RBI issues draft circular on capital funds and lending by UCBs

The provisions of the amended Banking Regulation Act, 1949 have come into force for State Co-operative Banks (StCBs) and district central co-operative banks (DCCBs) from 1 April 2021.

RBI has sought comments on the draft circular from UCBs, sector participants and other interested parties by 31 August 2021. 

Comments have also been invited from StCBs / DCCBs, rural co-operative banking sector participants and other interested parties as to whether a similar approach on issue and regulation of share capital and securities is warranted for StCBs / DCCBs

Under the revised regulation for capital funds, urban co-operative banks (UCBs) are permitted to raise equity share capital, as hitherto, by way of issue of equity shares to persons within their area of operation enrolled as members, in accordance with the provisions of their bye-laws, and through issue of additional equity shares to the existing members.

UCBs are also permitted to issue other equity share capital instruments like Preference Shares, Perpetual Non-Cumulative Preference Shares, Perpetual Cumulative Preference Shares, Redeemable Non-Cumulative Preference Shares , Redeemable Cumulative Preference Shares, all of which are eligible to be included in Tier I capital.

They may also issue debt instruments like Perpetual Debt Instruments, Long Term Subordinated Bonds, that can be included in Tier II capital.

RBI had issued guidelines governing these instruments and the regulatory requirements.

In order to better inform investors on the risk characteristics of regulatory capital requirements, UCBs, which issue regulatory capital instruments as specified above should adhere to the following conditions:

a) For floating rate instruments, banks should not use its fixed deposit rate as benchmark.

b) A specific sign-off as quoted below should be obtained from the investors, for having understood the features and risks of the instruments, may be incorporated in the common application form of the proposed issue:

"By making this application, I / we acknowledge that I / we have understood the terms and conditions of the issue of [Name of the share/security] being issued by [Name of the bank] as disclosed in the Prospectus and Offer Document".

c) UCBs should ensure that all the publicity material / offer document, application form and other communication with the investor should clearly state in bold letters (Arial font, size 14, equivalent size in English / Vernacular version) how a PNCPS / PCPS / RNCPS / RCPS / PDI / LTSB, as the case may be, is different from a fixed deposit, and that these instruments are not covered by deposit insurance.

d) The procedure for transfer to legal heirs in the event of death of the subscriber of the instrument should also be specified.

Refund of share capital

As per section 56 of the Banking Regulations Act, a co-operative bank cannot withdraw or reduce its share capital, except to the extent and subject to such conditions as the Reserve Bank may specify in that behalf. Accordingly, RBI has decided to permit UCBs to refund the share capital to their members, or nominees / heirs of deceased members, on demand, subject to the following conditions:

The bank’s capital to risk-weighted assets ratio (CRAR) is 9 per cent or above, both as per the latest audited financial statements and the last CRAR as assessed by RBI during statutory inspection.

Such refund does not result in the CRAR of the bank falling below regulatory minimum of 9 per cent.

RBI has clarified that for the purpose of computing CRAR, accretion to capital funds after the balance sheet date, other than by way of profits, may be taken into account. Any reduction in capital funds, including by way of losses, during the period should also be considered.

Share-to-loan limits

Borrowings from UCBs are linked to shareholdings of the borrowing members. It would be 20 times the shareholding in case of unsecured loans and 40 times for secured loans.

In case of secured borrowings by micro and small enterprises (MSE), loans forming 16 times the shareholding can be drawn initially while the remaining part forming 24 times of the shareholding is to be collected in the course of the following 2 years.

The share linking norm may be applicable for member's shareholdings up to the limit of 5 per cent of the total paid up share capital of the bank. Where a member is already holding 5 per cent of the total paid up share capital of a UCB, it would not be necessary for him / her to subscribe to any additional share capital on account of the application of extant share linking norms. In other words, a borrowing member may be required to hold shares for an amount that may be computed as per the extant share linking norms or for an amount that is 5 per cent of the total paid up share capital of the bank, whichever is lower.

In terms of the extant norms, UCBs which maintain CRAR of 12 per cent on a continuous basis, are exempted from the mandatory share linking norms. On a review, it has been decided that the share-linking to borrowing norms shall be discretionary for UCBs which meet the minimum regulatory CRAR criteria of 9 per cent and a Tier 1 CRAR of 5.5 per cent as per the latest audited financial statements and the last CRAR as assessed by RBI during statutory inspection. Such UCBs should have a board-approved policy on share-linking to borrowing norms, which should be implemented in a transparent, consistent and non-discriminatory manner. The policy may be reviewed by the board at the beginning of the accounting year. UCBs which do not maintain the minimum CRAR of 9 per cent and Tier 1 CRAR of 5.5 per cent, should continue to be guided by the norms on share-linking to borrowing.

RBI has sought comments as to whether in the light of the prudential regulations on capital adequacy having been implemented for UCBs over the last many years, should the RBI instructions on share linking to borrowing norms still continue? If yes, whether threshold criteria as suggested above is reasonable?

Feedback on the draft circular may be forwarded by email with the subject line “Feedback on draft circular on issue and regulation of share capital and securities – Primary (Urban) Co-operative Banks,” says an RBI release.