The Reserve Bank of India (RBI) has decided to adopt a simple four-tier regulatory framework with differentiated regulatory requirements aimed at enhancing the financial soundness of existing City Cooperative Banks (UCBs).

The RBI has stipulated a minimum net worth of Rs 2 crore for Tier 1 UCBs operating in a single district and Rs 5 crore for all other UCBs (of all tiers). “This should strengthen the financial resilience of banks and improve their ability to finance their growth,” he said.

According to data reported by UCBs as of March 31, 2021, most banks are already in compliance with the requirement. UCBs that fail to meet the requirement will be offered a five-year glide path with intermediate stages to facilitate a smooth transition to revised standards, the central bank said.

The RBI’s decision is based on the report submitted by the NS Viswanathan Committee on UCBs.

The minimum CRAR requirement for Tier 1 banks is maintained at the current requirement of 9% under the current Basel-1 rules-based capital adequacy framework. For UCB Tier 2, Tier 3 and Tier 4, while maintaining the current capital adequacy framework, it has been decided to revise the minimum CRAR to 12% in order to strengthen their capital structure, the RBI said.

“The increase in the CRAR requirement is reasonable as these UCBs do not have a full capital charge for market risk and currently maintain no capital charge for operational risk,” he said. According to data reported by banks as of March 31, 2021, most UCBs have a CRAR above 12% (1274 banks out of 1534).

In addition, banks that fail to comply with the revised CRAR will be given a three-year glide path to achieve compliance in a phased manner. Thus, these banks will have to achieve a CRAR of 10% by the financial year ending March 31, 2024, 11% by March 31, 2025 and 12% by March 31, 2026.

In order to stimulate growth opportunities in the sector, the RBI has decided to introduce an automatic route for the expansion of branches to UCBs that meet the revised Financial Soundness and Sound Management (FSWM) criteria and allow them to open new branches up to 10% of the number. branches at the end of the previous financial year. While branch expansion proposals under the pre-approval pathway will also continue to be reviewed as hitherto, the process will be streamlined to reduce the time required to grant approvals for new openings. branches, the RBI said.

For housing loans, it decided to assign risk weights based solely on the loan-to-value (LTV) ratio, which would result in capital savings. This will apply to all levels of UCB. Revaluation reserves will be considered for inclusion in Tier I capital subject to the applicable haircut on regular commercial bank lines.

In order to consider matters relating to the recommendation for a capital increase under the provisions of section 12 of the Banking Regulation Act 1949 (as amended) – applicable to co-operative societies – a working group consisting of representatives from the RBI, SEBI and the Ministry of Cooperation, the Government of India was constituted.

The committee also made certain recommendations regarding the umbrella organization for the UCB sector which will be considered once the entity is fully operational.