UCBs should follow a four tier structure: RBI appointed panel

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Based on the deposits, capital adequacies and regulatory norms, a Reserve Bank of India (RBI)-appointed committee has suggested a four-tier structure for the Urban Cooperative Banks (UCBs).

The four categories or tiers that UCBs would be split into, includes Tier-1 with deposits of up to Rs 100 crore, Tier-2 with deposits between Rs 100 to Rs 1,000 crore, Tier-3 with deposits between Rs 1,000 crore to Rs 10,000 and Tier-4 with deposits of over Rs 10,000 crore.

For UCBs in the tier-1 to tier-3 division the minimum Capital to Risk-Weighted Assets Ratio (CRAR) could vary from 9% to 15%, while for Tier-4 UCBs the Basel III prescribed norms would be followed, the panel suggested

The RBI panel has also prescribed separate ceilings for home loans, loan against gold ornaments and unsecured loans for different categories of UCBs.

On housing loans, the panel said the maximum limit on housing loans may be prescribed as a percentage of Tier 1 capital, subject to RBI-prescribed monetary ceiling for Tier 1 UCBs (but higher than the present ceiling) and respective board of directors-approved ceiling for Tier 2 UCBs.

For Tier 2 UCBs, the risk weight on housing loans may be prescribed based on size of the loan and loan-to-value (LTV) ratio, in line with SCBs. For loan against gold ornaments, the panel has recommended a bullet repayment option.

When it came to consolidation of UCBs, RBI should be largely neutral to voluntary consolidation except where it is suggested as a supervisory action, the panel said in reports.

“However, the RBI should not hesitate to use the route of mandatory merger to resolve UCBs that do not meet the prudential requirements after giving them an opportunity to come up with voluntary solutions,” it said.

The RBI had the constituted the Expert Committee on Primary (Urban) Co-operative Banks under the chairmanship of N S Vishwanathan, former RBI Deputy Governor, in February.

It’s recommendations on resolution of UCBs, the committee said that under the Banking Regulation Act, the RBI can prepare scheme of compulsory amalgamation or reconstruction of UCBs, like banking companies. This may be resorted to when the required voluntary actions are not forthcoming or leading to desired results.

UCBs under stress for a long time

According to the report, the committee noted that the UCB sector has been under stress for quite some time. The report added that there were two broad sources of constraints because of which the sector has underperformed.

The first set of factors are internal to the sector. Many UCBs are small and do not have either the capability both financial or human resources, and are possibly inclined towards providing technology enabled financial services. The second set of constraints are external to the banks. These emanate from the rather restrictive regulatory environment under which they have had to operate.