Urban Cooperative Banks

The Reserve Bank of India (RBI) recently announced a four-tiered regulatory framework for categorisation of Urban Co-operative Banks (UCBs).

Details –

• According to RBI, such framework is needed to balance the spirit of mutuality and co-operation more prevalent in banks of smaller sizes and those with limited area of operation vis-a-vis the growth ambitions of the large-sized UCBs and undertake more complex business activities.
• Based on size of deposits of the UCBs, the four-tiered regulatory framework will come into force with immediate effect.
• The extant regulatory framework classifies UCBs into two tiers – Tier I and Tier II —
  • • The RBI has categorised all unit UCBs and salary earners’ UCBs (irrespective of deposit size), and all other UCBs having deposits up to ₹100 crore in Tier 1.
    • In Tier 2, it has placed UCBs with deposits more than ₹100 crore and up to ₹1,000 crore.
    • Tier 3 will cover banks with deposits more than ₹1,000 crore and up to ₹10,000 crore.
    • UCBs with deposits more than ₹10,000 crore have been categorised in Tier 4.
• Net worth and capital adequacy —
  • • RBI also has come out with norms pertaining to the net worth and capital adequacy of these banks.
    • Tier 1 UCBs operating in a single district should have minimum net worth of ₹2 crore.
    • For all other UCBs (in Tier 1, 2 and 3) tiers), the minimum net worth should be ₹5 crore.
    • The UCBs, which currently do not meet the revised minimum net worth requirement, will have to achieve the minimum net worth of ₹2 crore or ₹5 crore (as applicable) in a phased manner.
• Minimum capital to risk weighted assets ratio —
  • • The central bank also prescribed minimum capital to risk weighted assets ratio requirement for UCBs.
    • Tier 1 UCBs have to maintain a minimum capital to risk weighted assets ratio of 9 per cent of Risk Weighted Assets (RWAs) on an ongoing basis.
    • Tier 2 to 4 UCBs have to maintain a minimum capital to risk weighted assets of 12 per cent of RWAs on an ongoing basis.

About Cooperative Banks –

Co-operative banks in India are registered under the States Cooperative Societies Act. The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the  – Banking Regulations Act 1949, and Banking Laws (Co-operative Societies) Act, 1955.

Features of Cooperative Banks –

• Customer Owned Entities – Co-operative bank members are both customer and owner of the bank.
• Democratic Member Control – Co-operative banks are owned and controlled by the members, who democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
• Profit Allocation – A significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.
• Financial Inclusion – They have played a significant role in the financial inclusion of unbanked rural masses.
• Supervision – In India, co-operative banks are registered under the States Cooperative Societies. They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws: the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.