Why in the news?
- In February 2021, 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. And the panel has recently submitted a report on urban cooperative banks (UCBs).
- The committee suggested a four-tier structure for the urban cooperative banks (UCBs) based on the deposits and prescribed different capital adequacy and regulatory norms for them based on their sizes.
- The UCBs were classified into four categories –
- Tier-1: UCB with deposits up to Rs 100 crore;
- Tier-2: UCB with deposits between Rs 100-Rs 1,000 crore,
- Tier-3: UCB with deposits between Rs 1,000 crore to Rs 10,000
- Tier-4: UCB with deposits of over Rs 10,000 crore.
- It suggested that the minimum Capital to Risk-Weighted Assets Ratio (CRAR) for these UCBs could vary from 9 per cent to 15 per cent and for Tier-4 UCBs the Basel III prescribed norms.
- It prescribed separate ceilings for home loans, loans against gold ornaments and unsecured loans for different categories of UCBs.
On consolidation of UCBs
- The panel urged RBI should be largely neutral to voluntary consolidation except where it is suggested as a supervisory action.
- The minimum capital stipulation provides an embedded size to a UCB.
Resolution of UCBs
- The committee said that under the Banking Regulation (BR) Act, the RBI can prepare a scheme of compulsory amalgamation or reconstruction of UCBs, like banking companies when the required voluntary actions are not forthcoming or leading to desired results.
Supervisory Action Framework (SAF)
- It should follow a twin-indicator approach instead of triple indicators at present. It should consider only:
- asset quality and
- capital measured through NNPA and CRAR
- 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 negative impact on its operations and may further erode its financial position.
Amendments to the Banking Regulation Act
- The panel said that the amendments to the BR Act empowering the RBI to declare certain securities issued by UCBs as covered under the Securities Contract Regulation Act to facilitate their listing and trading in a recognized stock exchange may be made.
About Co-operative Banks
- Co-operative banks, which are distinct from commercial banks, were born out of the concept of cooperative credit societies where members from a community band together to extend loans to each other, at favourable terms.
- Credit co-operatives (or co-operative banks) are majorly categorised into urban or rural co-operative banks on the basis of their region of operation.
- Urban co-operative banks are again classified into scheduled and non-scheduled banks.
Difference between Scheduled commercial banks and co-operative banks
- While Scheduled commercial banks are fully regulated by RBI, the UCBs are only partly regulated by the RBI.
- While their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms, their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government.
Borrower can be a Shareholder
- There is a clear separation between shareholders and borrowers in commercial banks, but with a UCB, borrowers may potentially double as stockholders.
- Unlike commercial banks, which are organised as joint stock companies, UCBs are organised as co-operatives, with unlimited liability for their members.