Well governed large urban cooperative banks (UCBs) which meet parameters 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 has suggested.
The four-tiered structure
A Reserve Bank-appointed committee has suggested a four-tier structure for UCBs depending upon the deposits and prescribed different capital adequacy and regulatory norms for them based on their sizes.
The RBI committee said that UCBs can be split into four categories — Tier-1 with deposits up to Rs 100 crore; Tier-2 with deposits between Rs 100-Rs 1,000 crore, Tier-3 with deposits between Rs 1,000 crore to Rs 10,000 and Tier-4 with deposits of over Rs 10,000 crore.
It suggested that the minimum Capital to Risk-Weighted Assets Ratio (CRAR) for them could vary from 9 per cent to 15 per cent and for Tier-4 UCBs the Basel III prescribed norms.
The panel said tier-3 urban cooperative banks with deposits of Rs 1,000 crore to Rs 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 Rs 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. Such UCBs can be given 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 RBI panel has also prescribed separate ceilings for home loans, loan against gold ornaments and unsecured loans for different categories of UCBs.
In February, the RBI had the constitution of the Expert Committee on Primary (Urban) Co-operative Banks under the chairmanship of N S Vishwanathan, former RBI Deputy Governor.
Mergers of UCBs
The committee emphasised that all-inclusive directions (AID) should be treated on a par with moratorium under Section 45 of the Banking Regulation Act.
If AID is imposed, a bank should not continue thereunder beyond the time permitted to keep a bank under moratorium — three months extendable by a maximum of another three months.
Currently about 50 UCBs are under AID, causing lot of hardship to depositors as deposit withdrawals are capped.
On consolidation of UCBs, the panel said that RBI should be largely neutral to voluntary consolidation except where it is suggested as a supervisory action.
“However, the RBI should not hesitate to use the route of mandatory merger to resolve UCBs that do not meet the prudential requirements after giving them an opportunity to come up with voluntary solutions,” it said.
The minimum capital stipulation provides an embedded size to a UCB.
The committee said that under the Banking Regulation (BR) Act, the RBI can prepare scheme of compulsory amalgamation or reconstruction of UCBs, like banking companies.
This may be resorted to when the required voluntary actions are not forthcoming or leading to desired results.
The panel further said Supervisory Action Framework (SAF) should follow a twin-indicator approach — it should consider only asset quality and capital measured through NNPA and CRAR — instead of triple indicators at present. The objective of the SAF should be to find a time-bound remedy to the financial stress of a bank.
If a UCB remains under more stringent stages of SAF for a prolonged period, it may have an adverse effect on its operations and may further erode its financial position, it said.
The RBI may also consider superseding the board if the bank fails to submit a merger/conversion proposal within the prescribed timeframe and take steps to avoid undue flight of deposits once the news becomes public. A Stage III UCB is one where its capital to risk-weighted assets ratio/CRAR is less than 4.5 per cent and/or net non-performing assets/NNPAs is greater than 12 per cent.
Housing loans
On housing loans, the panel said the maximum limit on housing loans may be prescribed as a percentage of Tier 1 capital, subject to RBI-prescribed monetary ceiling for Tier 1 UCBs (but higher than the present ceiling) and respective board of directors-approved ceiling for Tier 2 UCBs.
For Tier 2 UCBs, the risk weight on housing loans may be prescribed based on size of the loan and loan-to-value (LTV) ratio, in line with SCBs.
The panel has also made recommendations regarding loan against gold ornaments with bullet repayment option.
It also said that umbrella organisation (UO) is expected to play a crucial role in the strengthening of the sector.
For that, it must be a financially strong organisation with adequate capital and a viable business plan. The minimum capital for the UO should be Rs 300 crore with CRAR and regulatory framework akin to the largest segment of NBFCs, the panel said.
Alos, in the long run, the UO may take up the role of a Self-Regulatory Organisation (SRO) for smaller UCBs.
The report said there were two broad sources of constraints because of which the sector has underperformed.
The first set of factors are internal to the sector. Many UCBs are small and do not have either the capability – financial or human resources – and/or possibly inclination to provide technology enabled financial services.
The second set of constraints are external to the banks. These emanate from the rather restrictive regulatory environment under which they have had to operate.
There were suggestions that licensing of new UCBs should be immediately opened up. There are over 1,500 UCBs already. The committee has suggested that the existing UCBs may be allowed to expand their footprint.