RBI Tightens Supervisory Action Framework For Urban Cooperative Banks
A security guard stands by a Reserve Bank of India (RBI) logo in the RBI building in Mumbai, India. (Photographer: Karen Dias/Bloomberg)

RBI Tightens Supervisory Action Framework For Urban Cooperative Banks

The Reserve Bank of India has tightened its supervisory action framework to better manage stressed urban cooperative banks.

The new guidelines include threshold limits for asset quality, profitability and capital adequacy to determine whether a UCB should be put under a corrective active framework, similar to the one imposed on scheduled banks. The supervisory action framework was first introduced in 2014.

“Keeping in view the experience gained, it has been decided to further rationalise the SAF to make it more effective in bringing about the desired improvement in the UCBs as also expeditious resolution of UCBs experiencing financial stress. Reserve Bank will continue to monitor asset quality, profitability and capital / net worth of UCBs under the revised SAF,” the regulator said in a notification on its website.

Under the revised rules, an urban cooperative bank may be placed under the framework, if it meets any one of the three conditions set by the RBI.

  • Net non-performing asset ratio of over 6 percent.
  • Two consecutive years of losses.
  • Capital adequacy ratio below 9 percent.

If a UCB’s net NPA ratio rises above 6 percent, the RBI may ask the bank to submit a board-approved action plan to bring down its bad loans, advise board members to keep track of progress of the plan, or restrict declaration of a dividend or payment of donation without RBI approval.

The regulator may also curtail further sanction of credit to stressed sectors or high-risk segments.

In case of diminished profitability, the RBI can advise the UCB to submit a board-approved plan to boost profitability. The regulator could also restrict the bank’s ability to incur capital expenditure and introduce measures to cut operational and administrative costs.

In case of depletion in the capital base, the regulator has prescribed a longer list of corrective actions. Apart from seeking action from the bank’s board to boost capital adequacy, the RBI could consider a plan to merge the bank with another UCB. The board may also be asked to submit a plan to convert the bank into a credit society in such an event.

“Actions such as imposition of all-inclusive directions under section 35A of the Banking Regulation Act, 1949 (as applicable to co-operative societies) and issue of show cause notice for cancellation of banking license may be considered by the Reserve bank when continued normal functioning of the UCB is no longer considered to be in the interest of its depositors / public,” the RBI said.

The framework could be implemented on the basis of RBI’s statutory inspection or after considering the bank’s own reported financial position. Action may also be initiated if governance lapses are found.

Flurry Of Regulatory Changes

The revised supervisory framework is the third recent circular aimed at improving the functioning of cooperative banks. While not all categories of cooperative banks are regulated by the RBI, the collapse of Punjab and Maharashtra Cooperative Bank has prompted questions about the effectiveness of the regulatory and supervisory framework for such lenders.

On Dec. 31, the regulator issued final rules for constituting the Board of Management for UCBs with a deposit base of more than Rs 100 crore.

  • All such UCBs must appoint members with expertise in relevant areas to the BoM.
  • They must approve prior approval from the RBI for appointment of CEO.
  • RBI shall have powers to remove any member of the BoM and/ or the CEO.
  • The board of directors shall seek RBI approval before removing any member or accepting a resignation.

In a separate draft circular on Dec.30, the regulator proposed changes in the single and group borrower limits for UCBs.

  • The circular proposed that the prudential exposure limits for UCBs for a single borrower/party and a group of connected borrowers shall be 10 percent and 25 percent of their Tier I capital.
  • At least 50 percent of a UCB’s loan portfolio shall comprise loans not more than Rs 25 lakh per borrower/party.
  • The target for loans and advances to priority sector for UCBs shall stand increased to 75 percent of adjusted net bank credit by March 2023.

On Dec. 27, the regulator mandated that urban cooperative banks with a loan book of over Rs 500 crore will be required to report large exposure information, including the classification of special mention accounts to the RBI’s central repository for information on large credit. For this, the banks will have to consider borrowers with outstanding exposure of Rs 5 crore and above. This would include funded as well as non-funded exposures—in line with what scheduled commercial banks are required to do presently.

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