Introduction
4.1 The co-operative banking sector, with its more than a century old existence,
plays an important role in enlarging the reach of institutional credit both from
geographic and socio-economic perspective. Though it supplements the efforts of
the commercial banks in credit delivery and deposit mobilisation, its extensive
branch networks with reach even in remote areas, makes it an important instrument
for achieving greater financial inclusion. However, the financial health of most
of the co-operative banks has been a cause for concern and has so far proved to
be a serious handicap in reaching out to the larger population. Thus, the focus
of recent policy measures is on revitalising and strengthening the co-operative
banking sector in India. The ongoing task of revitalising the rural co-operative
sector is progressing on the lines of the recommendations of the Task Force to
review the problems of rural cooperative sector and for the UCBs, based on Vision
Document, 2005. 4.2 The structure of the co-operative banking sector
in India is complex. Credit needs of diverse sections of the population, both
in terms of location and tenor, are addressed by different segments of the cooperative
banking sector. While the urban areas are served by the urban co-operative banks
with a single tier structure, the rural areas are largely served by two distinct
sets of institutions extending short-term and long-term credit. The short-term
co-operative credit institutions have a three-tier structure comprising State
co-operative banks (StCBs) at the apex level, district central co-operative banks
(DCCBs) at the intermediate level and primary agricultural credit societies (PACS)
at the base level. The long-term co-operative credit institutions have, generally,
a two-tier structure comprising the State co-operative agriculture and rural development
banks (SCARDBs) at the State level and the primary co-operative agriculture and
rural development banks (PCARDBs) at the district or block level. Long-term co-operative
credit institutions have a unitary structure in some States with State level banks
operating through their own branches, while in other States they have a mixed
structure with the existence of both unitary and two-tier systems. The States
which do not have long-term co-operative credit entities are served by State co-operative
banks (Chart IV.1). 4.3 Recognising
the importance of urban co-operative banks in providing banking services to the
middle and lower income group of people, the Reserve Bank in March 2005 drafted
a Vision Document for UCBs pointing out the problem of dual control as a restrictive
mechanism inhibiting its ability to handle the weaknesses of the entities within
the sector. As per the terms of the document, so far 23 State Governments
and Central Government (in case of multi-State UCBs) have signed the Memoranda
of Understanding (MoUs) with the Reserve Bank covering 98.6 per cent of the total
number of the UCBs representing 99.2 per cent of deposits of the sector. As a
part of the MoU, the State level Task Force for Cooperative Urban Banks (TAFCUBs)
have been set up to identify the potentially viable and non-viable UCBs in the
State and to chart out the revival path and non-disruptive exit route for the
two sets of banks, respectively. These measures instilled public confidence in
the sector which is evident from the increase in deposits for three successive
years, i.e., from 2005-06 to 2007-08. 
4.4 During 2007-08, the Reserve Bank continued with its policy of encouraging
States to sign MoUs to establish a co-ordinated supervisory/regulatory structure,
by further incentivising the scheme in the form of additional business opportunities,
opening of new ATMs and conversion of exchange counters into branches, among others.
The process of consolidation through mergers of UCBs progressed further during
the year with a total of 61 mergers being effected upon the issue of statutory
orders by the Central Registrar of Co-operative Societies/Registrar of Co-operative
Societies (CRCS/RCS) concerned. Further, as on March 31, 2008, 268 UCBs were under
various stages of liquidation. All these measures appeared to have positive impact
on the performance of the UCBs as a whole. Their businesses expanded at
an impressive rate and operating profit increased during the year. 4.5
The process of implementation of the recommendations of the Task Force on revival
of short-term rural co-operative credit structure (Chairman: Prof. A. Vaidyanathan)
started with the announcement of a package by the Government of India. Twenty
five States have signed MoUs with the Government of India and NABARD. At end-March
2008, 59,294 PACS completed the required special audit. Until end-August 2008,
eight States had amended their respective Co-operative Societies Acts. Common
Accounting System (CAS) and management information system (MIS) were introduced
along with several human resources development (HRD) initiatives. Recapitalisation
of eligible PACS has been initiated. The Central Government also reached an agreement
with the State Governments regarding the contents of the package to implement
the Vaidyanathan Committee report on revival of long-term cooperative credit structure. 4.6
Balance sheets of all segments of the rural co-operative banking sector, except
for SCARDBs, expanded during 2006-07. Continuing with the trend witnessed in the
last year, the upper tier of both short-term and long-term rural co-operative
credit institutions made profits during 2006-07 also, while the lower tier (viz.,
PACS and PCARDBs) incurred losses. However, the profits made by the upper tier
were lower during 2006-07, while the losses incurred by the lower tier were higher
as compared with 2005-06. As a result, at the aggregate level, the financial performance
of the rural co-operative banking sector on the whole deteriorated further during
2006-07. Asset quality in terms of NPAs to loan ratio improved at the aggregate
level as well as at disaggregated level for all segments of rural credit structure,
barring PCARDBs (in case of PCARDBs the ratio remained unchanged during 2006-07).
The recovery performance improved this year for DCCBs, PACS and PCARDBs, while
it worsened for StCBs and SCARDBs. 4.7 The chapter is organised into
five sections. Section 2 details the policy developments, business operations
and performance of urban co-operative banks, while Section 3 focuses on the policy
developments and performance of rural cooperative banks. Section 4 delineates
the role of NABARD in the rural co-operative sector and the initiatives taken
during the year to improve the performance of the rural cooperative banking sector.
Section 5 reviews the progress made in the implementation of the Vaidyanathan
Committee’s recommendations on revival of the rural cooperative banking
sector. 2. Urban Co-operative Banks Policy Developments
4.8 The consultative mechanism adopted by the Reserve Bank for regulation
and supervision of UCBs in line with the framework suggested in the Vision Document
(2005) through signing of MoUs helped strengthen the sector. Furthermore,
the Reserve Bank guidelines on merger/ amalgamation of UCBs, just prior to commencement
of the MoU process, helped phase out non-viable banks through a non-disruptive
exit route. Both of these mechanisms progressed well during 2007-08 and helped
the UCB sector to strengthen further. Besides, the Reserve Bank continued with
its policy of relaxed regulatory norms for Tier I UCBs, i.e., smaller
UCBs with deposit base of less than Rs.100 crore and having branches limited to
a single district. Moreover, the Reserve Bank also made available a number of
facilities to UCBs in those States that have signed MoU with the Reserve Bank.
Structural Initiatives Vision Document
4.9 A significant proposal of the Vision Document was to address the problem
of dual control of UCBs by signing of MoU between the Reserve Bank and the respective
State Governments, and establishing a consultative forum for supervision of the
banks. Accordingly, the Reserve Bank approached the States having a large network
of UCBs for signing MoUs. Since June 2005, MoUs have been signed with 23
State Governments (upto October 20, 2008) and with the Central Government in respect
of multi-State UCBs and TAFCUBs have been constituted in all such States.
The mechanism of TAFCUBs has been able to restore the confidence in the UCB sector
(Box.IV.1). Two Tier Regulatory Structures - Definition
Amended 4.10 The definition of Tier I bank was amended with effect
from March 7, 2008. Banks falling under the following categories are classified
as Tier I banks: (i) unit banks, i.e., banks having a single branch/head
office Box IV.1: MoU and TAFCUBs - Impact and
Progress In order to ensure greater convergence of regulatory and
supervisory policies between the two regulators in the urban cooperative banking
sector, viz., State Governments (Central Government in case of Multi-State
UCBs) and the Reserve Bank, the latter pursued a policy of encouraging the State
Governments to sign a Memorandum of Understanding (MoU) in this regard. Pursuant
to this policy, as on October 20, 2008, 23 States, viz., Gujarat, Andhra
Pradesh, Karnataka, Madhya Pradesh, Uttarakhand, Rajasthan, Chhattisgarh, Goa,
Maharastra, Haryana, National Capital Territory of Delhi, West Bengal, Assam,
Tripura, Punjab, U.P., Manipur, Meghalaya, Himachal Pradesh, Kerala, Mizoram,
Tamil Nadu and Sikkim have signed MoUs with the Reserve Bank. MoU has also been
signed with central Government in respect of multi state UCBs. As on October 20,
2008, the MoU has covered 1,746 UCBs out of 1,770 which accounts for 98.6 per
cent of total number of UCBs and 99.2 per cent of total deposits as well as advances
of the sector. As per the arrangements under MoU, the Reserve Bank constitutes
State level Task Force for Co-operative Urban Banks (TAFCUB) comprising representatives
of the Reserve Bank, the State Government and the UCB sector. Accordingly, TAFCUBs
have been constituted in all States that have signed MoUs. A Central TAFCUB has
also been constituted for the multi-state UCBs. TAFCUBs identify potentially viable
and non-viable UCBs in the States and suggest revival path for the viable and
non-disruptive exit route for the non-viable ones. The exit of non-viable banks
could be through merger/amalgamation with stronger banks, conversion of them into
societies or liquidation, as the last option. TAFCUBs, since its inception, have
examined the position of 949 UCBs (Including cases of banks reviewed more than
once) and taken decision on finalising merger with respect to 14 banks. Orders
of directions by the Reserve Bank were imposed on 37 banks and licenses were cancelled
for 40 banks. The impact of the consultative process is assessed in respect
of UCBs in states that signed MoUs before December 2006. As at end-March 2008,
number of UCBs in Grade IV declined from what it was at end-March 2006 in all
of these states, except in Rajasthan and Maharashtra/Goa. In case of UCBs in Grade
III, their number declined in all these states as at end-March 2008 over the same
three year period. However, in Uttarakhand the number remained same as it was
at end-March 2007 (Table I). Total number of Grade I and II
banks increased over the 3 year period from 2006 to 2008 in all these states except
Maharashtra/ Goa which witnessed a decline in number. In Uttarakhand the number
of Grade I and II remained unchanged in 2007 and 2008. Grade III and IV banks
declined in all the States over the mentioned three year reference period (Table
2).
Table
1: Comparison of Grades in the Last Three Years in First Nine States that
signed MoU before December 2006 |
(As at end-March
2008) | States | End
March | Grade
I | Grade
II | Grade
III | Grade
IV | Total |
1. | Andhra
Pradesh | 2008 | 72 | 26 | 7 | 10 | 115 |
|
| 2007 | 65 | 33 | 7 | 11 | 116 |
|
| 2006 | 48 | 43 | 18 | 15 | 124 |
2. | Gujarat | 2008 | 110 | 99 | 27 | 35 | 271 |
|
| 2007 | 114 | 88 | 42 | 40 | 284 |
|
| 2006 | 136 | 50 | 67 | 43 | 296 |
3. | Karnataka | 2008 | 118 | 75 | 54 | 33 | 280 |
|
| 2007 | 99 | 92 | 55 | 42 | 288 |
|
| 2006 | 90 | 76 | 85 | 46 | 297 |
4. | Madhya
Pradesh/ | |
| |
| |
| | Chhattishgarh | 2008 | 18 | 27 | 16 | 9 | 70 |
|
| 2007 | 17 | 29 | 15 | 13 | 74 |
|
| 2006 | 16 | 28 | 17 | 14 | 75 |
5. | Maharashtra/Goa | 2008 | 201 | 191 | 101 | 116 | 609 |
|
| 2007 | 134 | 254 | 115 | 119 | 622 |
|
| 2006 | 226 | 173 | 127 | 104 | 630 |
6. | Rajasthan | 2008 | 23 | 13 | 1 | 2 | 39 |
|
| 2007 | 24 | 13 | 1 | 1 | 39 |
|
| 2006 | 25 | 10 | 3 | 1 | 39 |
7. | Uttarakhand | 2008 | 4 |
| 1 | 1 | 6 |
|
| 2007 | 4 |
| 1 | 2 | 7 |
| Total | 2008 | 546 | 431 | 207 | 206 | 1,390 |
|
| 2007 | 457 | 509 | 236 | 228 | 1,430 |
|
| 2006 | 541 | 380 | 317 | 223 | 1,461 |
Table
2: Number of UCBs in Grades ‘I & II’ and in Grades ‘III
& IV’ and their Percentage to | Total
Number of UCBs in First Nine TAFCUB States that Signed MoU before December 2006.
| (As
at end-March 2008) | States | No.
of Banks | Percentage
to Total |
| | Grades
I & II | Grades
III & IV | Grades
I & II | Grades
III & IV | 1. | Andhra
Pradesh 2008 | 98 | 17 | 85 | 15 |
| 2007 | 98 | 18 | 84 | 16 |
| 2006 | 91 | 33 | 73 | 27 |
2. | Gujarat
2008 | 209 | 62 | 77 | 23 |
| 2007 | 202 | 82 | 71 | 29 |
| 2006 | 186 | 110 | 63 | 37 |
3. | Karnataka
2008 | 193 | 87 | 69 | 31 |
| 2007 | 191 | 97 | 66 | 34 |
| 2006 | 166 | 131 | 56 | 44 |
4. | Madhya
Pradesh/ |
| |
| |
| Chhattishgarh
2008 | 45 | 25 | 64 | 36 |
| 2007 | 46 | 28 | 62 | 38 |
| 2006 | 44 | 31 | 59 | 41 |
5. | Maharashtra/Goa
2008 | 392 | 217 | 64 | 36 |
| 2007 | 388 | 234 | 62 | 38 |
| 2006 | 399 | 231 | 63 | 37 |
7. | Rajasthan
2008 | 36 | 3 | 92 | 8 |
| 2007 | 37 | 2 | 95 | 5 |
| 2006 | 35 | 4 | 90 | 10 |
8. | Uttarakhand
2008 | 4 | 2 | 67 | 33 |
| 2007 | 4 | 3 | 57 | 43 |
| Total
2008 | 977 | 413 | 70 | 30 |
| 2007 | 966 | 464 | 68 | 32 |
| 2006 | 921 | 540 | 63 | 37 |
Note :
1. Sound UCBs with no supervisory concern are classified as Grade
I. The remaining three grades would indicate existence of supervisory concerns
in increasing degree as per their positions on capital adequacy, net loss, NPA
level, default in maintenance of CRR/SLR etc. 2. Data related to
Uttarakhand for the year 2006 are not available. | and
banks with deposits below Rs.100 crore, whose branches are located in a single
district; (ii) 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 per
cent of the total deposits and advances, respectively, of the bank; (iii) banks
with deposits below Rs.100 crore, whose branches were originally in a single district
but subsequently, became multi-district due to reorganisation of the district.
The deposit base of Rs.100 crore would be determined on the basis of average of
fortnightly net demand and time liabilities (NDTL) in the financial year concerned
and that of advances on the basis of fortnightly average in the financial year
concerned. Rest of the UCBs are categorised as Tier II banks. Merger/Amalgamation
and Exit of Unviable Entities 4.11 The consolidation
of the UCB sector through the process of merger of weak entities with stronger
ones was set in motion by providing transparent and objective guidelines for granting
'no-objection' to merger proposals (Box IV.2). Financial
Restructuring of UCBs having Negative Net Worth 4.12 Apart from
the non-disruptive exit route through mergers/amalgamations, the Reserve Bank
also considered financial restructuring proposals for problem banks with large
negative net-worth and with large number of deposit erosion. The financial
restructuring proposals had to fulfill the following conditions: (i) interest
of small depositors should be protected in full; (ii) a portion of deposit of
individual depositors above Rs.1 lakh would be converted into equity. A portion
of deposit of institutional depositors would be converted into innovative perpetual
debt instrument (IPDI), which would be eligible for inclusion as Tier I capital,
subject to certain terms and conditions; (iii) the proportion of deposits converted
into equity/IPDI should be such that the net worth of the bank after reconstruction
becomes positive; (iv) the bank would have to maintain CRR/SLR on the restructured
regular deposits; (v) after restructuring, the management of the bank should be
in the hands of a board of administrators consisting of representatives of individual
depositors, institutional depositors as well as professional bankers to ensure
proper implementation of the reconstruction scheme, including recovery of NPAs.
Working Group on Umbrella Organisations and Constitution of Revival
Fund for the UCB Sector 4.13 A Working Group on Umbrella Organisations
and creation of Revival Fund for the UCB Sector was constituted by the Reserve
Bank (Chairman: Shri V.S Das) on July 23, 2008: (i) to study the regulatory and
supervisory structure of umbrella organisations of financial co-operative institutions/banks
as prevalent in other parts of the world, especially in relation to raising of
capital and intra co-operative group support system; (ii) to study the existing
structure and legal framework for UCBs in India and to examine the need and scope
for a federated structure/umbrella organisation for UCBs at the State level; (iii)
to suggest appropriate supervisory and regulatory framework to facilitate emergence
of such umbrella organisation(s) for UCBs, taking into consideration the international
systems and experiences; and (iv) to study and suggest modalities for setting
up an appropriate mutual assistance/revival fund for urban cooperative banks and
the nature of support that could be provided by such fund. The Working Group,
which comprises members from the Central Government, the State Governments, the
UCB sector and the Reserve Bank have held three meetings so far. Box
IV.2: Merger and Amalgamation of UCBs Merger and amalgamation provides
an inorganic route for expansion, facilitating in the process consolidation, and
emergence of strong entities and also paving the way for non-disruptive exit of
weak/unviable entities. In view of these merits, the Reserve Bank provided transparent
and objective guidelines for granting no-objection to merger proposals. The Reserve
Bank looks into the financial aspects of the merger only with a view to protecting
the interests of depositors and financial stability. Almost invariably, banks
voluntarily approach the Reserve Bank to obtain no objection for their merger
proposal. The guidelines on mergers are intended to facilitate the process by
delineating the pre-requisites and steps to be taken for merger between banks.
The process of merger and amalgamation is elaborate. The application for
merger giving the proposed scheme has to be submitted by the acquirer bank to
the Registrar of Cooperative Societies (RCS)/Central Registrar of Co-operative
Societies (CRCS) and a copy of the proposal is simultaneously forwarded to the
Reserve Bank along with certain specified information. The Reserve Bank examines
the proposals and places the same before an expert group for screening and recommendations.
On evaluation, if the proposal is found to be suitable, the Reserve Bank issues
no objection certificate (NOC) to the RCS/CRCS and the banks concerned. RCS/CRCS,
being the authorities vested with the responsibility of administering the Co-operative
Societies Act, then issues the order of amalgamation of the target UCB in compliance
with the provisions of the Act under which the bank is registered. Pursuant
to the issue of guidelines on merger of UCBs, since February 2005, Reserve Bank
received 107 proposals for merger in respect of 92 banks. The Reserve Bank has
issued NOC in 68 cases (Table 1 and 2). Of
these, 61 mergers became effective upon the issue of statutory orders by the RCS/CRCS
concerned. Twenty
Table
1: State-wise Break-up of Acquirer Banks | (As
on November 7, 2008) | Sr.
No. | Act
Under Which Registered | No.
of Acquirer Banks | No.
of Proposals Submitted | No.
of NOC Issued | No.
of Proposals Rejected | No.
of Proposals Withdrawn | Proposals
Under Process |
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
1. | Multi-State | 13 | 56 | 40 | 9 | 3 | 4 |
2. | Maharashtra | 14 | 22 | 11 | 8 | Nil | 3 |
3. | Gujarat | 6 | 9 | 7 | 1 | 1 | Nil |
4. | Andhra
Pradesh | 6 | 7 | 5 | Nil | Nil | 2 |
5. | Karnataka | 3 | 4 | 2 | 1 | Nil | 1 |
6. | Rajasthan | 2 | 2 | Nil | 1 | Nil | 1 |
7. | Punjab | 1 | 1 | 1 | Nil | Nil | Nil |
8. | Uttarakhand | 2 | 3 | 2 | Nil | 1 | Nil |
9. | Madhya
Pradesh | 2 | 2 | Nil | Nil | Nil | 2 |
10. | Chattisgarh | 1 | 1 | Nil | Nil | Nil | 1 |
Total (1 to 10) | 50 | 107 | 68 | 20 | 5 | 14 |
Table
2: State-wise Break-up of Target Banks | (As
on November 7, 2008) | Sr.
No. | Act
Under Which Registered | No.
of Target Banks | No.
of Proposals Submitted | No.
of NOC Issued | No.
of banks Merged | No.
of Proposals Withdrawn | Proposals
Rejected | Proposals
Under process | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
1. | Multi-State | 1 | 1 | 1 | 1 | NIL | NIL | NIL |
2. | Maharashtra | 36 | 45 | 24 | 22 | 2 | 12 | 5 |
3. | Gujarat | 25 | 27 | 22 | 19 | 2 | 2 | 1 |
4. | Andhra
Pradesh | 11 | 11 | 9 | 8 | NIL | NIL | 2 |
5. | Karnataka | 6 | 8 | 5 | 4 | NIL | 2 | 1 |
6. | Goa | 1 | 1 | 1 | 1 | NIL | NIL | NIL |
7. | Rajasthan | 1 | 1 | NIL | NIL | NIL | 1 | NIL |
8. | Delhi | 1 | 1 | NIL | NIL | NIL | 1 | NIL |
9. | Punjab | 1 | 1 | 1 | 1 | NIL | NIL | NIL |
10. | Madhya
Pradesh | 6 | 7 | 3 | 4 | NIL | 2 | 2 |
11. | Uttarakhand | 2 | 3 | 2 | 1 | 1 | NIL | NIL |
12. | Chattisgarh | 1 | 1 | NIL | NIL | NIL | NIL | 1 |
Total (1 to 12) | 92 | 107 | 68 | 61 | 5 | 20 | 12 |
Table 3: Grade-wise
Distribution of Merged Banks | proposals
for merger were rejected by the Reserve Bank, five proposals were withdrawn
by the banks and the remaining 14 are under consideration. Out of the 68 target
banks for which NOC for merger was issued, 61 banks were merged and 35 of them
were having negative net worth (Table 3). The profit-making banks were also permitted
to merge with the aim of consolidation and strengthening the sector. |
Grade | Number
of Banks | I | 8 |
II | 4 |
III | 8 |
IV | 41 |
Total | 61 |
Memo item: Out of
41 Grade IV banks, 35 banks had negative net worth. | Statutory
Pre-emptions Policy on CRR 4.14 The cash reserve
ratio (CRR) for scheduled primary urban co-operative banks was reduced to 5.50
per cent with effect from the fortnight beginning November 8, 2008 (Table
IV.1). Policy on SLR 4.15 As per the provisions
of Section 24 of the Banking Regulation Act, 1949 (AACS), deposits placed by UCBs
with the higher financing agencies in the co-operative sector, viz.,
DCCBs/StCBs would be reckoned as SLR assets to the extent they are not encumbered.
However, instances have come to light where some UCBs availed loans from the DCCB/
StCB concerned without specifically earmarking their liability against their deposits.
Though technically the entire deposits were being treated as eligible SLR asset,
the deposits as such may not be available to the UCBs to meet their liquidity
needs. Moreover, the lender bank (DCCB/ StCB) in such cases can exercise
its lien over the deposits of UCBs which have availed of loans in case of defaults.
It was, therefore, decided that when a UCB avails of a loan from a DCCB/StCB with
which it is maintaining deposits, for the purpose of computation of SLR, the amount
of loan availed from the DCCB/StCB, would be deducted from the deposits, irrespective
of whether lien has been marked on such deposits or not. UCBs have
Table
IV.1: Changes in CRR | Sr.No. | Effective
date* | CRR
(As percentage of NDTL) | 1 | 2 | 3 |
1. | April
14, 2007 | 6.25 |
2. | April
28, 2007 | 6.50 |
3. | August
4, 2007 | 7.00 |
4. | November
10, 2007 | 7.50 |
5. | April
26, 2008 | 7.75 |
6. | May
10, 2008 | 8.00 |
7. | May
24, 2008 | 8.25 |
8. | July
5, 2008 | 8.50 |
9. | July
19, 2008 | 8.75 |
10. | August
30, 2008 | 9.00 |
11. | October
11, 2008 | 6.50 |
12. | October
25, 2008 | 6.00 |
13. | November
8, 2008 | 5.50 |
*: From the fortnight
beginning. | been given a certain
period to comply with the SLR requirements in the case of shortfall, if any, arising
from the above instructions. 4.16 The issue of valuation of special securities,
viz., those that do not qualify for the purpose of complying with the
SLR requirements of banks, was examined. It was decided that for the limited purpose
of valuation, all special securities issued by the Government of India directly
to the beneficiary entities and which do not carry SLR status, may be valued at
a spread of 25 basis points above the corresponding yield on Government of India
securities. This amendment would come into force from the financial year 2008-09.
Presently, such special securities comprise oil bonds, fertiliser bonds, bonds
issued to the State Bank of India (during the recent rights issue), the erstwhile
Unit Trust of India, Industrial Finance Corporation of India Ltd., Food Corporation
of India, Industrial Investment Bank of India Ltd., the erstwhile Industrial
Development Bank of India and the erstwhile Shipping Development Finance
Corporation. 4.17 It was further clarified on July 11, 2008 that the
balance maintained by UCBs in current account with IDBI Bank Ltd. would not be
eligible for being reckoned as ‘net balance’ in current account for
the purpose of CRR/SLR under sections 18 and 24 of Banking Regulation Act, 1949
(AACS) since IDBI Bank Ltd. is not reckoned for maintaining current accounts that
will be treated as cash for the purpose of CRR/SLR by co-operative banks. UCBs,
maintaining current account balances with IDBI Bank and presently reporting the
same as CRR/SLR, were advised to intimate the position as on June 2008 to respective
regional offices of the Reserve Bank. Regulatory Initiatives
Asset Classification and Provisioning Norms 4.18 The asset
classification and provisioning norms for Tier I UCBs would continue to be different
from Tier II UCBs as follows: (i) the 180 day loan delinquency norm for NPAs was
extended by one year, i.e., up to March 31, 2009; (ii) the 12-month period
for classification of a 'sub-standard' asset in 'doubtful' category by Tier
I UCBs would be made effective from April 1, 2009 instead of April 1, 2008; (iii)
these banks would be required to provide 100 per cent on the secured portion of
D-III advances ('doubtful' for more than 3 years) as on or after April 1, 2010;
and (iv) for the outstanding stock of D-III advances as on March 31, 2010, banks
would be required to provide: (a) 50 per cent as on March 31, 2010; (b) 60 per
cent as on March 31, 2011; (c) 75 per cent as on March 31, 2012; and (d) 100 per
cent as on March 31, 2013. 4.19 For Tier II banks, 100 per cent provisioning
norms for advances classified as D-III would be applicable 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 are required
to provide: (a) 50 per cent up to March 31, 2007; (b) 60 per cent as on
March 31, 2008; (c) 75 per cent as on March 31, 2009; (d) 100 per cent as on March
31, 2010. 4.20 Keeping in view the nature of membership and loan profile
of the salary earners' banks (SEBs), it was decided that the SEBs in Tier II may
provide for standard assets in respect of personal loans at the rate of 0.4 per
cent instead of the existing level of 2 per cent. Provisioning requirement in
respect of loans and advances qualifying as capital market exposure, commercial
real estate loans and loans and advances to systemically important NBFCs (non-deposit
taking companies) would, however, continue to be 2 per cent for such banks. Tier
I banks are already subject to a provisioning requirement of 0.25 per cent on
their standard advances. 4.21 UCBs were required to provide at the rate
of 10 per cent and 20 per cent per annum, respectively, on their exposure to DCCBs,
StCBs facing financial problems. In view of the absence of adequate avenues for
raising of capital by these banks and the adverse impact of the revised provisioning
norms on the profitability of UCBs, it was decided to defer the implementation
of the revised provisioning norms by one year, i.e., to March 31, 2009. Risk
Weights for Capital Adequacy 4.22 According to the announcement
made in the Annual Policy Statement for the year 2007-08, risk weight on loans
up to Rs.1 lakh against gold and silver ornaments was reduced to 50 per cent from
the prevailing level of 125 per cent. Further, risk weight for capital adequacy
purpose on housing loans to individuals was reduced from the prevailing level
of 75 per cent to 50 per cent as a temporary measure. This dispensation is applicable
for loans up to Rs.20 lakh and would be reviewed after one year, keeping in view
the default experience and other relevant factors. Moreover, as announced in the
Annual Policy Statement 2008-09, the limit in respect of bank loans for housing
in terms of applicability of risk weights for capital adequacy purposes was enhanced
from Rs.20 lakh to Rs.30 lakh and such loans would carry a risk weight of 50 per
cent. Education loans were earlier classified as a part of ‘consumer credit’
for the purpose of capital adequacy and attracted risk weight of 125 per cent.
After a review, UCBs were advised not to classify education loans as 'consumer
credit' for the purpose of capital adequacy norms. Accordingly the risk weight
applicable to education loans would be 100 per cent as against 125 per cent.
Asset-Liability Management 4.23 Scheduled UCBs were advised
to submit the structural liquidity statement and interest rate sensitivity statement
through the asset-liability managment (ALM) module provided in the off-site surveillance
software (OSS). The statement of structural liquidity was to be prepared at fortnightly
intervals starting with the last reporting friday of June 2007, i.e., June
22, 2007 and that of interest rate sensitivity on a monthly basis starting with
the last reporting friday of the month of June, 2007. ALM guidelines have been
prescribed for non-scheduled UCBs also and would be effective from the quarter
ending December 2008. Basic liquidity risk management guidelines have been prescribed
for Tier I banks as well which would also come into effect from the quarter ending
December 2008. 4.24 UCBs were earlier advised not to consider any proposal
for granting advances against shares/debentures for trading or for granting advances
to share or stock brokers. It was further clarified to UCBs that they were
prohibited from extending any fund based or non-fund based credit facilities,
whether secured or unsecured, to stockbrokers. The prohibition would thus cover
in addition to shares and debentures, loans and advances against other securities
such as fixed deposits and LIC policies, among others. They were also advised
not to extend any facility to commodity brokers. This includes issue of guarantees
on behalf of the commodity brokers. Advances against units of mutual funds could
be extended only to individuals as in the case of advances against the security
of shares, debentures and bonds. UCBs were advised that any credit facility presently
in force, but not in consonance with the above instructions should be withdrawn/closed
without any delay. 4.25 Despite various safeguards being in place pertaining
to the post sanction monitoring of advances, instances of diversion of funds and
non-credit of sale proceeds to borrowal accounts continue to come to light and
are observed to be important factor contributing to the perpetration of frauds/the
account turning NPAs. UCBs were, therefore, advised on September 13, 2007 to adopt
more stringent safeguards, especially where accounts showed signs of turning into
NPAs, e.g., resorting to more frequent inspections of borrower’s
godowns, ensuring that the sale proceeds were routed through the borrower’s
accounts maintained with the bank and insisting on pledge of the stock instead
of hypothecation. Whenever stock under hypothecation to cash credit and other
loan accounts are found to have been sold but proceeds thereof have not been credited
to the loan account, such action should normally be treated as a fraud and banks
should take immediate steps to secure the remaining stock so as to prevent further
erosion in the value of the available security. Frauds and Suspicious
Transactions 4.26 It was communicated to UCBs that as a part of
transaction monitoring mechanism, they are required to put in place an appropriate
software application that alerts them when the transactions are inconsistent with
risk categorisation and updated profile of customers. They were also advised to
initiate urgent steps to ensure electronic filing of cash transaction report (CTR)
and suspicious transaction report (STR) to Financial Intelligence Unit - India
(FIU-IND). Further, in view of reports by FIU-IND that many banks are yet to file
electronic reports, UCBs were advised to arrange for filing the data of non-computerised
branches into an electronic file with the help of the editable electronic utilities
of CTR/STR as made available by FIU–IND on their website (http://fiuindia.gov.in).
It was further clarified that cash transaction reporting by branches to their
principal officer should be submitted on a monthly basis and not on a fortnightly
basis and the principal officer, in turn, should ensure to submit CTR for every
month to FIU-IND within the prescribed time schedule, i.e., by 15 th
of the succeeding month. It was reiterated that the cut-off limit of Rs.10 lakh
for reporting in CTR should be applicable to integrally connected cash transactions
also. 4.27 UCBs were advised on December 15, 2004 that they
should pay special attention to all complex, unusual/large transactions and all
unusual patterns of transactions which had no apparent economic or visible lawful
purpose. It was further advised that the background papers/documents of such transactions
should be examined and properly recorded to make it available to auditors and
also to the Reserve Bank/other relevant authorities. 4.28 UCBs were also
advised that the customers should not be tipped off on the STRs filed by them
with FIU-IND. Banks should report all such attempted transactions in STRs, even
if not completed by customers, irrespective of the amounts of transaction. ‘Suspicious
Transactions’ are defined in Rule 2(g) of Rules notified under the Prevention
of Money Laundering Act, 2002. Banks should submit STRs, if they have reasonable
grounds to believe that the transaction involves proceeds of crime, generally,
irrespective of the amount of transaction and/or threshold limit envisaged for
predicate offences in part B of schedule of the PMLA, 2002. UCBs were advised
to create awareness about KYC/AML among their staff and for generating alerts
for suspicious transactions, they may consider the indicative list of suspicious
activities contained in Annex E of the Indian Bank Association (IBA’s)
Guidance Note for Banks, 2005. UCBs were advised that these guidelines were issued
under section 35A of the Banking Regulation Act, 1949(AACS) and any contravention
of the said guidelines might attract penalties under the relevant provisions of
the Act. 4.29 As wire transfer is an instantaneous and the most preferred
route for transfer of funds across the globe, there is a need for preventing terrorists
and other criminals from having unfettered access to it for moving their funds
and for detecting any misuse when it occurs. UCBs were, therefore, advised to
invariably ensure certain specified information about all wire transfers. An ordering
bank, where the wire transfer originates, must ensure that qualifying wire transfer
contains complete originator information and intermediary bank should ensure that
the same is retained with the transfer. The record of such information should
be preserved for a period of 10 years. A beneficiary bank should have effective
risk-based procedures in place to identify wire transfers lacking complete originator
information. The lack of complete originator information may be considered as
a factor in assessing whether a wire transfer or related transactions are suspicious
and whether they should be reported to the FIU-IND. Credit Delivery
and Financial Inclusion Priority Sector Lending
4.30 In view of significant changes in the regulatory framework for UCBs,
which has become more or less comparable with that of commercial banks and the
exemptions hitherto enjoyed by UCBs from the payment of income tax having been
withdrawn, the priority sector lending target for UCBs was brought down to 40
per cent of the adjusted bank credit (ABC) (total loans and advances plus investments
made by UCBs in non-SLR bonds) or credit equivalent amount of off-balance sheet
exposure (OBE), whichever is higher, as on March 31 of the previous year and thus
brought at par with the target applicable to commercial banks. The revised target
came into effect from April 1, 2008. 4.31 UCBs were required to submit
data annually on priority sector lending within a month from the end of the reference
period, i.e., March 31 every year and credit flow to minority communities
every half year as on March 31 and September 30 in the prescribed format. The
existing reporting formats and periodicity were reviewed and revised on June 30,
2008. Sectors that qualify for inclusion as priority sector were revised in August
2007 and areas that qualify for inclusion as priority sector now include: (i)
total agricultural credit (direct and indirect); (ii) total credit to small enterprises
(direct and indirect); (iii) retail trade; (iv) micro credit; (v) State sponsored
organisations for SC/ST; (vi) education; and (vii) housing. UCBs were advised
to submit the first set of revised returns by April 15, 2009 to the concerned
Regional Offices of the Reserve Bank. 4.32 The definitions of micro,
small and medium enterprises were modified on August 30, 2007. The modified definitions
of micro, small and medium enterprises engaged in manufacturing or production
and in providing or rendering services are as under–(i) enterprises engaged
in the manufacture or production, processing or preservation of goods: (a) where
investment in plant and machinery does not exceed Rs.25 lakh is a micro enterprise;
(b) where the investment in plant and machinery is more than Rs.25 lakh, but does
not exceed Rs.5 crore is a small enterprise; (c) where the investment in plant
and machinery is more than Rs.5 crore, but does not exceed Rs.10 crore is a medium
enterprise; and (ii) enterprises engaged in providing or rendering services: (a)
where the investment in equipments does not exceed Rs.10 lakh is a micro enterprise;
(b) where the investment in equipment is more than Rs.10 lakh, but does not exceed
Rs.2 core is a small enterprise; (c) where the investment in equipment is more
than Rs.2 crore, but does not exceed Rs.5 crore is a medium enterprise. Bank’s
lending to medium enterprises would not be included for the purpose of reckoning
under the priority sector. Agricultural Debt Waiver and Debt Relief
Scheme, 2008 4.33 In the budget speech for 2008-09, the Hon'ble
Union Finance Minister announced a Debt Waiver and Debt Relief Scheme for farmers,
which was subsequently notified by the Government. The detailed scheme along with
necessary explanations was forwarded to UCBs and they were advised to take necessary
action for implementing the scheme. Guidelines for Relief Measures
by Banks to Poultry Industry, 2008 4.34 In view of the instances
of outbreak of Avian Influenza (bird flu) in some parts of the country and consequent
loss of income on account of culling of birds for poultry units financed by the
banks, UCBs were advised on February 19, 2008 to consider extending certain facilities
to them as under: (i) principal and interest due on working capital loans as also
instalments and interest on term loans which had fallen due for payment on or
after the onset of bird flu, i.e., December 31, 2007 and remaining unpaid
amount may be converted into term loans-the converted loans may be recovered in
instalments based on projected future inflows over a period up to three years
with an initial moratorium of up to one year (the first year of repayment may
be fixed after the expiry of moratorium period); (ii) the remaining portion of
term loans may be rescheduled similarly with a moratorium period up to one year
depending upon the cash flow generating capacity of the unit; (iii) the rescheduling/conversion
may be completed on or before April 30, 2008; (iv) the rescheduled/converted loans
may be treated as current dues; (v) after conversion as above, the borrower will
be eligible for fresh need-based finance; (vi) the relief measures as above may
be extended to all accounts of poultry industry, which were classified as standard
accounts as on December 31, 2007. KYC norms 4.35 In
order to ensure that the customer acceptance policy and its implementation
does not result in denial of banking services to general public, especially to
those who are financially or socially disadvantaged, UCBs were advised to review
their extant internal instructions in this regard so that a section of public
may not be denied access to banking services. It was clarified to UCBs that ‘permanent
correct address’ referred to in the existing instructions, means the address
at which person normally resides and can be taken as the address as mentioned
in a utility bill or any other document accepted by the bank for verification
of the address of the customer. Banks should keep in mind the spirit of instructions
issued by the Reserve Bank and avoid undue hardships to individuals who are otherwise
classified as low risk customers. Banks were further advised that the review of
risk categorisation of customers should be carried out not less than once in six
months. Banks should also introduce a system of periodical updating of customer
identification data after the account was opened. The periodicity of such updation
should not be less than once in five years in case of low risk category customers
and not less than once in two years in case of high and medium risk categories
of customers. Customer Services 4.36 UCBs were
advised on May 18, 2007 to lay down appropriate internal principles and procedures
so that usurious interest, including processing and other charges are not levied
by them on loans and advances. In laying down such principles and procedures in
respect of small value loans, particularly, personal loans and such other loans
of similar nature, banks were advised to take into account certain broad guidelines.
Banks were further advised to put in place such principles and procedures within
a period of three months from the date of notification. 4.37 UCBs were
advised that all transactions, including payment of interest on deposits/charging
of interest on advances, should be rounded off to the nearest rupee (fraction
of 50 paise and above to be rounded off to the next higher rupee and that of less
than 50 paise to be ignored). Banks were, however, advised that cheques issued
by their clients for amounts containing fraction of rupee should not be rejected
or dishonoured. Banks were also advised to ensure that the concerned staffs are
well versed with these instructions so that general public does not suffer. They
should also ensure that appropriate action is taken against members of their staff
who are found to have refused to accept cheques/drafts containing fraction of
a rupee. Banks were also advised to note that violation of aforesaid instructions
would be liable to be penalised under the provisions of the Banking Regulation
Act, 1949 (AACS). 4.38 UCBs were advised to generally insist that a person
opening a deposit account makes a nomination. The bank should explain the advantages
of nomination facility to the depositor and if the person still does not want
to nominate, the bank should ask him to give a specific letter to the effect that
he does not want to make nomination. In case the person declines to give such
a letter, the bank should record the fact on the account opening form and proceed
with opening of the account, if otherwise found eligible. Under no circumstances,
though, should a bank refuse to open an account solely on the ground that the
person opening the account has refused to nominate. UCBs were also advised to
follow the procedure outlined above in respect of deposit accounts in the name
of sole proprietary concerns. 4.39 Some schemes with lock-in periods
and other restrictive features floated by some banks were not in conformity with
the Reserve Bank’s instructions. Banks, which have floated such deposit
schemes, were advised to discontinue the schemes with immediate effect and report
compliance to concerned regional offices of the Reserve Bank. 4.40 Scheduled
UCBs were advised to formulate a comprehensive and transparent policy covering
the following three aspects, taking into account their technological capabilities,
systems and processes adopted for clearing arrangements and other internal arrangements
for collection through correspondents: (a) immediate credit of local/ outstation
cheques; (b) timeframe for collection of local/outstation instruments; and (c)
interest payment for delayed collection. They were also advised to review their
existing arrangements and capabilities and work out a scheme for reduction in
collection period. Adequate care should be taken to ensure that the interests
of the small depositors were fully protected. The policy should clearly lay down
the liability of the banks by way of interest payments due to delay for non-compliance
with the standards set by the banks themselves and should be integrated with the
deposit policy formulation by the bank in line with the IBA’s noted policy.
Scheduled UCBs were advised to place the policy before the board and obtain their
specific approval thereon. They were advised to send a copy of cheque collection
policy, after the board’s approval, to the Reserve Bank for its confirmation
before implementation. 4.41 To increase the usage of ATMs as a delivery
channel, banks entered into bilateral or multi-lateral arrangements with other
banks to have inter-bank ATM networks. The charges levied on the customers vary
from bank to bank, according to the ATM network that is used for the transaction.
The ideal situation is that a customer should be able to access any ATM installed
in the country free of charge through an equitable co-operative initiative by
banks. Based on the feedback report on an approach paper placed on the website
of the Reserve Bank, a framework of service charges for implementation by all
banks was decided (Table IV.2). 4.42 For the services
at (i) and (ii) in Table IV.2, the customer would not be levied any charge under
any other head and for services at (iii), the charge of Rs.20 would be all inclusive
and no other charges would be levied under any other head, irrespective of the
amount of withdrawal. The service charges for the following types of cash withdrawal
transactions may be determined by the banks themselves: (a) cash withdrawal with
the use of credit cards; and (b) cash withdrawal in an ATM located abroad.
Other Measures 4.43 The Committee on Procedures and Performance
Audit on Public Services (CPPAPS) had made some recommendations for easy operation
of lockers. on June 21, 2007, UCBs were also advised accordingly. UCBs were also
permitted to lay down policies with the approval of their boards for sanction
of gold loans with bullet repayment option, subject to the guidelines issued by
the Reserve Bank. 4.44 Since visually challenged persons are legally
competent to contract, banking facilities including cheque book facility/
Table
IV.2: ATM Charges | Sr.
No. | Service | Charges |
1 | 2 | 3
| (i) | For
use of own ATMs for any purpose | Free
(with effect from March 12, 2008) | (ii) | For
use of other bank ATMs for balance enquiries | Free
(with effect from March 12, 2008) | (iii) | For
use of other bank ATMs for cash withdrawals | l | No
bank shall increase the charges prevailing as on December 23, 2007 |
|
| | (i.e.,
the date of release of Approach Paper on RBI website) |
| | l | Banks
which are charging more than Rs.20 per transaction shall reduce |
|
| | the
charges to a maximum of Rs.20 per transaction by March 31, 2008 |
|
| l | Free
with effect from April 1, 2009 | operation
of ATM/locker, etc., cannot be denied to them. It was brought to the
notice of the Reserve Bank that visually challenged persons were facing problems
in availing of banking facilities. UCBs were, therefore, advised on June 4, 2008
to ensure that all banking facilities such as cheque book facility, including
third party cheques, ATM facility, net banking facility, locker facility, retail
loans and credit cards, among others, should invariably be offered to
the visually challenged without any discrimination. Other Policy
Initiatives Investments in Non-SLR Securities by UCBs
4.45 To allow UCBs greater flexibility in making non-SLR investments, the
instructions on the subject were reviewed and significant changes in the guidelines
were made. First, UCBs can now invest in ‘A’ or equivalent rated commercial
papers (CPs), debentures and bonds that are redeemable in nature which were not
permitted earlier. Second, they can also invest in units of debt mutual funds
and money market mutual funds. Earlier, only investment in units of UTI
were permitted and not in other mutual funds. This distinction was done away with,
though no investment in equity linked mutual funds is permitted. Third, fresh
investments in shares of all-India financial institutions (AIFIs) would also not
be permitted unlike hitherto. Fourth, balances held in deposit accounts with commercial
banks and in permitted scheduled UCBs and investments in certificate of deposits
issued by commercial banks would be outside the limit of 10 per cent of total
deposit prescribed for non-SLR investments. Fifth, a cap of 10 per cent of NDTL
has been placed on the total amount of funds that can be placed as inter-bank
deposits (for all purposes including clearing, remittance, etc). The
prudential inter-bank exposure limit of 10 per cent of the NDTL would be all-inclusive
and not limited to inter-bank call and notice money. The only exception is made
for Tier I UCBs, which may place deposits up to 15 per cent of their NDTL with
public sector banks over and above the said prudential limit of 10 per cent of
NDTL. Sixth, exposure to any single bank should not exceed 2 per cent of the depositing
bank’s DTL as on March 31 of the previous year, inclusive of its total non-SLR
investments and deposits placed with that bank. Deposits, if any, placed for availing
CSGL facility, currency chest facility and non-fund based facilities like bank
guarantee (BG), letter of credit (LC) would be excluded to determine the single
bank’s exposure limit for this purpose. Instruments for Augmenting
Capital Funds 4.46 In order to facilitate raising of capital funds,
UCBs were permitted on July 15, 2008 to issue preference shares, viz.,
(i) perpetual non-cumulative preference shares (PNCPS); (ii) perpetual cumulative
preference shares (PCPS); (iii) redeemable non-cumulative preference shares (RNCPS);
and (iv) redeemable cumulative preference shares (RCPS). Further, UCBs were also
permitted to raise term deposits for a minimum period of not less than 5 years,
which would be eligible to be treated as Tier II capital. The important features
of the instruments for augmenting capital funds are: first, the extant share linking
norm would not be applicable to a member who was already holding 5 per cent of
the total paid-up share capital of an UCB; Second, Tier II capital has been further
divided into upper and lower tiers. PCPS, RNCPS and RCPS would be treated as upper
Tier II capital. Long-term deposits would be treated as lower Tier II capital.
PNCPS should not exceed 20 per cent of Tier I capital. Long-term deposit should
not exceed 50 per cent of Tier II capital and that total Tier II should not exceed
Tier I capital; Third, as per extant instructions, elements of Tier II capital
were reckoned as capital funds up to a maximum of 100 per cent of Tier I capital.
In the case of banks that are having CRAR less than 9 per cent, it was decided
that the above restriction should be kept in abeyance for five years, i.e.,
up to March 31, 2013 in order to give time to the banks to raise Tier I capital.
In other words, Tier II capital would be reckoned as capital funds for capital
adequacy purpose even if a bank does not have Tier I capital. However, during
this period, for the purpose of capital adequacy requirement, lower Tier II capital
alone would be restricted to 50 per cent of the prescribed CRAR and the progressive
discount in respect of Tier II capital would be applicable. Implementation
of Recommendations of the Working Group on Access Criteria to Payment Systems
4.47 According to the announcement made in the Annual Policy Statement 2007-08,
a Working Group was constituted for prescribing guidelines for access to various
payment systems. The Working Group recommended that membership to clearing houses
at MICR centres be confined to licenced banks meeting the following financial
criteria: (i) CRAR of 9 per cent; (ii) net NPA of less than 10 per cent; (iii)
no default in maintenance of CRR and SLR during the past one year; and (iv) net
profit in at least one of the two preceding years. Further, the Working Group
recommended that the entities which are presently members of clearing houses at
MICR centres but ineligible to be members as per the proposed access criteria,
would have to conform to the prescribed norms within one year, failing which membership
would be downgraded to that of a sub-member. The Working Group has also recommended
that such banks may be barred with immediate effect, from sponsoring any sub-member.
INFINET Membership for UCBs 4.48 On the basis of the recommendations
of the Working Group for ‘Access to Payment Systems’ constituted for
preparation of comprehensive guidelines setting out the minimum eligibility criteria
for membership of clearing houses/payment systems, regional offices of the Reserve
Bank were advised to extend INFINET membership to all UCBs, provided they had
the requisite infrastructure in place for the same. The applicant bank should
be advised to submit details of infrastructure available with it for participation
in the INFINET, together with a board resolution for seeking the membership. Subject
to the above parameters, unlicensed UCBs could also be permitted to avail of INFINET
membership so long as their application for license has not been rejected by the
Reserve Bank. Regional offices of the Reserve Bank were further advised to make
it clear to these banks that the membership would not in any way entitle them
to claim a banking license at a later date and their application for license would
be examined independently on its merits. 4.49 The efforts to increase
the spread of technology in the UCB sector attracted greater attention with the
setting up of a Working Group to examine the areas relating to IT support to UCBs
(Box IV.3). Rationalisation of Returns Submitted
by UCBs 4.50 In view of a large number of returns that the UCBs
were required to submit, as directed by the Board for Financial Supervision (BFS),
an exercise for rationalisation of returns to be submitted by UCBs was undertaken.
The returns submitted by UCBs were examined from the point of view of reducing
the volume of data to be submitted by banks without compromising on the breadth
and depth of information being obtained from them. The rationalisation of the
returns was done and the maximum number of returns was reduced to 29 as against
a maximum of 36 returns required to be submitted by the scheduled UCBs earlier.
Insurance Business 4.51 According to the Annual Policy
Statement for the year 2007-08, UCBs registered in States that had entered into
MoU with the Reserve Bank or those registered under Multi-State Co-operative Societies
Act, 2002 were allowed to undertake insurance agency business as corporate agents
without risk participation, subject to compliance with the following eligibility
norms: first, UCB should have a minimum net worth of Rs.10 crore; second, it should
not have been classified as Grade III or IV. The minimum net worth criteria earlier
applicable was dispensed with for such banks on May 15, 2008. Box
IV.3: Working Group on IT support to UCBs The Mid-term
Review of the Annual Policy Statement for the year 2007-08 announced the constitution
of a Working Group comprising representatives of the Reserve Bank, State Governments
and the UCBs sector to examine the various areas where IT support could be provided
to the UCBs by the Reserve Bank. Accordingly a Working Group on IT support to
UCBs (Chairman: Shri R. Gandhi) was constituted. The Group, while acknowledging
the increasing importance of IT in UCBs, observed that there was a wide variance
among them with regard to the usage of IT. In fact, the lack of uniformity in
the levels of computerisation and inadequate awareness about the efficacy of computers
in enhancing competitiveness prompted the Group to articulate the following minimum
IT infrastructure which should exist in each UCB regardless of its size, location
or profitability: (i) computerised front-end, i.e., customer interface;
(ii) automatic back-end accounting (through software); (iii) computerised MIS
reporting; and (iv) automated regulatory reporting. The Group felt that
in order to implement the minimum level of IT infrastructure by the UCBs, core
banking solution (CBS) would be required to be adopted by them. The model of CBS
may vary according to the size and spread of the UCBs. The
Group suggested two methods for acquiring the IT infrastructure, viz.,
(i) application service provider; and (ii) outright purchase. The former
is suitable for small banks, particularly the unit banks because the problems
of software development and maintenance, training and retention of IT professionals,
installation and maintenance of complex and costly hardware and other logistics
like data centres, would be addressed by the service provider without need for
much initiative or involvement of the UCBs. An agency like Institute for Development
and Research in Banking Technology (IDRBT) could short-list/select one/a few vendors
and be the conduit and service quality assurer to the UCBs. On the other hand,
the method of outright purchase of the CBS, including data centre may be preferable
to a few large banks. The Group also deliberated on delivery mechanism
and felt that support could be routed through IDRBT and if required, IDRBT might
develop an area of expertise within itself to cater to the IT needs of small banks,
including UCBs. National and State Federation of co-operatives might also think
of creating such IT facilities for UCBs in the long run for the benefit of the
sector. The recommendations of the Group are being examined by the Reserve Bank. Norms
for Maintaining NRE/NRO Accounts 4.52 UCBs registered in States
that had entered into a MoU with the Reserve Bank for supervisory and regulatory
co-ordination and those registered under the Multi State Cooperative Societies
Act, 2002 were permitted to open NRE account subject to compliance with the following
eligibility norms: (i) minimum net worth of Rs.25 crore; (ii) CRAR of not less
than 9 per cent; (iii) net NPAs to be less than 10 per cent; (iv) compliance with
CRR/SLR requirements; (v) net profit during the preceding three years without
any accumulated losses; (vi) sound internal control systems; (vii) satisfactory
compliance with KYC/AML guidelines; and (viii) presence of at least two professional
directors on the board. 4.53 UCBs are not permitted to accept NRO deposits
and are required to close these accounts within a given time frame. It was decided
on June 4, 2007 that banks may maintain NRO accounts, arising from their re- designation
as such, upon the account holders becoming non-resident. Opening of fresh NRO
accounts was not permitted. Furthermore, no fresh credit, barring periodical credit
of interest, was allowed in these accounts. However, these restrictions were not
applicable to UCBs holding AD Category-I licence. Relaxation in Branch
Authorisation Policy for UCBs 4.54 In terms of the Annual Policy
Statement 2007-08, UCBs were allowed to open new branches/extension counters.
The eligibility criteria prescribed for new branches/extension counters were as
under: (i) the bank should be registered under the Cooperative Societies Act of
the States that had signed MoU with the Reserve Bank or under the Multi-State
Cooperative Societies Act, 2002; (ii) the bank should be licensed and have an
elected board of directors with at least two professionals; (iii) the bank should
comply with the following mutually exclusive, performance/financial parameters
– (a) CRAR should not be less than 9 per cent; (b) net NPA should be below
10 per cent; (c) there should have been no default in maintenance of CRR/ SLR
in the preceding financial year; (d) the bank should have net profit in the preceding
financial year; (e) the net worth should not be less than Rs.10 crore; and (f)
the average net worth per branch/extension counter, including the additional centres
for which licenses are sought, should not be less than Rs.2 crore per branch in
A and B centres with population more than 5 lakh and Rs.1 crore in C and D centres
with population less than 5 lakh. UCBs satisfying the above mentioned conditions
are eligible for additional branches/extension counters not exceeding 10 per cent
of their existing branch network, over a period of two years. All UCBs are required
to obtain prior authorisation for opening of extension counters. 4.55
Further, in terms of the Annual Policy Statement 2008-09, approvals for branch
expansion including off-site ATMs in respect of well managed and financially sound
UCBs in the States that have signed MoUs and those registered under the Multi-State
Co-operative Societies Act, 2002, are now considered, based on their annual business
plans, subject to: (i) maintenance of a minimum CRAR of 10 per cent on a continuous
basis with minimum owned funds commensurate with entry point capital norms for
the centre where the branch is proposed; (ii) net NPAs should be less than 10
per cent; (iii) no default in maintenance of CRR/SLR during the preceding financial
year; (iv) net profit in the immediate preceding financial year; and (v) regulatory
comfort based on its track record of compliance. 4.56 The Annual Policy
Statement for the Year 2008-09 liberalised the eligibility norms for opening of
on-site ATMs. Accordingly, w.e.f. May 26, 2008, UCBs that are registered in States
that have signed MoUs with the Reserve Bank or under Multi-State Co-operative
Societies Act, 2002 and classified in Grades other than Grade III and IV, are
allowed to set up on-site ATMs without prior approval of the Reserve Bank.
4.57 The powers for grant of branch authorisation for Tier I banks registered
under the State Co-operative Societies Acts in States that had signed MoUs with
the Reserve Bank were delegated to its regional offices. On receipt of annual
business plans, regional offices of the Reserve Bank were advised to scrutinise
whether UCBs satisfied the norms prescribed and any other requirements identified
in consultation with TAFCUB. Shifting of Offices 4.58
In relaxation of the existing guidelines, UCBs were permitted on August 28, 2007
to shift their branches from one city to another in their area of operation within
the same State, subject to the following conditions: (a) the new centre should
be located in an area with same or lower population compared to the existing centre;
(b) a branch located in under-banked district can be shifted to another centre
in under-banked district only; and (c) the shifting should be beneficial to the
bank in terms of cost and business. UCBs were further advised to submit their
applications in this regard to the regional office of Urban Co-operative Bank
Department of the Reserve Bank in whose jurisdiction the head office of the bank
was situated. Mahila Urban Co-operative Banks –Membership
4.59 Membership of Mahila UCBs was exclusively confined to women
except as nominal members for the purpose of standing as sureties for the borrowers
from the bank. Taking into account the representations made by the banks and their
federations and the findings of case studies carried out by the Reserve Bank in
this regard, existing Mahila UCBs which conform to the extant entry point
norms for general category banks, were permitted to enroll male members up to
a limit of 25 per cent of their total regular membership, subject to compliance
by the banks with their respective bye-laws. Registrar of Co-operative Societies
of Central and all State Governments were requested to convey their approval to
UCBs wherever applicable, for induction of male borrowers up to a limit of 25
per cent of their total regular membership. |