On January 7, 2020,Inorder to better manage the stressed UCBs, India’s Central Bank, the Reserve Bank of India (RBI) has released its final Supervisory Action Framework (SAF) tightening norms for Primary (Urban) Co-operative Banks (UCBs).
The revised rules include threshold limits for asset quality, profitability and Capital to Risk-weighted Assets ratio (CRAR).
All such actions are taken under section 35A of the Banking Regulation Act, 1949 (as applicable to co-operative societies).Threshold limits for asset quality:
An UCB will be kept under supervisory action framework when its net non-performing assets (NPAs) exceed 6% of its net advances. As soon as this threshold is breached, RBI will take multiple actions, depending on severity of stress.
i.All primary UCBs are mandated to submit a board-approved action plan for reducing its net NPAs below 6% on quarterly/monthly basis, post-review progress report.
ii.All UCBs are also face restrictions on declaration or payment of dividend without prior approval.
iii.RBI can also have the right to order curtailment of sanction / renewal of credit facilities to sectors having high proportion of defaults once the threshold is breached.
iv.RBI also has option of putting restriction on fresh loans and advances carrying risk-weights more than 100% threshold breach.
Under the revised rules, an UCBs may be placed under the framework, if it incurs two consecutive years of losses.
Capital to Risk-weighted Assets ratio (CRAR):
UCBs may also come under the scanner when its Capital to Risk-weighted Assets ratio (CRAR) falls below 9 %.
i.RBI can advise the UCB to submit a board-approved plan to increase the CRAR to 9% or above within 12 months, advise board members to keep track of progress of the plan, or restrict declaration of a dividend or payment of donation without RBI approval.
On December 31, 2019, RBI mandates UCBs, with deposits of Rs 100 crore and above, to constitute the Board of Management (BoM), which will be a mandatory requirement for opening new branches. The primary functions of BoM include recommending action for recovery of NPAs, One Time Settlement and assisting the board in monitoring the same.
Background: RBI has been extremely cautious on the front of cooperative banks after it has prohibited Punjab and Maharashtra Co-operative Bank Limited (PMC) operations.
A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
Headquarters– Mumbai ,Maharashtra
Established– 1 April 1935
Governor– Shaktikanta Das
Deputy Governors– 4 (BP Kanungo, N S Vishwanathan, and Mahesh Kumar Jain, 1 is yet to be appointed)