The Reserve Bank of India’s expert committee on urban co-operative banks (UCBs) has proposed a four-tiered structure to regulate them, depending upon the size of the deposits.

The committee, headed by former RBI deputy governor NS Vishwanathan, has suggested that UCBs can be split into four categories. While Tier-1 UCBs will have deposits up to Rs 100 crore, deposits between Rs 100-Rs 1,000 crore will be in Tier-2. UCBs with deposits between Rs 1,000 crore to Rs 10,000 will be in Tier-3 while Tier-4 will have deposits of over Rs 10,000 crore.

An umbrella organisation (UO) should be set up to oversee co-operative banks, the committee has suggested. “The UO should be financially strong and be well governed by a professional board and senior management, both of which are fit and proper,” it said.

The minimum capital for the UO should be Rs 300 crore with CRAR and regulatory framework akin to the largest segment of NBFCs, the panel said.

Also, in the long run, the UO may take up the role of a Self-Regulatory Organisation (SRO) for smaller UCBs.

The panel has suggested that RBI should not hesitate to use the route of mandatory merger to resolve UCBs that do not meet the prudential requirements. Beginning 2004-05 till March 2020, UCBs have undergone 136 mergers. Incidentally, Maharashtra has accounted for over half of them.

The UCBs should have different capital adequacy and regulatory norms for them based on their sizes.

The panel has suggested that the minimum Capital to Risk-Weighted Assets Ratio (CRAR) for them could vary from 9% to 15% and for Tier-4 UCBs the Basel III prescribed norms.

The RBI panel has also prescribed separate ceilings for home loans, loan against gold ornaments and unsecured loans for different categories of UCBs.

On consolidation of UCBs, the panel said that RBI should be largely neutral to voluntary consolidation except where it is suggested as a supervisory action.

"However, the RBI should not hesitate to use the route of mandatory merger to resolve UCBs that do not meet the prudential requirements after giving them an opportunity to come up with voluntary solutions," it said.

The minimum capital stipulation provides an embedded size to a UCB.

On resolution of UCBs, the committee said that under the Banking Regulation (BR) Act, the RBI can prepare scheme of compulsory amalgamation or reconstruction of UCBs, like banking companies.

This may be resorted to when the required voluntary actions are not forthcoming or leading to desired results.

The panel further said Supervisory Action Framework (SAF) should follow a twin-indicator approach -- it should consider only asset quality and capital measured through NNPA and CRAR -- instead of triple indicators at present. The objective of the SAF should be to find a time-bound remedy to the financial stress of a bank.

If a UCB remains under more stringent stages of SAF for a prolonged period, it may have an adverse effect on its operations and may further erode its financial position, it said.

It further suggested that amendments to the BR Act empowering the RBI to declare certain securities issued by UCBs as covered under the Securities Contract Regulation Act to facilitate their listing and trading in a recognised stock exchange may be made.

Till such time, the RBI may consider allowing banks in Tier 3 and 4, having the necessary technology and wherewithal, to issue shares at premium to persons residing in their areas of operation subject to certain conditions, the panel said.

On housing loans, the panel said the maximum limit may be prescribed as a percentage of Tier 1 capital, subject to RBI-prescribed monetary ceiling for Tier 1 UCBs (but higher than the present ceiling) and respective board of directors-approved ceiling for Tier 2 UCBs.

For Tier 2 UCBs, the risk weight on housing loans may be prescribed based on size of the loan and loan-to-value (LTV) ratio, in line with SCBs.

The panel has also made recommendations regarding loan against gold ornaments with bullet repayment option.