RBI Proposes Tweaks To Fundraising Norms Of Urban Cooperative Banks

RBI headquarters (Source: BloombergQuint)

RBI Proposes Tweaks To Fundraising Norms Of Urban Cooperative Banks

The Reserve Bank of India, in a draft circular released on Wednesday, proposed changes in rules for members of primary urban cooperative banks. The changes follow the RBI being given greater regulatory and supervisory powers over these lenders.

The cooperative structure allows its members, usually a community or a group of individuals that have come together to form the bank, to invest and withdraw their shareholding without any requirement of a lock-in period. Each such member is granted voting rights irrespective of the extent of their shareholding in the entity.

The RBI is now proposing that any refund of share capital to members, or their nominees, should be subject to the following conditions:

  • The bank’s capital adequacy ratio is 9% or above, both as per the latest audited financial statements and the last CRAR as assessed by RBI during statutory inspection.

  • Such refund does not result in the bank's capital adequacy falling below regulatory minimum of 9%.

A second change being proposed is in the link between shareholding and borrowings from an urban cooperative bank.

Currently, a member may be required to hold shares equivalent to a certain percentage of the funds being borrowed.

The shareholding requirement is 2.5% for secured borrowings and 5% for unsecured borrowings, if the member holds below 5% of the total paid up share capital of the bank. Those UCBs that maintain a capital adequacy ratio of 12%, higher than the minimum regulatory limit of 9%, are exempted from the share-linking norms.

The RBI is now proposing:

  • Share-linking to borrowing norms shall be discretionary for UCBs which meet the minimum regulatory capital adequacy of 9% and a tier-1 capital adequacy ratio of 5.5%, as per the latest audited financial statements and the last assessed level of capital by 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 nondiscriminatory manner.

But for cooperative banks with capital adequacy below 9% and tier-1 capital of 5.5%, the existing share-linking norms for its members would continue to apply, it said.

The banking regulator also invited feedback from stakeholders on whether share-linking to borrowing norms should continue despite prudential capital adequacy norms already in place for UCBs. "If yes, whether threshold criteria as suggested above is reasonable?," the regulator asked.

Following the amendment of the Banking Regulation act, which came into effect from June 29, 2020, urban cooperative banks can issue Perpetual Non-Cumulative Preference Shares. They are also permitted to offer perpetual debt instruments and long term subordinated bonds.

The RBI has directed cooperative banks to ensure their investors are educated on the risk characteristics of regulatory capital requirements. To that effect, the RBI asked cooperative lenders to have a specific sign-off from the investors to ensure they have understood the features and risks of the instruments.

It also asked UCBs to not benchmark floating rate instruments to the fixed deposit rate.

Further, it has sought feedback on whether any perpetual debt instrument issued by the lenders is restricted to institutional investors.

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