College of Agricultural Banking, RBI, PUNE Regulation and Supervision of Urban Cooperative Banks Jyoti Kumar Pandey Deputy General Manager & Member of

College of Agricultural Banking, RBI, PUNE 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.) 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 RBIs 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 UCBsDepositsAdvances 1966-671106153167 1990-91130786607802 1995-9613272416517908 1997-9815024069227801

College of Agricultural Banking, RBI, PUNE Progress of UCBs (Contd.) (Rs. in crores) No. of UCBsDepositsAdvances 200120848084054389 200220909306962060 2003210410154664888 2006185311223770379 2009172115873397918

College of Agricultural Banking, RBI, PUNE State-wise Position of UCBs Regional Office Number of banks in Grade II, III and IV Number of banks in Grade II Number of banks in Grade III Number of banks in Grade IV 1 Guwahati111 (6)4 (4)6 (1) 2Thiruvanathapuram489 (11)31 (28)8 (11) 3 Bhopal5617 (24)26 (15)13 (9) 4 Kolkata6- (10)- (1)6 (9) 5 Nagpur6531 (76)20 (39)14 (39) 6 Hyderabad10444 (33)34 (7)26 (11) 7 Bangalore18879 (92)97 (55)12 (42) 8 Bhubaneshwar115 (4)6 (4)0 (4) 9 Chandigarh134 (3)5 (-)4 (4) 10 Ahmedabad18750 (88)85 (42)52 (40) 11 Lucknow308 (17)14 (4)8 (5) 12 Jaipur92 (13)5 (1)2 (1) 13 Mumbai10132 (178)49 (76)20 (80) 14 Chennai11019 (34)76 (22)15 (6) 15 New Delhi41 (1)2 (-)1 (2) 16 Jammu11 ()0 (1)0 () 17 Dehradun-- (-)- (1)- (2) 18 Patna11 (-)0 (-) 19 Raipur-- (5)- (-)- (4) 18 Patna11 (-)0 (-) Total944303454187 Figures in bracket are for 2007

College of Agricultural Banking, RBI, PUNE State-wise Position of UCBs Grade II 598 Grade III 295 Grade IV 268 Grade I 652 Grade I - 845 Grade II - 484 Grade III - 219 Grade IV 173 Figures in for 2007 Figures in for 2009 - 1721

College of Agricultural Banking, RBI, PUNE State-wise Position of UCBs Figures in bracket are for 2006 CentreGrade IGrade IIGrade IIIGrade IVTotal 2006200720062007200620072006200720062007 Ahmedabad136114508867424340296284 Bangalore9099769285554642297288 Bhopal1612282417151497560 Bhubaneswar1264344414 Chandigarh1091314416 Chennai54693234392276132131 Dehradun4127 Guwahati664644411817 Hyderabad486543331871511124116 Jaipur25241013311139 Jammu232144 Kolkata30311110317951 Lucknow4744131794857770 Mumbai17311712817884767180456451 Nagpur5317457643393339174171 New Delhi12 112215 Patna351155 Raipur55414 Thiruvananthapuram10141114282311960 Total7166524605984072952702681,8531,813

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 RBIs 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 RBIs 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 RBIs 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 RBIs 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 RBIs training institutions

College of Agricultural Banking, RBI, PUNE Issues of Regulatory & Supervisory Concern : 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 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 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 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 DATEScheduled UCBsNon-scheduled UCBS MARCH 31, 20028 %6 % MARCH 31, 20039 %7 % MARCH 31, 2004AS APPLICABLE TO COMMERCIAL BANKS 9 % MARCH 31, 2005As 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), non- convertible, 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 No inter UCB deposits Rationale against co-operative principles Tantamount to exposure in the UCBs Prevention of systemic risks 1. Prohibition of Deposits by UCBs With Other UCBs

College of Agricultural Banking, RBI, PUNE Policy Measures after Madhavpura Mercantile Cooperative Bank Crisis (Contd.) 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 2. Operations in Call Money Market

College of Agricultural Banking, RBI, PUNE Operations In Call Money Market UCBs should report the borrowing every next day to MPD and UBD Penalty for violation Fortnightly statement to Regional Office on lending and borrowing Monitoring :

College of Agricultural Banking, RBI, PUNE Changes in SLR Composition Category Of UCBsMinimum SLR Holding In Government and other Approved Securities As Per Cent Of NDTL EarlierNow Applicable Non-scheduled UCBs UCBs With NDTL Of Rs. 25 Crore And Above 10.0 %15.0 % UCBs With NDTL With Less Than Rs.25 Crore NIL10.0 % Scheduled UCBs15.0 %Entire SLR requirement

College of Agricultural Banking, RBI, PUNE Changes in SLR Composition (Contd.) 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 UBD Circular dated February 16, 2006 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 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 Ban On Loans to Directors etc.

College of Agricultural Banking, RBI, PUNE Ban on Loans to Directors (Contd.) 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 Multi- State co-operative banks UBD Circular dated October 06, 2005

College of Agricultural Banking, RBI, PUNE Anant Geete Committee Recommendations (2002) 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 1. UNSECURED ADVANCES

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.) 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 2. PLACEMENT OF DEPOSITS WITH OTHER UCBs Done away with

College of Agricultural Banking, RBI, PUNE JPC Recommendations 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. 1. Strengthening of Audit:

College of Agricultural Banking, RBI, PUNE JPC Recommendations (Contd.) 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 2. COMPLIANCE TO RBI REPORT:

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 ON-SITE INSPECTION- NEW THRUST Classification of banks Existing frequencyRevised frequency Scheduled banksOnce in a year Grade IOnce in three yearsOnce in two years Grade II NAOnce in 18 months Grade IIIOnce in a year Grade IVOnce in a year Sardesai Committee

College of Agricultural Banking, RBI, PUNE Sardesai Committee (Contd.) 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 Inspection New Approach:

College of Agricultural Banking, RBI, PUNE Sardesai Committee (Contd.) Upgradation of skills of Inspecting Officers Staff requirements of UBD being finalised Three ROs with huge backlog to initiate revised measures Inspection New Approach

College of Agricultural Banking, RBI, PUNE Shifting focus - Inspection Traditional ApproachCAMELS Balance Sheet ApproachAnalytical Approach ImpressionisticBased on certain fixed parameters Prone to prejudices of the IOObjective ? IO may miss certain key areasConclusions 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.) Shifting to Central Subject Concurrent List Demarcation of Areas of managerial related and banking related functions Issues:

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, Co- operative 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 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 Developments Relating to Apex Cooperative Bank of Maharashtra and Goa

College of Agricultural Banking, RBI, PUNE Unlicensed Banks Section 2(gg) of DICGC Act, 1961 defines eligible banks Section 16 of the Act deals with the liability of the Corporation in respect of insured deposits

College of Agricultural Banking, RBI, PUNE Revised Licensing Policy for New Urban Banks Strong start up capital 4 categories Emphasis on professionalism Concept of unit banks Relaxation for special categories to continue Screening committee to process proposals Focus: Arrest Mushrooming Growth in UCBs

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 Unlicensed UCBs WHAT IS AN UNLICENSED BANK ? REQUIEMENT FOR LICENSING: (Present Policy) Compliance for entry point norms Compliance with CRAR Net NPA less than 10%, and Profit for preceding 3 years Final decision for existing unlicensed March 31, 2003 Directions of BFS

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) 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

College of Agricultural Banking, RBI, PUNE Vision Document (Contd.) Supervision Increased dependence on off-site surveillance of RBI and on- site 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 S maller 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 : 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 multi- district 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 March 07, 2008

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 Co- operative 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 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 Conduct of Foreign Exchange Business by UCBs 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) Installation of Automated Teller Machines (ATMs) 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 Conversion of Extension Counters into Full-Fledged Branches 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 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 UBD Circular dated July 01, 2008

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 Annual Policy 2007 08 UBD Circular July 04, 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%. No default in the maintenance of CRR/SLR during the preceding financial 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 June 16, 2008

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

CAMELS Framework ParametersWeights Capital Adequacy18% Asset Quality18% Management18% Earnings10% Liquidity18% Systems18% College of Agricultural Banking, RBI, PUNE

Camels Framework (contd.) Weighted Average/ marksRating Below 45D 45 49C- 50 54C 55 59C+ 60 64B- 65 69B 70 74B+ 75 79A- 80 85A Above 85A+ 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.) 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 Models Suggested

Report on IT Support for UCBs (contd.) 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 College of Agricultural Banking, RBI, PUNE Models Suggested 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

Report on IT Support for UCBs (contd.) 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 College of Agricultural Banking, RBI, PUNE Delivery Mechanism 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

Report on IT Support for UCBs (contd.) Big banks preferring to go for outright purchase of software and hardware Interest free with only service charge of 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, non- disruptive exit of the bank etc. College of Agricultural Banking, RBI, PUNE Delivery Mechanism

Report on IT Support for UCBs (contd.) 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 Delivery Mechanism

College of Agricultural Banking, RBI, PUNE Thank You

Documents

College of Agricultural Banking, RBI, PUNE Regulation and Supervision of Urban Cooperative Banks Jyoti Kumar Pandey Deputy General Manager & Member of