Enforcement of CAR Norms for UCBs Advanced [UPSC Notes]

In a surprise move, RBI has advanced the enforcement of net worth and capital adequacy norms for UCBs to 31st March 2023. This development is relevant for the Indian economy segment of the UPSC syllabus.

Enforcement of CAR Norms for UCBs Advanced

As per the circular (Revised Regulatory Framework for Urban Co-operative Banks) released by the RBI in December 2022, it was made clear that the net worth and capital adequacy norms will be applicable to primary urban cooperative banks (UCBs) and will come into effect from 1st April 2023.

Net worth norm:

  • Under these revised norms, RBI classifies all UCBs into a four-tier structure.
  1. Tier 1: UCBs having deposits up to Rs. 100 crore
  2. Tier 2: UCBs having deposits between Rs. 100 crore and Rs. 1000 crore
  3. Tier 3: UCBs having deposits between Rs. 1000 crore and Rs. 10000 crore
  4. Tier 2: UCBs having deposits of more than Rs. 10000 crore
  • The norm requires UCBs in tier 1 to have a net worth of Rs. 2 crore and all other UCBs (belonging to tier 2 to tier 4) to have a net worth of Rs. 5 crore.
  • All those UCBs that do not meet the criteria could accept a glide path recommended by RBI.
    • UCBs accepting the glide path should achieve at least 50% of the net worth norm by 31st March 2026 and the entire net worth norm by 31st March 2028.

Capital Adequacy Norm

  • Under this norm, RBI directs UCBs in tier 1 to maintain a minimum CAR of 9% of their risk-weighted assets on an ongoing basis. And all other UCBs (from tier 2 to tier 4) shall maintain a minimum CAR of 12% of their risk-weighted assets on an ongoing basis.
  • For all the UCBs (from tier 2 to tier 4), that do not meet the CAR criteria, RBI has recommended a phased plan. These UCBs should,
    • Achieve a CRAR of at least 10% by 31st March 2024
    • Achieve a CRAR of at least 11% by 31st March 2025
    • Achieve a CRAR of at least 12% by 31st March 2026

Recent Change:

  • Reserve Bank of India (RBI) advanced the enforcement of these norms for UCBs by a day from the earlier date of 1st April 2023. That is, these norms will come into effect from 31st March 2023. And all other instructions of the December circular will remain unchanged.
  • As only a few days are left to refigure the enforcement of the norms, this change could put UCBs in a difficult position.
Capital Adequacy Ratio (CAR)
  • It is a measure of a bank’s financial strength and its ability to absorb potential losses arising from its lending and investment activities. It is the ratio of a bank’s capital to its risk-weighted assets. In simpler terms, it is the amount of capital that a bank must maintain as a percentage of its total risk-weighted assets.
  • The capital adequacy ratio is a regulatory requirement that is set by banking authorities to ensure that banks are able to meet their financial obligations and continue operating even during times of financial stress. It is an important measure of a bank’s stability and soundness and is closely monitored by regulators, investors, and depositors.
  • A higher capital adequacy ratio indicates that a bank has a stronger financial position and is better able to withstand adverse economic conditions or losses.

Know more about capital adequacy ratio in the linked article.

 

Urban Cooperative Banks (UCBs)
  • Urban Cooperative Banks, commonly referred to as Primary Cooperative Banks, are cooperative societies that are registered under the relevant State Cooperative Societies Act or Multi-state Cooperative Societies Act of 2002.
  • The Registrar of Cooperative Societies is responsible for overseeing UCBs. However, the authority to grant banking licences and regulate, supervise, and enhance the banking operations of UCBs is vested in the RBI through the Banking Regulation (BR) Act of 1949.

Know more about cooperative banks in India in the linked article.

Enforcement of CAR Norms for UCBs Advanced:- Download PDF Here

Related Links
Urban Cooperative Banks in India Different Types of Banks in India
List of Regional Rural banks in India EXIM Bank
NABARD UPSC 2023 Calendar

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