Regulation and Supervision of
Urban Cooperative Banks
Jyoti Kumar Pandey
Deputy General Manager &
Member of Faculty
College of Agricultural Banking
Reserve Bank of India, Pune
College of Agricultural Banking, RBI, PUNE
Co-operative Credit Structure
• Rural credit institutions and urban cooperative
banks
• PACs and UCBs at the base level
• State Co-operative Banks and DCCBs - higher
financing agencies for UCBs also
College of Agricultural Banking, RBI, PUNE
Characteristics of
Urban Cooperative Banks
• Registered under State Cooperative Societies
Acts
• No controlling interest since the board of
management is elected by share holders in a
democratic manner
• One member one vote irrespective of number of
shares held by a member
• Duality of command – RCS / CRCS and RBI
College of Agricultural Banking, RBI, PUNE
Characteristics of UCBs (Contd.)
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Borrowing restricted to members
Restricted area of operation
Share linking to borrowing
No listing / no trading of shares
Strong in helping financially weaker section
College of Agricultural Banking, RBI, PUNE
Reasons why UCBs were brought
under RBI’s control
• Demand for introduction of deposit insurance to
cooperative banks
• Rapid growth of the cooperative banking sector
necessitated better monitoring
• Effective from March 1,1966, provisions of B.R. Act
(1949) were extended to UCBs
• This resulted in dual command, cooperation being a
state subject
College of Agricultural Banking, RBI, PUNE
Progress of Urban Co-operative Bank
• PHASE I – In formative stage, urban credit societies
organised by communities
• PHASE II - Post 1966
• PHASE III - Post Marathe Committee
• PHASE IV - Post Madhav Rao / Madhavpura Mercantile
Cooperative Bank Crisis
College of Agricultural Banking, RBI, PUNE
Progress of UCBs (Contd.)
(Rs. in crores)
No. of UCBs
Deposits
Advances
1966-67
1106
153
1990-91
1307
8660
1995-96
1327
24165
17908
1997-98
1502
40692
27801
College of Agricultural Banking, RBI, PUNE
167
7802
Progress of UCBs (Contd.)
(Rs. in crores)
No. of UCBs
Deposits
Advances
2001
2084
80840
54389
2002
2090
93069
62060
2003
2104
101546
64888
2006
1853
112237
70379
2009
1721
158733
97918
College of Agricultural Banking, RBI, PUNE
State-wise Position of UCBs
Figures in for 2007
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Grade
Grade
Grade
Grade
II – 598
III – 295
IV – 268
I – 652
Figures in for 2009 - 1721
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Grade
Grade
Grade
Grade
I - 845
II - 484
III - 219
IV – 173
College of Agricultural Banking, RBI, PUNE
Centre-wise Distribution of UCBs
College of Agricultural Banking, RBI, PUNE
Role of RBI
• Regulatory, Supervisory, Operational and
Developmental Functions
(Carried out through the Urban Banks
Department)
• RBI derives authority to control and supervise the
urban banks through the Banking Regulation Act,
1949 (As Applicable to Cooperative societies)
College of Agricultural Banking, RBI, PUNE
RBI’s Regulatory Functions
• Licence to commence banking business under
Section 22 of B.R. Act, 1949 (AACS)
• Licence to open branches & extension counters
• Permission to deal in foreign exchange
• Issue of directions to maintain cash reserve and
liquid assets
• Power to control advances (Section 21) –
Purposes for which advances are given, margins
to be maintained
College of Agricultural Banking, RBI, PUNE
RBI’s Regulatory Functions
• Issue of prudential and operational guidelines
• Directions on maximum limit on advances,
prescribe guidelines on individual / group
exposure norms
• Issue of requisition to RCS for supersession of
board of management of bank / liquidation of
banks
College of Agricultural Banking, RBI, PUNE
RBI’s Regulatory Functions
• Interest rates on deposits and advances (Section
21)
• Issue of Direction (Section 35A)
• Imposition of penalty (Section 46)
• Cancellation / rejection of licence (Section 22(4))
• Prescription towards CRR / SLR
• Grant of scheduled status
College of Agricultural Banking, RBI, PUNE
Supervisory Function
• On-site supervision
• Off-site returns
• Off-site surveillance
College of Agricultural Banking, RBI, PUNE
RBI’s Developmental Functions
• Refinance to small scale industries sector through
UCBs
• Identification of financially unsound banks and
rehabilitation of such banks
• Training of urban bank personnel – support given
through RBI’s training institutions
College of Agricultural Banking, RBI, PUNE
Issues of Regulatory & Supervisory
Concern :
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Sharp increase in no. of banks and branches
Large number of financially unsound banks
Steep increase in deposits consequent on deregulation
High rate of interest on deposits, consequently on advances
Adverse selection of borrowers
Low capital base
Dual/triple control
Belated introduction of CRAR, ALM etc.
High exposure to real estate and other sensitive sector
College of Agricultural Banking, RBI, PUNE
Issues of Regulatory & Supervisory
Concern: Problems Faced By The Sector
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Lack of professionalism
Political interference
Unlicensed UCBs
Low level of computerisation
No Central recruitment – Faulty recruitment
system / excess staff / poor skill upgradation
• Low level of operational efficiency
• High operating cost
College of Agricultural Banking, RBI, PUNE
Issues of Regulatory & Supervisory
Concern: (Contd.)
• UCBs’ membership of Payment System – Should
it be unconditional?
 Experience of MMCB
 Access to call money
 SLR investments
College of Agricultural Banking, RBI, PUNE
Issues of Regulatory & Supervisory
Concern: (Contd.)
• Governance in UCBs
 Is it enough?
 How much is enough?
• Growing ambit of operations of UCBs
 Should UCBs have unlimited access to inter-bank markets?
 Whether the reach should be nationwide?
 Access to capital markets?
College of Agricultural Banking, RBI, PUNE
Issues of Regulatory & Supervisory
Concern: (Contd.)
• Disclosure Standards
 Is it enough?
 How much is enough?
• Interest Rates on Advances
 High interest rates as compared to the commercial banks
 Adverse selection of borrowers
College of Agricultural Banking, RBI, PUNE
Regulatory Issues concerning RBI
• Capital Adequacy
 UCBs unable to maintain capital
 HPC viewed CRAR to be made applicable to UCBs
• Issue pertaining to Deposit Insurance
 Some states do not have eligibility clause to be covered
under DICGC Act, 1961
 Insured banks often default payment of premium
College of Agricultural Banking, RBI, PUNE
Regulatory Issues concerning RBI
• Supervision of UCBs
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Large number of banks
On-site inspection in two years time frame
System is under severe strain to maintain the schedule
Need for off-site surveillance
• Other issues
 Financially unsound banks
 Unlicensed banks in Kerala
 Recent transactions by UCBs in Government Securities
College of Agricultural Banking, RBI, PUNE
Road Map To Future
• Focus on:
 Consolidation : slow down in issue of new Licence
 Weeding out weak units
 Strengthening of regulatory and supervisory standards
College of Agricultural Banking, RBI, PUNE
Policy Changes
• Standing Advisory Committee
• Guidelines issued to commercial banks by DBOD
and DBS
• Recommendations of committees / working group
• Feed back / representations from NAFCUB / local
• Cooperative Banks Association / Unions
• Recommendations of JPC etc.
College of Agricultural Banking, RBI, PUNE
Committees
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Madhava Das - 1978
Marathe - 1992
Chitale Committee -1996
Madhava Rao -1999
Anant Geete Committee 2002
Joint Parliamentary Committee
College of Agricultural Banking, RBI, PUNE
Recent Policy Changes
• Implementation of Madhava Rao committee
recommendations
• Recent monetary policy measures after the
failure of Madhavpura Mercantile Cooperative
Bank Ltd., Ahmedabad
• Anant Geete Committee recommendations
• Recommendations of JPC
• Sardesai Committee recommendations
• MOU
• Other measures
College of Agricultural Banking, RBI, PUNE
Off-site surveillance system
• Designed for continuous monitoring of banks’
operation
• Initially made applicable for scheduled urban
banks and to be extended to others in a phased
manner
College of Agricultural Banking, RBI, PUNE
Off-site monitoring– to be more
broad-based
• Initially, only the scheduled UCBs and UCBs with
deposit size of over Rs. 100 crore covered
• Now UCBs with deposit size of Rs. 50 crore and
above are included
College of Agricultural Banking, RBI, PUNE
Rehabilitation
• Increased frequency of inspection for financially
unsound banks
• SLRC meets to periodically review progress
• Discussions with CEOs/Chairmen
• Timeframe for improvement
College of Agricultural Banking, RBI, PUNE
Application Of Prudential Norms
• Introduction of CRAR
• Why CRAR Introduced Belatedly ?
• Various Constraints
College of Agricultural Banking, RBI, PUNE
Introduction of CRAR
DATE
Scheduled UCBs
Non-scheduled UCBS
MARCH 31, 2002
8%
6%
MARCH 31, 2003
9%
7%
MARCH 31, 2004
AS APPLICABLE TO
COMMERCIAL BANKS
9%
MARCH 31, 2005
As Applicable To
Commercial Banks
As Applicable To
Commercial Banks
College of Agricultural Banking, RBI, PUNE
Introduction of CRAR (Contd.)
• CRAR now important parameter to know the
financial soundness of UCBs
• Expansion etc. not allowed if CRAR not at
stipulated level
• Large Increase in share capital not possible owing
to Acts provisions
• UCBs to transfer 50% of profit if stipulated level
not achieved.
College of Agricultural Banking, RBI, PUNE
Vishwanathan Working Group
• For augmenting capital of UCBs
• State Governments be requested to exempt the
UCBs from the existing monetary ceiling on
individual shareholding
• Provide instruments and avenues for raising
stable and long term funds having equity or quasi
equity characteristics
College of Agricultural Banking, RBI, PUNE
Vishwanathan Working Group (Contd.)
• UCBs may be permitted to issue unsecured,
subordinated (to the claims of depositors), nonconvertible, redeemable debentures / bonds,
which can be subscribed to by those within their
area of operations and outside (Tier II)
College of Agricultural Banking, RBI, PUNE
Vishwanathan Working Group (Contd.)
• UCBs may be allowed to issue special shares
• UCBs can also be allowed to issue these shares at
a premium, which could be approved by the
respective RCS, in consultation with Reserve
Bank
 The special shares will be non-voting, perpetual and
transferable by endorsement and delivery
 Commercial banks may be allowed to invest in these
shares and Tier II bonds of UCBs
College of Agricultural Banking, RBI, PUNE
Vishwanathan Working Group (Contd.)
• UCBs may be allowed to issue redeemable
cumulative preference shares on specific terms
and conditions with prior permission of RCS, in
consultation with Reserve Bank
• UCBs may be permitted to raise deposits of over
15 year maturity and such deposits can be
considered as Tier II capital subject to their
meeting certain conditions such as
 They shall be subordinate to other deposits
 Ineligible for DICGC cover
College of Agricultural Banking, RBI, PUNE
Vishwanathan Working Group (Contd.)
• UCBs with negative networth may raise Tier II
bonds such as bonds, preference share and long
maturity deposits through conversion of existing
deposits
 RBI may consider it as part of regulatory capital even
though Tier I capital is negative
College of Agricultural Banking, RBI, PUNE
Policy Measures after Madhavpura
Mercantile Cooperative Bank Crisis
1. Prohibition of Deposits by UCBs With Other UCBs
• No inter UCB deposits
• Rationale
 against co-operative principles
 Tantamount to exposure in the UCBs
 Prevention of systemic risks
College of Agricultural Banking, RBI, PUNE
Policy Measures after Madhavpura
Mercantile Cooperative Bank Crisis (Contd.)
2. Operations in Call Money Market
• Call / notice money borrowing should not exceed
2 per cent of aggregate deposit as at the end of
march of previous financial year.
• Complete freedom to lend
• Rationale
 To prevent asset – liability mismatch
 Evening out temporary liquidity mismatches
College of Agricultural Banking, RBI, PUNE
Operations In Call Money Market
Monitoring :
• UCBs should report the borrowing every next day
to MPD and UBD
 Penalty for violation
 Fortnightly statement to Regional Office on lending and
borrowing
College of Agricultural Banking, RBI, PUNE
Changes in SLR Composition
Category Of UCBs
Minimum SLR Holding In Government and other Approved
Securities As Per Cent Of NDTL
Earlier
Now Applicable
UCBs With NDTL Of Rs.
25 Crore And Above
10.0 %
15.0 %
UCBs With NDTL With
Less Than Rs.25 Crore
NIL
10.0 %
Scheduled UCBs
15.0 %
Entire SLR requirement
Non-scheduled UCBs
College of Agricultural Banking, RBI, PUNE
Changes in SLR Composition (Contd.)
UBD Circular dated February 16, 2006
Non-scheduled primary (urban) co-operative banks
having single branch-cum-head-office or
having multiple branches within a single district
having a deposit base of Rs.100 crore or less (?)
would be exempted from maintaining SLR in
prescribed assets upto 15% of their DTL
on keeping the required amount, in interest bearing deposits,
with State Bank of India and its subsidiary banks and the public sector banks
including Industrial Development Bank of India Ltd.
College of Agricultural Banking, RBI, PUNE
Monetary Policy Measures – 2003
Ban On Loans to Directors etc.
• Prohibition on loans to directors, their relatives
and concerns in which they are involved
• Ban to be effective from October 01, 2003
• Fortnightly return prescribed to monitor
• Recommendations of Geete committee i.e.
Enhanced limit of unsecured advances,
implemented
College of Agricultural Banking, RBI, PUNE
Ban on Loans to Directors (Contd.)
UBD Circular dated October 06, 2005
• Following categories of director related loans are out
of the purview:
 regular employee-related loans to staff directors on the Board
of UCBs
 normal loans as applicable to members to the directors on the
Boards of salary earners’ co-operative banks and
 normal employee-related loans to Managing Directors of MultiState co-operative banks
College of Agricultural Banking, RBI, PUNE
Anant Geete Committee
Recommendations (2002)
1. UNSECURED ADVANCES
• Increased as recommended by the Committee
• For non-scheduled UCBs with DTL < than Rs.10
crore : Rs.50,000/• For non-scheduled UCBs with DTL > than Rs.10
crore : Rs.1.00 lakh
• For scheduled banks : Rs.2.00 lakh
• Only Gr. I banks can take advantage of this
increase
College of Agricultural Banking, RBI, PUNE
Anant Geete Committee
Recommendations (Contd.)
• Both ‘gold’ loan and small loans upto Rs.1 lakh
were exempted from the 90 days norms, and
these loans will continue to be governed by the
180 days norm for recognition of loan
impairment.
• UCBs permitted to open extension counters in
residential colonies. The condition to have at
least five hundred beneficiaries accounts for
extension counters was withdrawn
• Non-scheduled UCBs were allowed to place their
surplus funds with strong scheduled UCBs,
subject to certain conditions
College of Agricultural Banking, RBI, PUNE
Anant Geete Committee
Recommendations (Contd.)
2. PLACEMENT OF DEPOSITS WITH OTHER UCBs
• Scheduled UCBs permitted to accept deposits
from other UCBs
• Requirement of deposit accepting banks:
 Three consecutive ‘A’ audit ratings
 Compliance with RBI requirements
 No inter scheduled UCB deposits
College of Agricultural Banking, RBI, PUNE
Done away
with
JPC Recommendations
1. Strengthening of Audit:
• Concurrent audit made mandatory for all UCBs
• Audit committee of board as stated in earlier
circulars, should exist in each of the banks
• Audit committee to monitor for all audit functions
as also compliance with RBI inspection reports,
RBI guidelines etc.
College of Agricultural Banking, RBI, PUNE
JPC Recommendations (Contd.)
2. COMPLIANCE TO RBI REPORT:
• Compliance to be furnished within 6 weeks
• All defects pointed out in inspection report to be
removed within 4 months
• Certificate to be effect submitted to RBI within 4
months
• False certificate or delayed compliance to attract
penal action
• Strict penalty for non – compliance of RBI
directives
College of Agricultural Banking, RBI, PUNE
Other JPC Recommendations
• Dual control should go
• Inspection report should comment on the quality
of audit report
• Improvement of on-site / off-site supervision
• Prohibition of loans & Advances to Directors and
their relatives and concerns in which they are
interested
College of Agricultural Banking, RBI, PUNE
Sardesai Committee
ON-SITE INSPECTION- NEW THRUST
Classification of
banks
Existing frequency
Revised frequency
Scheduled banks
Once in a year
Once in a year
Grade I
Once in three years
Once in two years
Grade II
NA
Once in 18 months
Grade III
Once in a year
Once in a year
Grade IV
Once in a year
Once in a year
College of Agricultural Banking, RBI, PUNE
Sardesai Committee (Contd.)
Inspection – New Approach:
• Each UCB to be inspected at least once in two
years
• Focused supervision of UCBs with deposits more
than Rs.100 crore
• ROs to be fully responsible for follow up
• Periodic interaction of ROs with State Authorities
College of Agricultural Banking, RBI, PUNE
Sardesai Committee (Contd.)
Inspection – New Approach
• Upgradation of skills of Inspecting Officers
• Staff requirements of UBD being finalised
• Three ROs with huge backlog to initiate revised
measures
College of Agricultural Banking, RBI, PUNE
Shifting focus - Inspection
Traditional Approach
CAMELS
Balance Sheet Approach
Analytical Approach
Impressionistic
Based on certain fixed parameters
Prone to prejudices of the IO
Objective ?
IO may miss certain key areas
Conclusions based on
performance in certain key areas
College of Agricultural Banking, RBI, PUNE
Identification Of Financially Unsound
Banks And Future Set Up
• Focus: On Early Identification By Objective
Parameters
• Nomenclature changed – banks not to be
classified as weak / sick
• The banks to be classified into four Grades
depending upon their financial status
• Four grades depending upon NPA level, CRAR ,
Regulatory compliance
• Profitability
College of Agricultural Banking, RBI, PUNE
Dual Control of UCBs
• Managerial aspects viz.
 Registration
 Constitution of management
 Administration and recruitment
 Amalgamation and liquidation
 Statutory audit / appointment of auditors are with State
Governments
College of Agricultural Banking, RBI, PUNE
Dual Control of UCBs (Contd.)
• RBI does not have any powers to: -Appoint or remove the members of the board of
management of urban banks
-Initiate amalgamation of two urban banks
-Appoint auditors of urban banks
• Matters related to banking operations are
governed by directives and guidelines issued by
the RBI
College of Agricultural Banking, RBI, PUNE
Dual Control on UCBs (Contd.)
Issues:
• Shifting to Central Subject
• Concurrent List
• Demarcation of Areas of managerial related and
banking related functions
College of Agricultural Banking, RBI, PUNE
Separate Supervisory Authority
• Duality / multiplicity of control slackens
regulatory control
• Apex Single body to regulate and supervise
• Comprising officials from State Government,
Central Government, Reserve Bank of India, Cooperative banks, independent experts etc.
College of Agricultural Banking, RBI, PUNE
Separate Supervisory Authority (Contd.)
• RBI RESPONSE : After separate supervisory body
 The urban co-operative banks should not accept /
demand deposits (chequable deposits)
 They should not resort to non collateralised borrowings
and they should not have access to call money market,
and
 Government of India may consider evolving a suitable
mechanism to safeguard the interests of depositors of
urban co-operative banks
College of Agricultural Banking, RBI, PUNE
Amendment to B. R. Act, 1949
• Management related functions, like, Elections,
Conduct of Directors, etc., to be with RCS.
• Banking related functions to be with RBI
• Audit function, including statutory audit to be
with RBI
College of Agricultural Banking, RBI, PUNE
Amendment to B. R. Act, 1949 (Contd.)
• Section 56 of B. R. Act, 1949 to be deleted
• Make all provisions of the parent Act applicable
• Section 10B and 10BB requiring RBI approval for
appointment of full time Chairman / MD
• Section 10C would enable non-member as
Chairman
• Serving MPs / MLAs / MLCs as also stockbrokers
banned from being a director of the bank
College of Agricultural Banking, RBI, PUNE
Disclosure Norms
• Applicable to UCBs with deposits of Rs.100 crore
& more
• CRAR, investments, advances against real
estate/shares, interest of directors, profitability
etc. To be declared.
College of Agricultural Banking, RBI, PUNE
Specific Issues
Developments Relating to Apex Cooperative Bank of
Maharashtra and Goa
• Licence Cancelled As Directed By The Supreme
Court
• The Court Holds That The RBI Can Not Give
Banking Licence to
 Societies Registered Under Multi – State Act
 Directions Issued to the Bank
College of Agricultural Banking, RBI, PUNE
Revised Licensing Policy for New
Urban Banks
Focus: Arrest Mushrooming Growth in UCBs
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Strong start up capital
4 categories
Emphasis on professionalism
Concept of unit banks
Relaxation for special categories to continue
Screening committee to process proposals
College of Agricultural Banking, RBI, PUNE
Revised Licensing Policy:
Screening Committee
• Comprised of four eminent experts of impeccable
credentials from the fields of banking, finance
and co-operation
• Need and potential, Viability of the proposal /
institution
• Since September 2001 up to date, the Committee
 considered 216 proposals
 'in principle' approval for 9 proposals
 205 proposals rejected (2 under correspondence)
 (Licenses granted in 1999-2000 : 114, 2000-01 : 28)
College of Agricultural Banking, RBI, PUNE
Revised Licensing Policy:
Present Stance
• Annual Policy Statement 2004 – 05
To consider issuance of fresh licences only after a
comprehensive policy on UCBs, including an
appropriate legal and regulatory framework for the
sector, is put in place and a policy for improving the
financial health of the urban co-operative banking
sector is formulated early
College of Agricultural Banking, RBI, PUNE
Revised Licensing Policy:
Present Stance
• UCBs, other than those in Grade III and IV, registered in states
which have signed MoU and those registered under Multi-State
Cooperative Societies Act, 2002 will be eligible to convert the
extension counters on completion of three years of their operation
into full-fledged branches
 Proposal is for shifting/relocation of the converted branch
within the city/town limit
 Banking services to the existing customers of the extension
counter, including the institutional customer, are ensured
 No new extension counter will be allowed in the institution in
which the extension counter is housed presently
College of Agricultural Banking, RBI, PUNE
Annual Policy Statement: 2004-05
• To consider issue of licences to new proposals
only after a comprehensive policy is in place,
including appropriate legal regulatory framework
• To consider only such schemes of reconstruction
which envisages recapitalisation by stakeholders
College of Agricultural Banking, RBI, PUNE
Mid Term Review of Annual Policy
Statement: 2004-05
• Vision Document
• Standing Advisory Committee comprising of DG
(RBI), Govt. representatives, Select State Govt.
representatives,Federation, IBA, DICGC, NABARD
would meet on quarterly basis
College of Agricultural Banking, RBI, PUNE
Vision Document
• Need for State specific approach
 State Level Task Force on Coop Urban Banks (TAFCUB)
comprising of RD, RCS, Central Office and in-charges of
UBD ROs and a representative each from NAFCUB and
state federations
 MOU signed with the State of Gujarat, Andhra Pradesh,
Karnataka and Madhya Pradesh
 TAFCUB would identify the potentially viable urban
cooperative banks and draw up a time bound action plan
for revival of UCBs by setting specific monitorable
milestones
College of Agricultural Banking, RBI, PUNE
Vision Document (Contd.)
• Terms of Reference
 Categorise UCBs in the state under two tiers of regulatory
regime
 Identify banks, which are viable, potentially viable and
unviable
 To recommend various conditions, including
 the nature and extent of funds required to be infused, in each UCB
identified as potentially viable
 the sources of fund
 changes in management where necessary and the time frame for
achieving viability
 In doing so, the TAFCUB may assign responsibility to different
agencies for facilitating the turn-around
 To set up milestones for evaluation of progress made under
the rehabilitation plan
College of Agricultural Banking, RBI, PUNE
Vision Document (Contd.)
• To recommend the future set up of the existing unlicenced
banks whose applications are pending with Reserve Bank of
India
• To recommend the manner and time frame for exit of the
un-viable banks either by
 merger / amalgamation
 conversion into a credit society and liquidation
 The proposals for merger / amalgamation recommended by
the TAFCUB shall conform to the guidelines issued in this
regard
• To arrive at a threshold limit of deposits that would make a
depositor automatically eligible to become a member
• To recommend on the management aspects of a bank
which is placed under the revival plan
• Any other issues as may be referred to it by the Reserve
Bank of India
College of Agricultural Banking, RBI, PUNE
Vision Document (Contd.)
• Proposed Operating Framework
 Unit Banks (Deposits Less than Rs. 50 crore)
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Simplified regulatory regime
CRAR could be replaced by NOF to NDTL ratio
Exposure to sensitive sector restricted
Lower prescribed limit for investment in G-Sec
Restrictions to insulate them from systemic shocks
Restricted geographical operations
Such banks to roll back operations in far off locations
College of Agricultural Banking, RBI, PUNE
Vision Document (Contd.)
• Proposed Operating Framework
 All other Banks
Regulatory prescriptions as applicable to commercial banks
Extant relaxations may continue up to the period specified
There should be no concept of unscheduled multi state bank
CRCS may ensure that a bank is scheduled before it is granted
license under MCS Act
 Existing scheduled banks both under MCS Act and State
Cooperative Societies who do not comply with prudential and
regulatory regime akin to that of commercial banks could be
excluded from second schedule of RBI Act
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College of Agricultural Banking, RBI, PUNE
Vision Document (Contd.)
• Supervision
 Increased dependence on off-site surveillance of RBI and onsite supervision of RCS in respect of small unit banks would
provide RBI with increased flexibility to deploy resources to
larger and risky banks
• Developmental Role
 RBI may help particularly small UCBs in helping their skills
 CAB could provide subsidised training
 RDs of RBI may facilitate with PDs enabling UCBs to buy sell
G-Sec easily
College of Agricultural Banking, RBI, PUNE
Two Tier Framework
• Smaller UCBs whose operations are limited to a single district and
have deposits of less than Rs.100 crore
 Allowed to adopt 180-day delinquency norm for classification of assets
as non-performing
 Smaller UCBs given exemption from maintaining SLR in Government
securities (up to 15 per cent of NDTL) to the extent of funds placed in
interest bearing deposits with the public sector banks
 Not subject to the provisioning norms of 0.40 per cent of Standard
Advances which is applicable to the larger UCBs
 Simplified reporting system consisting of five returns has been
introduced for the smaller banks having deposits between Rs.50 crore
and Rs.100 crore and whose branches are limited to a single district
College of Agricultural Banking, RBI, PUNE
Two Tier Framework –
Changes
• Tier I banks :
March 07, 2008
 Unit banks i.e. banks having a single branch / Head Office and
banks with deposits below Rs.100 crore, whose branches are
located in a single district
 Banks with deposits below Rs.100 crore having branches in
more than one district, provided the branches are in
contiguous districts and deposits and advances of branches in
one district separately constitute at least 95% of the total
deposits and advances respectively of the bank
 Banks with deposits below Rs.100 crore, whose branches were
originally in a single district but subsequently, became multidistrict due to reorganization of the district
• Tier II Banks: All other banks
The deposit base of Rs. 100 crore will be determined on the basis of average of the fortnightly Net Demand
and Time Liabilities in the financial year concerned
Similarly, advances will be determined on the basis of fortnightly average in the financial year concerned
College of Agricultural Banking, RBI, PUNE
New Business Opportunities
• Insurance
 All scheduled UCBs having a minimum net worth of Rs.50
crore were permitted to undertake insurance business as
corporate agents. All other UCBs could undertake insurance
business on a referral basis, without any risk participation,
through their network of branches (January 24, 2005)
 UCBs registered in States that have entered into MoUs with
the Reserve Bank or registered under the Multi State Cooperative Societies Act, 2002 to undertake insurance agency
business as corporate agents without risk participation, subject
to compliance with the following eligibility norms:
 Minimum networth of Rs 10 crore
 Should not have been classified as Grade III or IV bank.
 In case of UCBs registered in States which have not signed
MoUs with the Reserve Bank existing norms shall continue
College of Agricultural Banking, RBI, PUNE
New Business Opportunities (Contd.)
•
Distribution of Units of Mutual Funds
•
Conduct of Foreign Exchange Business by UCBs
•
Installation of Automated Teller Machines (ATMs)
•
Conversion of Extension Counters into Full-Fledged Branches
 UCBs registered in States which have signed MoU and those registered under
Multi-State Co-operative Societies Act, 2002 now permitted to enter into
agreement with mutual funds for marketing their units, subject to certain
prescribed norms
 UCBs registered under the MOU State, or under the Multi-State Co-operative
Societies Act, 2002, permitted for Authorised Dealer (AD) Category I and II
licence
 It was also decided not to give any fresh authorisation to UCBs to function as Full
Fledged Money Changers (FFMCs)
 Sound scheduled and non-scheduled UCBs permitted to set up select off-site/
on-site ATMs
 Banks permitted to have ATMs can also issue ATM-cum-debit cards
 Prior approval of the Reserve Bank for network connectivity and/or sharing of
the ATMs dispensed with
 Sound UCBs registered in MOU States and those registered under the Multi-State
Cooperative Societies Act, 2002 allowed to convert existing extension counters
into full-fledged branches
College of Agricultural Banking, RBI, PUNE
New Relaxations
•
•
Tier-I banks
 The 180 day loan delinquency norm for NPAs extended by one more year i.e. up
to March 31, 2008
 The 12-month period for classification of a substandard asset in doubtful
category will be effective from April 1, 2008
 Further these banks would be required to provide 100% on the secured portion
of D-III advances classified as doubtful more than three years on or after April 1,
2010
 For the outstanding stock of D-III advances as on March 31, 2010, banks will be
required to provide as under:




50% as on March 31, 2010
60% as on March 31, 2011
75% as on March 31, 2012
100% as on March 31, 2013
Tier-II banks
 100% provisioning for advances classified as D-III (doubtful more than three
years) will apply to those classified as such on or after April 1, 2007 instead of
those so classified on or after April 1, 2006
 Consequently, for the outstanding stock of D-III assets as on March 31, 2007,
banks would be required to provide as under:




50% upto March 31, 2007
60% as on March 31, 2008
75% as on March 31, 2009
100% as on March 31, 2010
College of Agricultural Banking, RBI, PUNE
New Norms (Contd.)
• Statutory minimum CRR requirement of 3 per cent of total
demand and time liabilities no longer exists with effect from the
said notified date (April 25, 2007)
• Know Your Customer (KYC) Norms / Anti-Money Laundering (AML)
Standards / Combating of Financing of Terrorism (CFT)
 All cross-border wire transfers must be accompanied by accurate and
meaningful originator information
 Cross-border wire transfers must contain the name and address of the
originator and where an account exists, the number of that account
 Information accompanying all domestic wire transfers of Rs. 50000/and above must include complete originator information i.e. name,
address and account number etc., unless full originator information
can be made available to the beneficiary bank by other means.
 If a bank has reason to believe that a customer is intentionally
structuring wire transfers to below Rs. 50000/- to several beneficiaries
in order to avoid reporting or monitoring, the bank must insist on
complete customer identification before effecting the transfer
 Interbank transfers and settlements where both the originator and
beneficiary are banks or financial institutions would be exempted from
the above requirements
College of Agricultural Banking, RBI, PUNE
New Norms (Contd.)
• Provisioning for Standard Assets (February 19, 2007)
 Direct advances to agricultural and SME sectors 0.25 %
 Personal loans, Loans and advances qualifying as capital market
exposures, Commercial real estate loans and loans and advances
to systemically important NBFCs-ND. - 2.00 %
 All other loans and advances not included in above - 0.40%
• UCBs to extend individual housing loan up to the limit of Rs.
25.00 lakh per beneficiary of a dwelling unit
 However, housing finance to borrowers availing loans above Rs
15.00 lakh will not be treated as priority sector lending
College of Agricultural Banking, RBI, PUNE
Branch Licensing Relaxations
• Branch licenses only in MOU States
 UCBs whose net worth was not less than Rs.10 crore
and average networth per bank, including the proposed
ones was not less than Rs.2 crore in ‘A’ and ‘B’ category
centres and Rs.1 crore in ‘C’ and ‘D’ category centres
 The eligibility of the banks to be decided on the basis of
their audited balance sheet for the financial year ended
March 2007
College of Agricultural Banking, RBI, PUNE
Extension of Area of Operations
• Licensed Grade I UCBs may extend their area of operation
to the whole of the district of registration and to its
adjoining districts within their State of registration, without
prior permission from the RBI
• Eligible banks need not approach Reserve Bank for seeking
'no objection' for extension of area of operation as stated
above. Such banks may directly approach the RCS of the
State concerned for extension of area of operation to the
entire district of registration and its adjoining districts
within the State of registration.
• Extension of Area of Operation Beyond the Adjoining
Districts and the State of Registration
 Extension of Area of Operation beyond the adjoining districts
and the State of registration is not permitted according to the
existing policy
College of Agricultural Banking, RBI, PUNE
Branch Licensing
UBD Circular dated July 01, 2008
Grade III / IV UCBs and not complying with Section 11(1) of B. R. Act, 1949 (AACS)
to obtain prior approval of the RBI and / or RCS for :
- Sale of bank's own premises
- Surrender of existing premises taken on lease / rental basis
- Acquisition of new premises on ownership or lease / rental basis
- Shifting of offices / departments as a result of sale of premises / surrender of
premises / acquisition of new premises.
- To submit their application to the Regional Office concerned
College of Agricultural Banking, RBI, PUNE
Branch Licensing Relaxations
Annual Policy 2007 – 08
UBD Circular July 04, 2007
• Branch licenses only in MOU States
 UCBs whose net worth was not less than Rs.10 crore
and average networth per bank, including the proposed
ones was not less than Rs.2 crore in ‘A’ and ‘B’ category
centres and Rs.1 crore in ‘C’ and ‘D’ category centres
 The eligibility of the banks to be decided on the basis of
their audited balance sheet for the financial year ended
March 2007
College of Agricultural Banking, RBI, PUNE
Branch Licensing Relaxations
(contd.)
• Eligibility Criteria
 Well managed and financially sound UCBs
 MOU signed States and
 Those registered under Multi-State Co-operative Societies Act, 2002
may submit their proposals for branch expansion based on their
Annual Business Plans (ABP) for approvals to the respective Regional
Offices of the Urban Banks Department of RBI
 ABP will be for a period of twelve months beginning 1st April of the
following year.
 UCBs should satisfy the following
 CRAR of 10% on a continuous basis with minimum owned funds
commensurate with entry point capital norms for the centre where branch is
proposed
 Net NPAs being less than 10%.
default in the maintenance of CRR/SLR during the preceding financial
June 16, 2008  No
year
 Net profit in the immediate preceding financial year and
 Regulatory comfort - compliance with B. R. Act, 1949 (AACS) and the
instructions / directions issued by RBI from time to time
College of Agricultural Banking, RBI, PUNE
Mahila Banks - Membership
• Can enroll male members up to a limit of 25 % of
their total regular membership, subject to
compliance by the banks with their respective
bye-laws
• Mahila UCBs to comply with the entry point
norms for general category banks
College of Agricultural Banking, RBI, PUNE
CAMELS Framework
Parameters
Weights
Capital Adequacy
18%
Asset Quality
18%
Management
18%
Earnings
10%
Liquidity
18%
Systems
18%
College of Agricultural Banking, RBI, PUNE
Camels Framework (contd.)
Weighted Average/ marks
Rating
Below 45
D
45 – 49
C-
50 – 54
C
55 – 59
C+
60 – 64
B-
65 – 69
B
70 – 74
B+
75 – 79
A-
80 – 85
A
Above 85
A+
College of Agricultural Banking, RBI, PUNE
Health of the Sector
• Stress tests were carried out on 52 scheduled
UCBs accounting for 43 per cent of the total
assets at end-March 2007 of all scheduled UCBs
 Tests restricted to the credit portfolio of these banks
 The credit portfolios of the UCBs were given shocks in
the form of an increase in the provisioning requirement
and an increase of 25 per cent and 50 per cent in the
non-performing assets
• Tests revealed that as at end-March 2007, 27
banks (accounting for 38 per cent of scheduled
UCBs’ assets) would not have been able to
comply with the 9 per cent with CRAR norm with
an increase in NPA levels by 25 per cent
College of Agricultural Banking, RBI, PUNE
Health of the Sector (contd.)
• At the system level, the CRAR declined from 11.4
per cent to 5.6 per cent at 25 per cent stress in
NPAS
• Further, with an increase in NPA levels by 50 per
cent, the number of banks that would not have
been able to comply with the stipulated minimum
increased to 31
• At the system level, the CRAR dipped sharply to
2.8 per cent
College of Agricultural Banking, RBI, PUNE
Umbrella Organisation
• Professionally Managed organsation that would
provide
 Offering credit facilities
 Providing liquidity to meet short term mismatches
 Fund management services
 Investment banking services
 Payment and settlement services/gateway
 IT Services
 ATM Network and services
 Management consultancy
 Capacity building services
College of Agricultural Banking, RBI, PUNE
Umbrella Organisation (contd.)
• Membership to UO voluntary
• Will be an NBFC. Can be converted to a bank
later
• Authorised capital – Rs. 200 crore
• Paid up capital – Rs. 100 crore
• Membership at 10 paise per Rs. 100 asset
• One time membership of Rs. 1 lakh
College of Agricultural Banking, RBI, PUNE
Umbrella Organisation (contd.)
• Being a non-deposit taking NBFC, it would have
access to the following sources for its working
capital:
 Borrowings from banks/financial institutions
 Deposits: term deposits from UCBs
 Debt instruments: bonds/debentures
 Refinance: against financial assets (loans and advances)
including securities
 Other miscellaneous sources
College of Agricultural Banking, RBI, PUNE
Umbrella Organisation (contd.)
• Deposits kept by the UCBs with the UO qualifying
as CRR/SLR
• Permitting the UO membership of the Payment &
Settlement systems
• Any other support that may be required in future,
such as setting up of ATM networks, etc.
College of Agricultural Banking, RBI, PUNE
Umbrella Organisation (contd.)
• Emergency Fund Facility Scheme under a
tripartite Industry Support Agreement (ISA)
 UCBs under State Cooperative Act to contribute 0.5 per
cent of their asset to the fund as deposits at a specified
rate of interest
 Fund would be available to the participating UCBs as a
soft loan (liquidity support) carrying interest, say at 8%
[cost of funds (6%) +2% markup] for a period of not
more than six months/one year
 The quantum of liquidity support at a soft rate (First
Tranche) may be capped at 50% of net worth of the
UCB concerned
College of Agricultural Banking, RBI, PUNE
Umbrella Organisation (contd.)
• Under the ISA, a participating UCB should also commit to
provide a line of credit to the Emergency Fund when called
upon to do so (say additional 0.05% of its assets) at a
specified rate of interest (say, the prevailing interest rate
for one year deposit)
• The amount may be used for providing liquidity support
under Second and Third Tranches to UCBs, at rates higher
than the loan under First Tranche say at 10% [ cost (8%)+
2%mark up} and 12%[cost(10%)+2% mark up)
respectively. The Second and Third Tranches may also be
to the extent of 75% and 100% of the net worth of the UCB
concerned, respectively
• TAFCUBs may be entrusted with the responsibility of
working as the Steering Committee for setting up of trust
fund
College of Agricultural Banking, RBI, PUNE
Umbrella Organisation (contd.)
•
Revival Fund
 UCBs with negative net worth were to be brought to positive net worth, an
enormous sum of about Rs.2, 500 crore may be required
 RBI may pursue a menu of options, including mergers, with or without DICGC
support
 The total net profit of the sector being about Rs.1,000 crore,
mobilization of this magnitude of resources from the sector may
not be feasible
 Such a fund could only be raised out of contribution from the net
profits of UCBs
 Further, contribution from the profits to the Revival Fund would be
resisted by UCBs
 The Working Group also felt that the State and Central
Government may not come forward to contribute to the Revival
Fund for UCBs
 Therefore, creation of separate Revival Fund for UCBs is not
recommended
College of Agricultural Banking, RBI, PUNE
Report on IT Support for UCBs
• This minimum level of IT infrastructure should
include the following:
• Computerized front-end i.e. customer interface
• Automatic backend accounting (through
software)
• Computerized MIS reporting; and
• Automated regulatory reporting
College of Agricultural Banking, RBI, PUNE
Report on IT Support for UCBs (contd.)
Models Suggested
• Application Service Provider (ASP) Model
 Agency like IDRBT could short-list/select one/ few
vendors and be the conduit and service quality assuror
to the banks
 Payment model for the ASP option includes a one time
payment and a small charge every month combined with
per transaction fee
 Initial Investment in ASP model would be less and by
combining the requirements of a large number of banks
the cost could be further reduced
 Good for smaller UCBs
College of Agricultural Banking, RBI, PUNE
Report on IT Support for UCBs (contd.)
Models Suggested
• Outright Purchase Model
 Only UCBs which have a business of more than 100
crores, CRAR of over 9% and have been profit making
for the past 3 years could be provided support for
outright purchase
 Outright purchase of the Core Banking, including data
centre, the cost would be in the range of 1.5 crore to 2
crore for 5-10 branches per bank
Only those banks which are well capitalised and with good track record, who give
confidence and comfort that the end use of funds are assured, and that they haveIT
savvy personnel to implement/oversee and deal with the vendors and for whom investing
in an outright purchase option is financially a preferable option should be given the option
to choose this model
College of Agricultural Banking, RBI, PUNE
Report on IT Support for UCBs (contd.)
Delivery Mechanism
• Support will be available to all UCBs but it should
not be treated as a grant
• Support may be in the form of a loan and not
subsidy
• Interest free loan for 7 years – for both hardware
and software
If required, IDRBT may develop an area of expertise within itself to cater to the IT
needs of small banks, including UCBs. National and State Federation of
cooperatives may also think of creating such IT facilities for UCBs in the long run
for the benefit of the sector
College of Agricultural Banking, RBI, PUNE
Report on IT Support for UCBs (contd.)
Delivery Mechanism
• Big banks preferring to go for outright purchase
of software and hardware
 Interest free with only service charge of ½ percent to 1
percent to be charged by the SCB routing the loan may
be considered
 Weak / sick banks, the ‘moratorium’ may be for two
years
 In case the UCB defaults on its repayment
obligations even after that, a view may be
taken at that point regarding other options
like continuation of management, nondisruptive exit of the bank etc.
College of Agricultural Banking, RBI, PUNE
Report on IT Support for UCBs (contd.)
Delivery Mechanism
• Banks adopting ASP Model
 Interest-free loan by the Reserve Bank could be through
IDRBT, which could prepare Systems Requirement
Specifications, select vendors, prepare development /
testing & implementation plans, and vetting the SLA
(Service Level Agreement) between users i.e. UCBs and
the service providing entity
• UCBs adopting outright purchase model
 The Group felt that the Reserve Bank may not be able to
extend direct loans
 However, NABARD has a separate fund for IT usage in
co-operative sector, a portion of which can be routed to
UCBs, through SCCB / DCCBs
College of Agricultural Banking, RBI, PUNE
Thank You
College of Agricultural Banking, RBI, PUNE