The Reserve Bank of India (RBI) Thursday announced a four-tiered regulatory framework for categorisation of Urban Co-operative Banks (UCBs). These will be based on the size of deposits and come into force with immediate effect.

The central bank has also come out with norms relating to the net worth and capital adequacy of the UCBs.

The extant regulatory framework classifies UCBs into two tiers -- Tier I and Tier II.

In a circular, the RBI said given the heterogeneity in the cooperative sector, a tiered regulatory framework is required.

Such a framework is needed to balance the spirit of mutuality and co-operation more prevalent in banks of smaller sizes and those with limited area of operation vis-a-vis the growth ambitions of the large-sized UCBs and undertake more complex business activities.

"... it has been decided to adopt a four-tiered regulatory framework, as against the existing two-tiered framework, for categorisation of UCBs," it said.

The categorisation is aimed at strengthening the financial soundness of the UCBs and may be used for differentiated regulatory prescriptions.

In Tier 1, the RBI has put all unit UCBs and salary earners' UCBs (irrespective of deposit size), and all other UCBs having deposits up to Rs 100 crore in Tier 1.

The Tier 2 category will have UCBs with deposits over Rs 100 crore and up to Rs 1,000 crore. 

Under Tier 3, banks with deposits more than Rs 1,000 crore and up to Rs 10,000 crore will be covered.

UCBs with deposits more than Rs 10,000 crore have been categorised in Tier 4.

"If a UCB transits to a higher Tier on account of increase in deposits in any year, it may be provided a glide path of up to a maximum of three years, to comply with higher regulatory requirements...," the RBI said.

In another circular, the RBI has listed out the net worth and capital adequacy requirements of the UCBs.

A minimum net worth requirement of Rs 2 crore is required for Tier 1 UCBs operating in a single district. 

For all other UCBs (in Tier 1, 2 and 3) tiers), the minimum net worth should be Rs 5 crore.

The UCBs, which currently do not meet the revised minimum net worth requirement, will have to achieve the minimum net worth of Rs 2 crore or Rs 5 crore (as applicable) in a phased manner, RBI said.

The central bank also prescribed minimum capital to risk weighted assets ratio requirement for UCBs.

Tier 1 UCBs have to maintain a minimum capital to risk weighted assets ratio of 9% of Risk Weighted Assets (RWAs) on an ongoing basis. 

Tier 2 to 4 UCBs have to maintain a minimum capital to risk weighted assets of 12 per cent of RWAs on an ongoing basis, RBI said.