RBI: Four-tiered regulatory for Urban Cooperative Banks

July 20, 2022

On July 19, 2022, a simple four-tiered regulatory framework was adopted by the Central Bank, for Urban Co-operative Banks (UCBs).

Key Facts

The RBI adopted the framework on the basis of size of deposits.
This move is aimed at strengthening their financial soundness.

N. S. Vishwanathan Committee

S. Vishwanathan Committee was created to make recommendations on strengthening the Urban Co-operative Banks. It had recommended to adopt four-tiered regulatory framework, on the basis of size of deposits of banks and area of operations. Committee had recommended a differentiated regulatory approach for key parameters like net worth, branch expansion, Capital to Risk-weighted Assets Ratio (CRAR) and exposure limits. It had also suggested for ‘membership to an Umbrella Organisation’.

Which recommendations have been adopted?

The central bank accepted following recommendations of the committee.

Simple four-tiered regulatory framework has been adopted, with differentiated regulatory prescriptions.
Minimum net worth of Rs 2 crore has been specified for Tier 1 UCBs operational in single district and Rs 5 crore has been specified for all other UCBs (across all tiers).

CRAR framework

Currently, a minimum Capital Adequacy Ratio (CAR) requirement of 9% is retained for Tier 1 banks, based on Basel I. For Tier 2, Tier 3 and Tier 4 UCBs, RBI has decided to increase minimum CAR to 12%, in a bid to strengthen their capital structure.

Automatic Route for Branch Expansion

The RBI will also initiate automatic route for branch expansion of UCBs, meeting some specific norms. This move will bring in growth opportunities in the sector.

Umbrella Organisation for UCB sector

The N. S. Vishwanathan Committee had recommended for membership to an Umbrella Organisation (UO) in UCB sector. RBI will examine this recommendation, after the entity is fully operational.

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