profits, may be taken into account. Any reduction in capital funds, including by way of losses, during the aforesaid period will also be considered.

The RBI said that for floating rate instruments, banks cannot use their Fixed Deposit rate as benchmark. UCBs have to obtain a specific sign-off from investors, stating that they have understood the terms and conditions of the issue of the share/security being issued by the bank as disclosed in the Prospectus and Offer Document.

These banks need to ensure that all the publicity material / offer document, application form and other communication with the investor clearly state how the regulatory capital instruments are different from a fixed deposit, and that these instruments are not covered by deposit insurance.

Share-linking

The RBI said share-linking to borrowing norms shall be discretionary for UCBs, which meet the minimum regulatory CRAR criteria of 9 per cent and a Tier 1 CRAR of 5.5 per cent, as per the latest audited financial statements and the last CRAR as assessed by the RBI during statutory inspection.

Such UCBs shall have a board-approved policy on share-linking to borrowing norms, which shall be implemented in a transparent, consistent and non-discriminatory manner. Currently, borrowings from UCBs are linked to shareholdings of the borrowing members – 5 per cent of the borrowings if on unsecured basis – and 2.5 per cent of the borrowings in case of secured borrowings.

The RBI said where a member already holds 5 per cent of the total paid-up share capital of a UCB, it would not be necessary for him / her to subscribe to any additional share capital on account of the application of extant share-linking norms.

In other words, a borrowing member may be required to hold shares for an amount that may be computed as per the extant share linking norms or for an amount that is 5 per cent of the total paid-up share capital of the bank, whichever is lower.