The Reserve Bank of India (RBI) has made modifications to the Supervisory Action Framework (SAF) for Urban Co-operative Banks (UCBs). The objective behind this revision is to resolve swiftly the financial stress that some UCBs are contending with. This action occurs in light of reported irregularities in the Punjab and Maharashtra Cooperative (PMC) Bank, which negatively impacted over 900,000 depositors. The SAF bears resemblance to the Prompt Corrective Action (PCA) framework, which commercial banks are subject to.
Understanding Co-operative Banks
Unlike commercial banks, Co-operative Banks stem from co-operative credit societies where community members pool resources to provide loans amongst each other under favorable conditions. Depending upon their operational region, these banks are categorized into Urban and Rural co-operative banks.
The Role of Commercial Banks
Commercial Banks are financial establishments that offer services in accepting deposits from the general public and providing loans with a profit-driven objective. The RBI has designated certain regulatory trigger points to instigate specific structured and discretionary actions for banks that hit such trigger points. These triggers are part of the Prompt Corrective Action (PCA) Framework, which revolves around three parameters: Capital Adequacy Ratio (CAR), net Non-Performing Assets (NPA), and Return on Assets (RoA). The PCA framework applies solely to commercial banks and does not cover co-operative banks and Non-Banking Financial Companies (NBFCs).
Differentiating UCBs and Commercial Banks
There are key differences between UCBs and Commercial Banks. While the RBI only partially regulates UCBs, controlling their capital adequacy, risk control, and lending norms, it does not manage their distress resolution, which are looked after by the Registrar of Co-operative Societies under the State or Central government. Another difference lies in the fact that borrowers can be shareholders in case of UCBs, a distinction that does not exist in commercial banks.
Key Facts
| Parameters | Co-operative Banks | Commercial Banks |
|---|---|---|
| Regulation | Partially by RBI | Fully by RBI |
| Borrowers As Shareholders | Allowed | Not Allowed |
| PCA Framework | Does not apply | Applies |
Implications of the Revised SAF for UCBs
The revised SAF subjects UCBs to restrictions based on three parameters: exceeding 6% of net advances in net Non-Performing Assets (NPAs), incurring losses for two consecutive financial years or having accumulated losses on balance sheets, and a dip in the Capital Adequacy Ratio (CAR) below 9%. In cases of serious governance issues, the RBI may also intervene.
Possible Restrictions and Actions by the RBI
The RBI may require UCBs breaching any of the above-mentioned parameters to submit a board-approved action plan to rectify the situation. The board may be asked to periodically review the progress and report to the RBI. If parameters are breached, the RBI can impose restrictions on declaration or payment of dividend or donation without prior approval. In case of CAR falling below 9%, the RBI may ask for a board-approved proposal for merging the UCB with another bank or converting into a credit society. Extreme measures could involve issuing a show-cause notice for cancellation of banking license if the normal functioning of the UCB could potentially harm its depositors or the public.
Conversion of Shivalik Mercantile Co-operative Bank Limited into a Small Finance Bank
Shivalik Mercantile Co-operative Bank Limited, the first UCB to receive ‘in-principle’ permission from the RBI, is set to convert into a Small Finance Bank (SFB). This event follows the RBI’s 2018 scheme announcement allowing voluntary transition of UCBs into SFBs. SFBs are special banking segments, created by the RBI under Government of India guidance, primarily to further financial inclusion by undertaking basic banking activities for un-served and underserved sections, including small business units and marginal farmers.
