regualtion and supervision of ubd - 220210 (1)

College of Agricultural Banking, RBI, PUNE Regulation and Supervision of Urban Cooperative BanksJyoti Kumar PandeyDeputy General Manager & Member of FacultyCollege of Agricultural Banking Reserve Bank of India, Pune

College of Agricultural Banking, RBI, PUNE

College of Agricultural Banking, RBI, PUNE Co-operative Credit StructureRural credit institutions and urban cooperative banksPACs and UCBs at the base levelState 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 ActsNo controlling interest since the board of management is elected by share holders in a democratic mannerOne member one vote irrespective of number of shares held by a memberDuality of command RCS / CRCS and RBI


College of Agricultural Banking, RBI, PUNE Characteristics of UCBs (Contd.)

Borrowing restricted to membersRestricted area of operationShare linking to borrowingNo listing / no trading of sharesStrong in helping financially weaker section


College of Agricultural Banking, RBI, PUNE Reasons why UCBs were brought under RBIs controlDemand for introduction of deposit insurance to cooperative banksRapid growth of the cooperative banking sector necessitated better monitoringEffective from March 1,1966, provisions of B.R. Act (1949) were extended to UCBsThis resulted in dual command, cooperation being a state subject


College of Agricultural Banking, RBI, PUNE Progress of Urban Co-operative BankPHASE I In formative stage, urban credit societies organised by communitiesPHASE II - Post 1966PHASE III - Post Marathe CommitteePHASE IV - Post Madhav Rao / Madhavpura Mercantile Cooperative Bank Crisis


College of Agricultural Banking, RBI, PUNE Progress of UCBs (Contd.)

(Rs. in crores)No. of UCBsDepositsAdvances1966-6711061531671990-911307866078021995-96132724165179081997-9815024069227801


College of Agricultural Banking, RBI, PUNE Progress of UCBs (Contd.)

(Rs. in crores)No. of UCBsDepositsAdvances200120848084054389200220909306962060200321041015466488820061853112237703792009172115873397918


College of Agricultural Banking, RBI, PUNE State-wise Position of UCBsFigures in bracket are for 2007

Regional OfficeNumber of banks in Grade II, III and IVNumber of banks in Grade IINumber of banks in Grade IIINumber of banks in Grade IV1Guwahati111 (6)4 (4)6 (1)2Thiruvanathapuram489 (11)31 (28)8 (11)3Bhopal5617 (24)26 (15)13 (9)4Kolkata6- (10)- (1)6 (9)5Nagpur6531 (76)20 (39)14 (39)6Hyderabad10444 (33)34 (7)26 (11)7Bangalore18879 (92)97 (55)12 (42)8Bhubaneshwar115 (4)6 (4)0 (4)9Chandigarh134 (3)5 (-)4 (4)10Ahmedabad18750 (88)85 (42)52 (40)11Lucknow308 (17)14 (4)8 (5)12Jaipur92 (13)5 (1)2 (1)13Mumbai10132 (178)49 (76)20 (80)14Chennai11019 (34)76 (22)15 (6)15New Delhi41 (1)2 (-)1 (2)16Jammu11 ()0 (1)0 ()17Dehradun-- (-)- (1)- (2)18Patna11 (-)0 (-)0 (-)19Raipur -- (5)- (-)- (4)18Patna11 (-)0 (-)0 (-)Total944303454187


College of Agricultural Banking, RBI, PUNE State-wise Position of UCBsGrade II 598Grade III 295Grade IV 268Grade I 652

Grade I - 845Grade II - 484Grade III - 219Grade IV 173

Figures in for 2007Figures in for 2009 - 1721


College of Agricultural Banking, RBI, PUNE State-wise Position of UCBsFigures in bracket are for 2006

CentreGrade IGrade IIGrade IIIGrade IVTotal 2006200720062007200620072006200720062007Ahmedabad136114508867424340296284Bangalore9099769285554642297288Bhopal1612282417151497560Bhubaneswar126434441414Chandigarh109131441616Chennai54693234392276132131Dehradun4127Guwahati664644411817Hyderabad486543331871511124116Jaipur2524101331113939Jammu232144Kolkata3031111031795151Lucknow4744131794857770Mumbai17311712817884767180456451Nagpur5317457643393339174171New Delhi121211221515Patna351155Raipur55414Thiruvananthapuram1014111428231196060Total7166524605984072952702681,8531,813


Centre-wise Distribution of UCBsCollege of Agricultural Banking, RBI, PUNE


College of Agricultural Banking, RBI, PUNE Role of RBIRegulatory, 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 FunctionsLicence to commence banking business under Section 22 of B.R. Act, 1949 (AACS)Licence to open branches & extension countersPermission to deal in foreign exchangeIssue of directions to maintain cash reserve and liquid assetsPower to control advances (Section 21) Purposes for which advances are given, margins to be maintained


College of Agricultural Banking, RBI, PUNE RBIs Regulatory FunctionsIssue of prudential and operational guidelinesDirections on maximum limit on advances, prescribe guidelines on individual / group exposure normsIssue of requisition to RCS for supersession of board of management of bank / liquidation of banks


College of Agricultural Banking, RBI, PUNE RBIs Regulatory FunctionsInterest 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 / SLRGrant of scheduled status


College of Agricultural Banking, RBI, PUNE Supervisory FunctionOn-site supervisionOff-site returnsOff-site surveillance



RBIs Developmental FunctionsRefinance to small scale industries sector through UCBsIdentification of financially unsound banks and rehabilitation of such banksTraining 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 branchesLarge number of financially unsound banksSteep increase in deposits consequent on deregulationHigh rate of interest on deposits, consequently on advancesAdverse selection of borrowersLow capital baseDual/triple controlBelated 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 SectorLack of professionalismPolitical interferenceUnlicensed UCBsLow level of computerisationNo Central recruitment Faulty recruitment system / excess staff / poor skill upgradationLow level of operational efficiencyHigh 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 MMCBAccess to call money SLR investments

College of Agricultural Banking, RBI, PUNE *

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 banksAdverse selection of borrowers


College of Agricultural Banking, RBI, PUNE Regulatory Issues concerning RBICapital Adequacy

UCBs unable to maintain capitalHPC viewed CRAR to be made applicable to UCBsIssue pertaining to Deposit Insurance

Some states do not have eligibility clause to be covered under DICGC Act, 1961Insured banks often default payment of premium


College of Agricultural Banking, RBI, PUNE Regulatory Issues concerning RBISupervision of UCBs

Large number of banks On-site inspection in two years time frameSystem is under severe strain to maintain the scheduleNeed for off-site surveillance

Other issues

Financially unsound banksUnlicensed banks in KeralaRecent transactions by UCBs in Government Securities


College of Agricultural Banking, RBI, PUNE Road Map To FutureFocus on:

Consolidation : slow down in issue of new LicenceWeeding out weak unitsStrengthening of regulatory and supervisory standards


College of Agricultural Banking, RBI, PUNE Policy ChangesStanding Advisory CommitteeGuidelines issued to commercial banks by DBOD and DBSRecommendations of committees / working groupFeed back / representations from NAFCUB / local Cooperative Banks Association / UnionsRecommendations of JPC etc.


College of Agricultural Banking, RBI, PUNE CommitteesMadhava Das - 1978Marathe - 1992Chitale Committee -1996Madhava Rao -1999Anant Geete Committee 2002Joint Parliamentary Committee


College of Agricultural Banking, RBI, PUNE Recent Policy ChangesImplementation of Madhava Rao committee recommendationsRecent monetary policy measures after the failure of Madhavpura Mercantile Cooperative Bank Ltd., AhmedabadAnant Geete Committee recommendationsRecommendations of JPCSardesai Committee recommendationsMOUOther measures



Off-site surveillance systemDesigned for continuous monitoring of banks operationInitially 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-basedInitially, 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 banksSLRC meets to periodically review progressDiscussions with CEOs/ChairmenTimeframe for improvement


College of Agricultural Banking, RBI, PUNE Application Of Prudential NormsIntroduction of CRAR Why CRAR Introduced Belatedly ?Various Constraints


College of Agricultural Banking, RBI, PUNE Introduction of CRAR

DATEScheduled UCBsNon-scheduled UCBSMARCH 31, 20028 %6 %MARCH 31, 20039 %7 %MARCH 31, 2004AS APPLICABLE TO COMMERCIAL BANKS9 %MARCH 31, 2005As Applicable To Commercial BanksAs Applicable To Commercial Banks


College of Agricultural Banking, RBI, PUNE Introduction of CRAR (Contd.)CRAR now important parameter to know the financial soundness of UCBsExpansion etc. not allowed if CRAR not at stipulated levelLarge Increase in share capital not possible owing to Acts provisionsUCBs to transfer 50% of profit if stipulated level not achieved.


College of Agricultural Banking, RBI, PUNE Vishwanathan Working GroupFor augmenting capital of UCBsState Governments be requested to exempt the UCBs from the existing monetary ceiling on individual shareholdingProvide 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 BankUCBs 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 depositsRationale

against co-operative principlesTantamount to exposure in the UCBsPrevention of systemic risks1. 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 lendRationale

To prevent asset liability mismatchEvening out temporary liquidity mismatches 2. Operations in Call Money Market



Operations In Call Money Market

UCBs should report the borrowing every next day to MPD and UBD

Penalty for violationFortnightly statement to Regional Office on lending and borrowingMonitoring :


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 NDTLEarlierNow Applicable Non-scheduled UCBsUCBs With NDTL Of Rs. 25 Crore And Above10.0 %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 bankshaving single branch-cum-head-office or having multiple branches within a single districthaving 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, 2006on 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 involvedBan to be effective from October 01, 2003Fortnightly return prescribed to monitorRecommendations 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 UCBsnormal 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 banksUBD Circular dated October 06, 2005


College of Agricultural Banking, RBI, PUNE Anant Geete Committee Recommendations (2002)

Increased as recommended by the CommitteeFor 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 lakhFor scheduled banks : Rs.2.00 lakhOnly 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 UCBsRequirement of deposit accepting banks:

Three consecutive A audit ratingsCompliance with RBI requirementsNo inter scheduled UCB deposits2. PLACEMENT OF DEPOSITS WITH OTHER UCBsDone away with


College of Agricultural Banking, RBI, PUNE JPC Recommendations

Concurrent audit made mandatory for all UCBsAudit committee of board as stated in earlier circulars, should exist in each of the banksAudit 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 weeksAll defects pointed out in inspection report to be removed within 4 monthsCertificate to be effect submitted to RBI within 4 monthsFalse certificate or delayed compliance to attract penal actionStrict penalty for non compliance of RBI directives

2. COMPLIANCE TO RBI REPORT:


College of Agricultural Banking, RBI, PUNE Other JPC RecommendationsDual control should goInspection report should comment on the quality of audit reportImprovement of on-site / off-site supervisionProhibition of loans & Advances to Directors and their relatives and concerns in which they are interested


College of Agricultural Banking, RBI, PUNE Sardesai Committee

ON-SITE INSPECTION- NEW THRUSTClassification of banksExisting frequencyRevised frequency

Scheduled banks Once in a yearOnce in a yearGrade I Once in three yearsOnce in two yearsGrade II NA Once in 18 monthsGrade IIIOnce in a yearOnce in a yearGrade IVOnce in a yearOnce in a year


College of Agricultural Banking, RBI, PUNE Sardesai Committee (Contd.)

Each UCB to be inspected at least once in two yearsFocused supervision of UCBs with deposits more than Rs.100 croreROs to be fully responsible for follow upPeriodic interaction of ROs with State Authorities

Inspection New Approach:


College of Agricultural Banking, RBI, PUNE Sardesai Committee (Contd.)Upgradation of skills of Inspecting OfficersStaff requirements of UBD being finalisedThree ROs with huge backlog to initiate revised measures

Inspection New Approach


College of Agricultural Banking, RBI, PUNE Shifting focus - Inspection

Traditional ApproachCAMELSBalance Sheet ApproachAnalytical ApproachImpressionisticBased on certain fixed parametersProne 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 UpFocus: On Early Identification By Objective ParametersNomenclature changed banks not to be classified as weak / sickThe banks to be classified into four Grades depending upon their financial statusFour grades depending upon NPA level, CRAR , Regulatory complianceProfitability


College of Agricultural Banking, RBI, PUNE Dual Control of UCBs Managerial aspects viz.

RegistrationConstitution of managementAdministration and recruitment Amalgamation and liquidationStatutory 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 SubjectConcurrent ListDemarcation of Areas of managerial related and banking related functions

Issues:


College of Agricultural Banking, RBI, PUNE Separate Supervisory AuthorityDuality / multiplicity of control slackens regulatory controlApex Single body to regulate and superviseComprising 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, andGovernment 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, 1949Management related functions, like, Elections, Conduct of Directors, etc., to be with RCS.Banking related functions to be with RBIAudit 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 deletedMake all provisions of the parent Act applicableSection 10B and 10BB requiring RBI approval for appointment of full time Chairman / MDSection 10C would enable non-member as ChairmanServing MPs / MLAs / MLCs as also stockbrokers banned from being a director of the bank


College of Agricultural Banking, RBI, PUNE Disclosure NormsApplicable to UCBs with deposits of Rs.100 crore & moreCRAR, 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 CourtThe Court Holds That The RBI Can Not Give Banking Licence to

Societies Registered Under Multi State ActDirections 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 banksSection 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 CommitteeComprised of four eminent experts of impeccable credentials from the fields of banking, finance and co-operation Need and potential, Viability of the proposal / institutionSince September 2001 up to date, the Committee

considered 216 proposals 'in principle' approval for 9 proposals205 proposals rejected (2 under correspondence)(Licenses granted in 1999-2000 : 114, 2000-01 : 28)


College of Agricultural Banking, RBI, PUNE Revised Licensing Policy: Present StanceAnnual 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 StanceUCBs, 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 ensuredNo new extension counter will be allowed in the institution in which the extension counter is housed presently


College of Agricultural Banking, RBI, PUNE Unlicensed UCBsWHAT IS AN UNLICENSED BANK ?REQUIEMENT FOR LICENSING: (Present Policy)

Compliance for entry point normsCompliance with CRARNet NPA less than 10%, andProfit for preceding 3 yearsFinal decision for existing unlicensed March 31, 2003Directions of BFS


College of Agricultural Banking, RBI, PUNE Annual Policy Statement: 2004-05To consider issue of licences to new proposals only after a comprehensive policy is in place, including appropriate legal regulatory frameworkTo consider only such schemes of reconstruction which envisages recapitalisation by stakeholders


College of Agricultural Banking, RBI, PUNE Mid Term Review of Annual Policy Statement: 2004-05Vision DocumentStanding 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 DocumentNeed 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 federationsMOU signed with the State of Gujarat, Andhra Pradesh, Karnataka and Madhya PradeshTAFCUB 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 regimeIdentify 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 viablethe sources of fund changes in management where necessary and the time frame for achieving viabilityIn doing so, the TAFCUB may assign responsibility to different agencies for facilitating the turn-aroundTo 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 IndiaTo recommend the manner and time frame for exit of the un-viable banks either by

merger / amalgamationconversion into a credit society and liquidationThe 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 memberTo recommend on the management aspects of a bank which is placed under the revival planAny 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 regimeCRAR could be replaced by NOF to NDTL ratioExposure to sensitive sector restrictedLower prescribed limit for investment in G-SecRestrictions to insulate them from systemic shocksRestricted geographical operationsSuch 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 banksExtant relaxations may continue up to the period specifiedThere should be no concept of unscheduled multi state bankCRCS may ensure that a bank is scheduled before it is granted license under MCS ActExisting 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 banksDevelopmental Role

RBI may help particularly small UCBs in helping their skillsCAB 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 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 banksNot 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 districtBanks 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 bankBanks with deposits below Rs.100 crore, whose branches were originally in a single district but subsequently, became multi-district due to reorganization of the districtTier 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 concernedMarch 07, 2008


College of Agricultural Banking, RBI, PUNE New Business OpportunitiesInsurance

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 croreShould 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 normsConduct 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 licenceIt 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 ATMsBanks permitted to have ATMs can also issue ATM-cum-debit cardsPrior approval of the Reserve Bank for network connectivity and/or sharing of the ATMs dispensed withConversion 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 RelaxationsTier-I banks

The 180 day loan delinquency norm for NPAs extended by one more year i.e. up to March 31, 2008The 12-month period for classification of a substandard asset in doubtful category will be effective from April 1, 2008Further 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, 201060% as on March 31, 201175% as on March 31, 2012100% as on March 31, 2013Tier-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, 200760% as on March 31, 200875% as on March 31, 2009100% 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 informationCross-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 transferInterbank 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 RelaxationsBranch 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 centresThe 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 OperationsLicensed 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 RBIEligible 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 concernedUBD 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 centresThe 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 RBIABP will be for a period of twelve months beginning 1st April of the following year. UCBs should satisfy the followingCRAR of 10% on a continuous basis with minimum owned funds commensurate with entry point capital norms for the centre where branch is proposedNet NPAs being less than 10%.No default in the maintenance of CRR/SLR during the preceding financial yearNet profit in the immediate preceding financial year andRegulatory comfort - compliance with B. R. Act, 1949 (AACS) and the instructions / directions issued by RBI from time to timeJune 16, 2008


College of Agricultural Banking, RBI, PUNE Mahila Banks - MembershipCan 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 FrameworkCollege of Agricultural Banking, RBI, PUNE

ParametersWeightsCapital Adequacy18%Asset Quality18%Management18%Earnings10%Liquidity18%Systems 18%


Camels Framework (contd.) College of Agricultural Banking, RBI, PUNE

Weighted Average/ marksRatingBelow 45D45 49C-50 54C55 59C+60 64B-65 69B70 74B+75 79A-80 85AAbove 85A+


Health of the SectorStress 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 banksThe 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 assetsTests 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



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 NPASFurther, 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 31At the system level, the CRAR dipped sharply to 2.8 per cent



Umbrella OrganisationProfessionally 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 servicesCollege of Agricultural Banking, RBI, PUNE


Umbrella Organisation (contd.)Membership to UO voluntaryWill be an NBFC. Can be converted to a bank laterAuthorised capital Rs. 200 crorePaid up capital Rs. 100 croreMembership at 10 paise per Rs. 100 assetOne time membership of Rs. 1 lakh



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 sourcesCollege 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.



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 yearThe quantum of liquidity support at a soft rate (First Tranche) may be capped at 50% of net worth of the UCB concernedCollege 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, respectivelyTAFCUBs may be entrusted with the responsibility of working as the Steering Committee for setting up of trust fund



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 requiredRBI may pursue a menu of options, including mergers, with or without DICGC supportThe total net profit of the sector being about Rs.1,000 crore, mobilization of this magnitude of resources from the sector may not be feasibleSuch 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 UCBsThe Working Group also felt that the State and Central Government may not come forward to contribute to the Revival Fund for UCBsTherefore, creation of separate Revival Fund for UCBs is not recommendedCollege of Agricultural Banking, RBI, PUNE


Report on IT Support for UCBsThis minimum level of IT infrastructure should include the following:Computerized front-end i.e. customer interfaceAutomatic backend accounting (through software)Computerized MIS reporting; andAutomated regulatory reporting



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 banksPayment model for the ASP option includes a one time payment and a small charge every month combined with per transaction feeInitial Investment in ASP model would be less and by combining the requirements of a large number of banks the cost could be further reducedGood 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 SuggestedOnly 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 grantSupport may be in the form of a loan and not subsidyInterest free loan for 7 years for both hardware and software

College of Agricultural Banking, RBI, PUNE Delivery MechanismIf required, IDRBT may develop an area of expertise within itself to cater to the ITneeds of small banks, including UCBs. National and State Federation ofcooperatives may also think of creating such IT facilities for UCBs in the long runfor 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 consideredWeak / sick banks, the moratorium may be for two yearsIn 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 entityUCBs 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 / DCCBsCollege of Agricultural Banking, RBI, PUNE Delivery Mechanism


College of Agricultural Banking, RBI, PUNE Thank You


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regualtion and supervision of ubd - 220210 (1)

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