Regulation and Supervision of Urban Cooperative Banks

1
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

2
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

3
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

4
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

5
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

6
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

7
Progress of UCBs (Contd.)
(Rs. in crores) (Rs. in crores) (Rs. in crores) (Rs. in crores)
No. of UCBs Deposits Advances
1966-67 1106 153 167
1990-91 1307 8660 7802
1995-96 1327 24165 17908
1997-98 1502 40692 27801
8
Progress of UCBs (Contd.)
(Rs. in crores) (Rs. in crores) (Rs. in crores) (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
9
State-wise Position of UCBs
Figures in bracket are for 2007
  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 Guwahati 11 1 (6) 4 (4) 6 (1)
2 Thiruvanathapuram 48 9 (11) 31 (28) 8 (11)
3 Bhopal 56 17 (24) 26 (15) 13 (9)
4 Kolkata 6 - (10) - (1) 6 (9)
5 Nagpur 65 31 (76) 20 (39) 14 (39)
6 Hyderabad 104 44 (33) 34 (7) 26 (11)
7 Bangalore 188 79 (92) 97 (55) 12 (42)
8 Bhubaneshwar 11 5 (4) 6 (4) 0 (4)
9 Chandigarh 13 4 (3) 5 (-) 4 (4)
10 Ahmedabad 187 50 (88) 85 (42) 52 (40)
11 Lucknow 30 8 (17) 14 (4) 8 (5)
12 Jaipur 9 2 (13) 5 (1) 2 (1)
13 Mumbai 101 32 (178) 49 (76) 20 (80)
14 Chennai 110 19 (34) 76 (22) 15 (6)
15 New Delhi 4 1 (1) 2 (-) 1 (2)
16 Jammu 1 1 () 0 (1) 0 ()
17 Dehradun - - (-) - (1) - (2)
18 Patna 1 1 (-) 0 (-) 0 (-)
19 Raipur - - (5) - (-) - (4)
18 Patna 1 1 (-) 0 (-) 0 (-)
  Total 944 303 454 187
10
State-wise Position of UCBs
Figures in for 2007

• 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 2009 - 1721
11
State-wise Position of UCBs
Centre Grade I Grade I Grade II Grade II Grade III Grade III Grade IV Grade IV Total  
  2006 2007 2006 2007 2006 2007 2006 2007 2006 2007
Ahmedabad 136 114 50 88 67 42 43 40 296 284
Bangalore 90 99 76 92 85 55 46 42 297 288
Bhopal 16 12 28 24 17 15 14 9 75 60
Bhubaneswar 1 2 6 4 3 4 4 4 14 14
Chandigarh 10 9 1 3 1 4 4 16 16
Chennai 54 69 32 34 39 22 7 6 132 131
Dehradun 4 1 2 7
Guwahati 6 6 4 6 4 4 4 1 18 17
Hyderabad 48 65 43 33 18 7 15 11 124 116
Jaipur 25 24 10 13 3 1 1 1 39 39
Jammu 2 3 2 1 4 4
Kolkata 30 31 11 10 3 1 7 9 51 51
Lucknow 47 44 13 17 9 4 8 5 77 70
Mumbai 173 117 128 178 84 76 71 80 456 451
Nagpur 53 17 45 76 43 39 33 39 174 171
New Delhi 12 12 1 1 2 2 15 15
Patna 3 5 1 1 5 5
Raipur 5 5 4 14
Thiruvananthapuram 10 14 11 14 28 23 11 9 60 60
Total 716 652 460 598 407 295 270 268 1,853 1,813
Figures in bracket are for 2006
12
Centre-wise Distribution of UCBs
13
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)

14
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

15
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

16
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

17
Supervisory Function

• On-site supervision
• Off-site returns
• Off-site surveillance

18
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

19
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

20
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

21
Issues of Regulatory Supervisory Concern
(Contd.)

• UCBs membership of Payment System Should it be
  unconditional?
• Experience of MMCB
• Access to call money
• SLR investments

22
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?

23
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

24
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

25
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

26
Road Map To Future

• Focus on
• Consolidation slow down in issue of new
  Licence
• Weeding out weak units
• Strengthening of regulatory and supervisory
  standards

27
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.

28
Committees

• Madhava Das - 1978
• Marathe - 1992
• Chitale Committee -1996
• Madhava Rao -1999
• Anant Geete Committee 2002
• Joint Parliamentary Committee

29
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

30
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

31
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

32
Rehabilitation

• Increased frequency of inspection for financially
  unsound banks
• SLRC meets to periodically review progress
• Discussions with CEOs/Chairmen
• Timeframe for improvement

33
Application Of Prudential Norms

• Introduction of CRAR
• Why CRAR Introduced Belatedly ?
• Various Constraints

34
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
35
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.

36
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

37
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)

38
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

39
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

40
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

41
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

42
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

43
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
44
Changes in SLR Composition
Category Of UCBs Minimum SLR Holding In Government and other Approved Securities As Per Cent Of NDTL Minimum SLR Holding In Government and other Approved Securities As Per Cent Of NDTL
Earlier Now 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 NIL 10.0
Scheduled UCBs 15.0 Entire SLR requirement
45
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.

46
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.
47
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 Multi-State co-operative banks

48
Anant Geete Committee Recommendations (2002)
1. UNSECURED ADVANCES

• Increased as recommended by the Committee
• For non-scheduled UCBs with DTL lt than Rs.10
  crore Rs.50,000/-
• For non-scheduled UCBs with DTL gt 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

49
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

50
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

Done away with
51
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.

52
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

53
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

54
Sardesai Committee
ON-SITE INSPECTION- NEW THRUST ON-SITE INSPECTION- NEW THRUST 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
55
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

56
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

57
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
58
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

59
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

60
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

61
Dual Control on UCBs (Contd.)
Issues

• Shifting to Central Subject
• Concurrent List
• Demarcation of Areas of managerial related and
  banking related functions

62
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.

63
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

64
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

65
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

66
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.

67
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

68
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

69
Revised Licensing Policy for New Urban Banks
Focus Arrest Mushrooming Growth in UCBs

• Strong start up capital
• 4 categories
• Emphasis on professionalism
• Concept of unit banks
• Relaxation for special categories to continue
• Screening committee to process proposals

70
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)

71
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
72
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

73
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

74
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

75
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

76
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

77
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

78
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

79
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

80
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

81
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

82
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

83
Two Tier Framework Changes

March 07, 2008

• 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
84
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

85
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

86
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

87
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

88
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

89
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

90
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

91
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
92
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

93
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
94
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

95
CAMELS Framework
Parameters Weights
Capital Adequacy 18
Asset Quality 18
Management 18
Earnings 10
Liquidity 18
Systems 18
96
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
97
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

98
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

99
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

100
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

101
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

102
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.

103
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

104
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) 2mark up and
  12cost(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

105
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

106
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

107
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

108
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
109
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
110
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, non-disruptive exit
  of the bank etc.

111
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

112
Thank You