Regualtion and Supervision of UBD - 220210

College of Agricultural Banking, RBI, PUNE
Regulation and Supervision of

Urban Cooperative Banks
Jyoti Kumar Pandey
Deputy General Manager &
Member of Faculty
College of Agricultural Banking
Reserve Bank of India, Pune
Co-operative Credit Structure
Rural credit institutions and urban cooperative
banks
PACs and UCBs at the base level
State Co-operative Banks and DCCBs - higher
financing agencies for UCBs also
Characteristics of
Urban Cooperative Banks
Registered under State Cooperative Societies
Acts
No controlling interest since the board of
management is elected by share holders in a
democratic manner
One member one vote irrespective of number of
shares held by a member
Duality of command RCS / CRCS and RBI

Characteristics of UCBs (Contd.)

Borrowing restricted to members
Restricted area of operation
Share linking to borrowing
No listing / no trading of shares
Strong in helping financially weaker section
Reasons why UCBs were brought
under RBIs control
Demand for introduction of deposit insurance to
cooperative banks
Rapid growth of the cooperative banking sector
necessitated better monitoring
Effective from March 1,1966, provisions of B.R. Act
(1949) were extended to UCBs
This resulted in dual command, cooperation being a
state subject
Progress of Urban Co-operative Bank
PHASE I In formative stage, urban credit societies
organised by communities
PHASE II - Post 1966
PHASE III - Post Marathe Committee
PHASE IV - Post Madhav Rao / Madhavpura Mercantile
Cooperative Bank Crisis
Progress of UCBs (Contd.)
(Rs. in crores)
No. of UCBs Deposits Advances
1966-67 1106 153 167
1990-91 1307 8660 7802
1995-96 1327 24165 17908
1997-98 1502 40692 27801
Progress of UCBs (Contd.)
(Rs. in crores)
No. of UCBs Deposits Advances
2001 2084 80840 54389
2002 2090 93069 62060
2003 2104 101546 64888
2006 1853 112237 70379
2009 1721 158733 97918
State-wise Position of UCBs
Grade II 598
Grade III 295
Grade IV 268
Grade I 652

Grade I - 845
Grade II - 484
Grade III - 219
Grade IV 173

Figures in for 2007
Figures in for 2009 - 1721
Centre-wise Distribution of UCBs
Role of RBI
Regulatory, Supervisory, Operational and
Developmental Functions
(Carried out through the Urban Banks
Department)

RBI derives authority to control and supervise the
urban banks through the Banking Regulation Act,
1949 (As Applicable to Cooperative societies)

RBIs Regulatory Functions
Licence to commence banking business under
Section 22 of B.R. Act, 1949 (AACS)
Licence to open branches & extension counters
Permission to deal in foreign exchange
Issue of directions to maintain cash reserve and
liquid assets
Power to control advances (Section 21)
Purposes for which advances are given, margins
to be maintained

Issue of prudential and operational guidelines
Directions on maximum limit on advances,
prescribe guidelines on individual / group
exposure norms
Issue of requisition to RCS for supersession of
board of management of bank / liquidation of
banks

Interest rates on deposits and advances (Section
21)
Issue of Direction (Section 35A)
Imposition of penalty (Section 46)
Cancellation / rejection of licence (Section 22(4))
Prescription towards CRR / SLR
Grant of scheduled status
Supervisory Function
On-site supervision
Off-site returns
Off-site surveillance

RBIs Developmental Functions
Refinance to small scale industries sector through
UCBs
Identification of financially unsound banks and
rehabilitation of such banks
Training of urban bank personnel support given
through RBIs training institutions

Issues of Regulatory & Supervisory
Concern :
Sharp increase in no. of banks and branches
Large number of financially unsound banks
Steep increase in deposits consequent on deregulation
High rate of interest on deposits, consequently on advances
Adverse selection of borrowers
Low capital base
Dual/triple control
Belated introduction of CRAR, ALM etc.
High exposure to real estate and other sensitive sector

Concern: Problems Faced By The Sector
Lack of professionalism
Political interference
Unlicensed UCBs
Low level of computerisation
No Central recruitment Faulty recruitment
system / excess staff / poor skill upgradation
Low level of operational efficiency
High operating cost
Concern: (Contd.)
UCBs membership of Payment System Should
it be unconditional?
Experience of MMCB
Access to call money
SLR investments
Concern: (Contd.)
Governance in UCBs
Is it enough?
How much is enough?
Growing ambit of operations of UCBs
Should UCBs have unlimited access to inter-bank markets?
Whether the reach should be nationwide?
Access to capital markets?
Concern: (Contd.)
Disclosure Standards
Is it enough?
How much is enough?
Interest Rates on Advances
High interest rates as compared to the commercial banks
Adverse selection of borrowers

Regulatory Issues concerning RBI
Capital Adequacy
UCBs unable to maintain capital
HPC viewed CRAR to be made applicable to UCBs
Issue pertaining to Deposit Insurance
Some states do not have eligibility clause to be covered
under DICGC Act, 1961
Insured banks often default payment of premium
Regulatory Issues concerning RBI
Supervision of UCBs
Large number of banks
On-site inspection in two years time frame
System is under severe strain to maintain the schedule
Need for off-site surveillance

Other issues
Financially unsound banks
Unlicensed banks in Kerala
Recent transactions by UCBs in Government Securities
Road Map To Future
Focus on:
Consolidation : slow down in issue of new Licence
Weeding out weak units
Strengthening of regulatory and supervisory standards

Policy Changes
Standing Advisory Committee
Guidelines issued to commercial banks by DBOD
and DBS
Recommendations of committees / working group
Feed back / representations from NAFCUB / local
Cooperative Banks Association / Unions
Recommendations of JPC etc.
Committees
Madhava Das - 1978
Marathe - 1992
Chitale Committee -1996
Madhava Rao -1999
Anant Geete Committee 2002
Joint Parliamentary Committee
Recent Policy Changes
Implementation of Madhava Rao committee
recommendations
Recent monetary policy measures after the
failure of Madhavpura Mercantile Cooperative
Bank Ltd., Ahmedabad
Anant Geete Committee recommendations
Recommendations of JPC
Sardesai Committee recommendations
MOU
Other measures

Off-site surveillance system
Designed for continuous monitoring of banks
operation
Initially made applicable for scheduled urban
banks and to be extended to others in a phased
manner
Off-site monitoring to be more
broad-based
Initially, only the scheduled UCBs and UCBs with
deposit size of over Rs. 100 crore covered
Now UCBs with deposit size of Rs. 50 crore and
above are included
Rehabilitation
Increased frequency of inspection for financially
unsound banks
SLRC meets to periodically review progress
Discussions with CEOs/Chairmen
Timeframe for improvement
Application Of Prudential Norms
Introduction of CRAR
Why CRAR Introduced Belatedly ?
Various Constraints
Introduction of CRAR
DATE Scheduled UCBs Non-scheduled UCBS
MARCH 31, 2002 8 % 6 %
MARCH 31, 2003 9 % 7 %
MARCH 31, 2004 AS APPLICABLE TO
COMMERCIAL BANKS
9 %
MARCH 31, 2005 As Applicable To
Commercial Banks
As Applicable To
Commercial Banks
Introduction of CRAR (Contd.)
CRAR now important parameter to know the
financial soundness of UCBs
Expansion etc. not allowed if CRAR not at
stipulated level
Large Increase in share capital not possible owing
to Acts provisions
UCBs to transfer 50% of profit if stipulated level
not achieved.

Vishwanathan Working Group
For augmenting capital of UCBs
State Governments be requested to exempt the
UCBs from the existing monetary ceiling on
individual shareholding
Provide instruments and avenues for raising
stable and long term funds having equity or quasi
equity characteristics
Vishwanathan Working Group (Contd.)
UCBs may be permitted to issue unsecured,
subordinated (to the claims of depositors), non-
convertible, redeemable debentures / bonds,
which can be subscribed to by those within their
area of operations and outside (Tier II)
UCBs may be allowed to issue special shares
UCBs can also be allowed to issue these shares at
a premium, which could be approved by the
respective RCS, in consultation with Reserve
Bank
The special shares will be non-voting, perpetual and
transferable by endorsement and delivery
Commercial banks may be allowed to invest in these
shares and Tier II bonds of UCBs
UCBs may be allowed to issue redeemable
cumulative preference shares on specific terms
and conditions with prior permission of RCS, in
consultation with Reserve Bank
UCBs may be permitted to raise deposits of over
15 year maturity and such deposits can be
considered as Tier II capital subject to their
meeting certain conditions such as
They shall be subordinate to other deposits
Ineligible for DICGC cover
UCBs with negative networth may raise Tier II
bonds such as bonds, preference share and long
maturity deposits through conversion of existing
deposits
RBI may consider it as part of regulatory capital even
though Tier I capital is negative

Policy Measures after Madhavpura
Mercantile Cooperative Bank Crisis

No inter UCB deposits
Rationale
against co-operative principles
Tantamount to exposure in the UCBs
Prevention of systemic risks
1. Prohibition of Deposits by UCBs With Other UCBs

Policy Measures after Madhavpura
Mercantile Cooperative Bank Crisis (Contd.)

Call / notice money borrowing should not exceed
2 per cent of aggregate deposit as at the end of
march of previous financial year.
Complete freedom to lend
Rationale
To prevent asset liability mismatch
Evening out temporary liquidity mismatches
2. Operations in Call Money Market

Operations In Call Money Market

UCBs should report the borrowing every next day
to MPD and UBD
Penalty for violation
Fortnightly statement to Regional Office on lending and
borrowing
Monitoring :
Changes in SLR Composition

Category Of UCBs Minimum SLR Holding In Government and other Approved Securities
As Per Cent Of NDTL
Earlier Now Applicable
Non-scheduled UCBs
UCBs With NDTL Of Rs. 25
Crore And Above
10.0 % 15.0 %
UCBs With NDTL With Less
Than Rs.25 Crore
NIL 10.0 %
Scheduled UCBs 15.0 % Entire SLR requirement
Changes in SLR Composition (Contd.)

Non-scheduled primary (urban) co-operative banks
having single branch-cum-head-office or
having multiple branches within a single district
having a deposit base of Rs.100 crore or less (?)
would be exempted from maintaining SLR in
prescribed assets upto 15% of their DTL
UBD Circular dated February 16, 2006
on keeping the required amount, in interest bearing deposits,
with State Bank of India and its subsidiary banks and the public sector banks
including Industrial Development Bank of India Ltd.
Monetary Policy Measures 2003

Prohibition on loans to directors, their relatives
and concerns in which they are involved
Ban to be effective from October 01, 2003
Fortnightly return prescribed to monitor
Recommendations of Geete committee i.e.
Enhanced limit of unsecured advances,
implemented

Ban On Loans to Directors etc.

Ban on Loans to Directors (Contd.)
Following categories of director related loans are out
of the purview:
regular employee-related loans to staff directors on the Board
of UCBs
normal loans as applicable to members to the directors on the
Boards of salary earners co-operative banks and
normal employee-related loans to Managing Directors of Multi-
State co-operative banks

UBD Circular dated October 06, 2005
Anant Geete Committee
Recommendations (2002)

Increased as recommended by the Committee
For non-scheduled UCBs with DTL < than Rs.10
crore : Rs.50,000/-
For non-scheduled UCBs with DTL > than Rs.10
crore : Rs.1.00 lakh
For scheduled banks : Rs.2.00 lakh
Only Gr. I banks can take advantage of this
increase
1. UNSECURED ADVANCES
Recommendations (Contd.)
Both gold loan and small loans upto Rs.1 lakh
were exempted from the 90 days norms, and
these loans will continue to be governed by the
180 days norm for recognition of loan
impairment.
UCBs permitted to open extension counters in
residential colonies. The condition to have at
least five hundred beneficiaries accounts for
extension counters was withdrawn
Non-scheduled UCBs were allowed to place their
surplus funds with strong scheduled UCBs,
subject to certain conditions
Recommendations (Contd.)

Scheduled UCBs permitted to accept deposits
from other UCBs
Requirement of deposit accepting banks:
Three consecutive A audit ratings
Compliance with RBI requirements
No inter scheduled UCB deposits
2. PLACEMENT OF DEPOSITS WITH OTHER UCBs
Done away
with
JPC Recommendations

Concurrent audit made mandatory for all UCBs
Audit committee of board as stated in earlier
circulars, should exist in each of the banks
Audit committee to monitor for all audit functions
as also compliance with RBI inspection reports,
RBI guidelines etc.
1. Strengthening of Audit:
JPC Recommendations (Contd.)

Compliance to be furnished within 6 weeks
All defects pointed out in inspection report to be
removed within 4 months
Certificate to be effect submitted to RBI within 4
months
False certificate or delayed compliance to attract
penal action
Strict penalty for non compliance of RBI
directives
2. COMPLIANCE TO RBI REPORT:
Other JPC Recommendations
Dual control should go
Inspection report should comment on the quality
of audit report
Improvement of on-site / off-site supervision
Prohibition of loans & Advances to Directors and
their relatives and concerns in which they are
interested
ON-SITE INSPECTION- NEW THRUST
Classification of
banks
Existing frequency

Revised frequency

Scheduled banks Once in a year Once in a year
Grade I Once in three years Once in two years
Grade II NA Once in 18 months
Grade III Once in a year Once in a year
Grade IV Once in a year Once in a year
Sardesai Committee
Sardesai Committee (Contd.)

Each UCB to be inspected at least once in two
years
Focused supervision of UCBs with deposits more
than Rs.100 crore
ROs to be fully responsible for follow up
Periodic interaction of ROs with State Authorities
Inspection New Approach:
Sardesai Committee (Contd.)
Upgradation of skills of Inspecting Officers
Staff requirements of UBD being finalised
Three ROs with huge backlog to initiate revised
measures
Inspection New Approach
Shifting focus - Inspection
Traditional Approach CAMELS
Balance Sheet Approach Analytical Approach
Impressionistic Based on certain fixed parameters
Prone to prejudices of the IO Objective ?
IO may miss certain key areas Conclusions based on
performance in certain key areas
Identification Of Financially Unsound
Banks And Future Set Up
Focus: On Early Identification By Objective
Parameters
Nomenclature changed banks not to be
classified as weak / sick
The banks to be classified into four Grades
depending upon their financial status
Four grades depending upon NPA level, CRAR ,
Regulatory compliance
Profitability
Dual Control of UCBs
Managerial aspects viz.
Registration
Constitution of management
Administration and recruitment
Amalgamation and liquidation
Statutory audit / appointment of auditors are with State
Governments
Dual Control of UCBs (Contd.)
RBI does not have any powers to: -
-Appoint or remove the members of the board of
management of urban banks
-Initiate amalgamation of two urban banks
-Appoint auditors of urban banks

Matters related to banking operations are
governed by directives and guidelines issued by
the RBI
Dual Control on UCBs (Contd.)

Shifting to Central Subject
Concurrent List
Demarcation of Areas of managerial related and
banking related functions
Issues:
Separate Supervisory Authority
Duality / multiplicity of control slackens
regulatory control
Apex Single body to regulate and supervise
Comprising officials from State Government,
Central Government, Reserve Bank of India, Co-
operative banks, independent experts etc.
Separate Supervisory Authority (Contd.)
RBI RESPONSE : After separate supervisory body
The urban co-operative banks should not accept /
demand deposits (chequable deposits)
They should not resort to non collateralised borrowings
and they should not have access to call money market,
and
Government of India may consider evolving a suitable
mechanism to safeguard the interests of depositors of
urban co-operative banks
Amendment to B. R. Act, 1949
Management related functions, like, Elections,
Conduct of Directors, etc., to be with RCS.
Banking related functions to be with RBI
Audit function, including statutory audit to be
with RBI
Amendment to B. R. Act, 1949 (Contd.)
Section 56 of B. R. Act, 1949 to be deleted
Make all provisions of the parent Act applicable
Section 10B and 10BB requiring RBI approval for
appointment of full time Chairman / MD
Section 10C would enable non-member as
Chairman
Serving MPs / MLAs / MLCs as also stockbrokers
banned from being a director of the bank
Disclosure Norms
Applicable to UCBs with deposits of Rs.100 crore
& more
CRAR, investments, advances against real
estate/shares, interest of directors, profitability
etc. To be declared.
Specific Issues

Licence Cancelled As Directed By The Supreme
Court
The Court Holds That The RBI Can Not Give
Banking Licence to
Societies Registered Under Multi State Act
Directions Issued to the Bank
Developments Relating to Apex Cooperative Bank of
Maharashtra and Goa
Revised Licensing Policy for New
Urban Banks
Strong start up capital
4 categories
Emphasis on professionalism
Concept of unit banks
Relaxation for special categories to continue
Screening committee to process proposals
Focus: Arrest Mushrooming Growth in UCBs
Revised Licensing Policy:
Screening Committee
Comprised of four eminent experts of impeccable
credentials from the fields of banking, finance
and co-operation
Need and potential, Viability of the proposal /
institution
Since September 2001 up to date, the Committee
considered 216 proposals
'in principle' approval for 9 proposals
205 proposals rejected (2 under correspondence)
(Licenses granted in 1999-2000 : 114, 2000-01 : 28)
Present Stance
Annual Policy Statement 2004 05

To consider issuance of fresh licences only after a
comprehensive policy on UCBs, including an
appropriate legal and regulatory framework for the
sector, is put in place and a policy for improving the
financial health of the urban co-operative banking
sector is formulated early

Present Stance
UCBs, other than those in Grade III and IV, registered in states
which have signed MoU and those registered under Multi-State
Cooperative Societies Act, 2002 will be eligible to convert the
extension counters on completion of three years of their operation
into full-fledged branches
Proposal is for shifting/relocation of the converted branch
within the city/town limit
Banking services to the existing customers of the extension
counter, including the institutional customer, are ensured
No new extension counter will be allowed in the institution in
which the extension counter is housed presently
Annual Policy Statement: 2004-05
To consider issue of licences to new proposals
only after a comprehensive policy is in place,
including appropriate legal regulatory framework
To consider only such schemes of reconstruction
which envisages recapitalisation by stakeholders

Mid Term Review of Annual Policy
Statement: 2004-05
Vision Document
Standing Advisory Committee comprising of DG
(RBI), Govt. representatives, Select State Govt.
representatives,Federation, IBA, DICGC, NABARD
would meet on quarterly basis

Vision Document
Need for State specific approach
State Level Task Force on Coop Urban Banks (TAFCUB)
comprising of RD, RCS, Central Office and in-charges of
UBD ROs and a representative each from NAFCUB and
state federations
MOU signed with the State of Gujarat, Andhra Pradesh,
Karnataka and Madhya Pradesh
TAFCUB would identify the potentially viable urban
cooperative banks and draw up a time bound action plan
for revival of UCBs by setting specific monitorable
milestones

Vision Document (Contd.)
Terms of Reference
Categorise UCBs in the state under two tiers of regulatory
regime
Identify banks, which are viable, potentially viable and
unviable
To recommend various conditions, including
the nature and extent of funds required to be infused, in each UCB
identified as potentially viable
the sources of fund
changes in management where necessary and the time frame for
achieving viability
In doing so, the TAFCUB may assign responsibility to different
agencies for facilitating the turn-around
To set up milestones for evaluation of progress made under
the rehabilitation plan

To recommend the future set up of the existing unlicenced
banks whose applications are pending with Reserve Bank of
India
To recommend the manner and time frame for exit of the
un-viable banks either by
merger / amalgamation
conversion into a credit society and liquidation
The proposals for merger / amalgamation recommended by
the TAFCUB shall conform to the guidelines issued in this
regard
To arrive at a threshold limit of deposits that would make a
depositor automatically eligible to become a member
To recommend on the management aspects of a bank
which is placed under the revival plan
Any other issues as may be referred to it by the Reserve
Bank of India

Proposed Operating Framework
Unit Banks (Deposits Less than Rs. 50 crore)
Simplified regulatory regime
CRAR could be replaced by NOF to NDTL ratio
Exposure to sensitive sector restricted
Lower prescribed limit for investment in G-Sec
Restrictions to insulate them from systemic shocks
Restricted geographical operations
Such banks to roll back operations in far off locations

Proposed Operating Framework
All other Banks
Regulatory prescriptions as applicable to commercial banks
Extant relaxations may continue up to the period specified
There should be no concept of unscheduled multi state bank
CRCS may ensure that a bank is scheduled before it is granted
license under MCS Act
Existing scheduled banks both under MCS Act and State
Cooperative Societies who do not comply with prudential and
regulatory regime akin to that of commercial banks could be
excluded from second schedule of RBI Act

Supervision
Increased dependence on off-site surveillance of RBI and on-
site supervision of RCS in respect of small unit banks would
provide RBI with increased flexibility to deploy resources to
larger and risky banks
Developmental Role
RBI may help particularly small UCBs in helping their skills
CAB could provide subsidised training
RDs of RBI may facilitate with PDs enabling UCBs to buy sell
G-Sec easily

Two Tier Framework
Smaller UCBs whose operations are limited to a single district and
have deposits of less than Rs.100 crore
Allowed to adopt 180-day delinquency norm for classification of assets
as non-performing
Smaller UCBs given exemption from maintaining SLR in Government
securities (up to 15 per cent of NDTL) to the extent of funds placed in
interest bearing deposits with the public sector banks
Not subject to the provisioning norms of 0.40 per cent of Standard
Advances which is applicable to the larger UCBs
Simplified reporting system consisting of five returns has been
introduced for the smaller banks having deposits between Rs.50 crore
and Rs.100 crore and whose branches are limited to a single district

Two Tier Framework
Changes
Tier I banks :
Unit banks i.e. banks having a single branch / Head Office and
banks with deposits below Rs.100 crore, whose branches are
located in a single district
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% of the total
deposits and advances respectively of the bank
Banks with deposits below Rs.100 crore, whose branches were
originally in a single district but subsequently, became multi-
district due to reorganization of the district
Tier II Banks: All other banks

The deposit base of Rs. 100 crore will be determined on the basis of average of the fortnightly Net Demand
and Time Liabilities in the financial year concerned
Similarly, advances will be determined on the basis of fortnightly average in the financial year concerned
March 07, 2008
New Business Opportunities
Insurance
All scheduled UCBs having a minimum net worth of Rs.50
crore were permitted to undertake insurance business as
corporate agents. All other UCBs could undertake insurance
business on a referral basis, without any risk participation,
through their network of branches (January 24, 2005)
UCBs registered in States that have entered into MoUs with
the Reserve Bank or registered under the Multi State Co-
operative Societies Act, 2002 to undertake insurance agency
business as corporate agents without risk participation, subject
to compliance with the following eligibility norms:
Minimum networth of Rs 10 crore
Should not have been classified as Grade III or IV bank.
In case of UCBs registered in States which have not signed
MoUs with the Reserve Bank existing norms shall continue
New Business Opportunities (Contd.)
Distribution of Units of Mutual Funds
UCBs registered in States which have signed MoU and those registered under
Multi-State Co-operative Societies Act, 2002 now permitted to enter into
agreement with mutual funds for marketing their units, subject to certain
prescribed norms
Conduct of Foreign Exchange Business by UCBs
UCBs registered under the MOU State, or under the Multi-State Co-operative
Societies Act, 2002, permitted for Authorised Dealer (AD) Category I and II
licence
It was also decided not to give any fresh authorisation to UCBs to function as Full
Fledged Money Changers (FFMCs)
Installation of Automated Teller Machines (ATMs)
Sound scheduled and non-scheduled UCBs permitted to set up select off-site/
on-site ATMs
Banks permitted to have ATMs can also issue ATM-cum-debit cards
Prior approval of the Reserve Bank for network connectivity and/or sharing of
the ATMs dispensed with
Conversion of Extension Counters into Full-Fledged Branches
Sound UCBs registered in MOU States and those registered under the Multi-State
Cooperative Societies Act, 2002 allowed to convert existing extension counters
into full-fledged branches

New Relaxations
Tier-I banks
The 180 day loan delinquency norm for NPAs extended by one more year i.e. up
to March 31, 2008
The 12-month period for classification of a substandard asset in doubtful
category will be effective from April 1, 2008
Further these banks would be required to provide 100% on the secured portion
of D-III advances classified as doubtful more than three years on or after April 1,
2010
For the outstanding stock of D-III advances as on March 31, 2010, banks will be
required to provide as under:
50% as on March 31, 2010
60% as on March 31, 2011
75% as on March 31, 2012
100% as on March 31, 2013
Tier-II banks
100% provisioning for advances classified as D-III (doubtful more than three
years) will apply to those classified as such 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 would be required to provide as under:
50% upto March 31, 2007
60% as on March 31, 2008
75% as on March 31, 2009
100% as on March 31, 2010
New Norms (Contd.)
Statutory minimum CRR requirement of 3 per cent of total
demand and time liabilities no longer exists with effect from the
said notified date (April 25, 2007)
Know Your Customer (KYC) Norms / Anti-Money Laundering (AML)
Standards / Combating of Financing of Terrorism (CFT)
All cross-border wire transfers must be accompanied by accurate and
meaningful originator information
Cross-border wire transfers must contain the name and address of the
originator and where an account exists, the number of that account
Information accompanying all domestic wire transfers of Rs. 50000/-
and above must include complete originator information i.e. name,
address and account number etc., unless full originator information
can be made available to the beneficiary bank by other means.
If a bank has reason to believe that a customer is intentionally
structuring wire transfers to below Rs. 50000/- to several beneficiaries
in order to avoid reporting or monitoring, the bank must insist on
complete customer identification before effecting the transfer
Interbank transfers and settlements where both the originator and
beneficiary are banks or financial institutions would be exempted from
the above requirements
New Norms (Contd.)
Provisioning for Standard Assets (February 19, 2007)
Direct advances to agricultural and SME sectors 0.25 %
Personal loans, Loans and advances qualifying as capital market
exposures, Commercial real estate loans and loans and advances
to systemically important NBFCs-ND. - 2.00 %
All other loans and advances not included in above - 0.40%
UCBs to extend individual housing loan up to the limit of Rs.
25.00 lakh per beneficiary of a dwelling unit
However, housing finance to borrowers availing loans above Rs
15.00 lakh will not be treated as priority sector lending
Branch Licensing Relaxations
Branch licenses only in MOU States
UCBs whose net worth was not less than Rs.10 crore
and average networth per bank, including the proposed
ones was not less than Rs.2 crore in A and B category
centres and Rs.1 crore in C and D category centres
The eligibility of the banks to be decided on the basis of
their audited balance sheet for the financial year ended
March 2007
Extension of Area of Operations
Licensed Grade I UCBs may extend their area of operation
to the whole of the district of registration and to its
adjoining districts within their State of registration, without
prior permission from the RBI
Eligible banks need not approach Reserve Bank for seeking
'no objection' for extension of area of operation as stated
above. Such banks may directly approach the RCS of the
State concerned for extension of area of operation to the
entire district of registration and its adjoining districts
within the State of registration.
Extension of Area of Operation Beyond the Adjoining
Districts and the State of Registration
Extension of Area of Operation beyond the adjoining districts
and the State of registration is not permitted according to the
existing policy
Branch Licensing
Grade III / IV UCBs and not complying with Section 11(1) of B. R. Act, 1949 (AACS)
to obtain prior approval of the RBI and / or RCS for :
- Sale of bank's own premises
- Surrender of existing premises taken on lease / rental basis
- Acquisition of new premises on ownership or lease / rental basis
- Shifting of offices / departments as a result of sale of premises / surrender of
premises / acquisition of new premises.
- To submit their application to the Regional Office concerned
UBD Circular dated July 01, 2008
Branch Licensing Relaxations

Branch licenses only in MOU States
UCBs whose net worth was not less than Rs.10 crore
and average networth per bank, including the proposed
ones was not less than Rs.2 crore in A and B category
centres and Rs.1 crore in C and D category centres
The eligibility of the banks to be decided on the basis of
their audited balance sheet for the financial year ended
March 2007
Annual Policy 2007 08
UBD Circular July 04, 2007
Branch Licensing Relaxations (contd.)
Eligibility Criteria
Well managed and financially sound UCBs
MOU signed States and
Those registered under Multi-State Co-operative Societies Act, 2002
may submit their proposals for branch expansion based on their
Annual Business Plans (ABP) for approvals to the respective Regional
Offices of the Urban Banks Department of RBI
ABP will be for a period of twelve months beginning 1st April of the
following year.
UCBs should satisfy the following
CRAR of 10% on a continuous basis with minimum owned funds
commensurate with entry point capital norms for the centre where branch is
proposed
Net NPAs being less than 10%.
No default in the maintenance of CRR/SLR during the preceding financial
year
Net profit in the immediate preceding financial year and
Regulatory comfort - compliance with B. R. Act, 1949 (AACS) and the
instructions / directions issued by RBI from time to time
June 16, 2008
Mahila Banks - Membership
Can enroll male members up to a limit of 25 % of
their total regular membership, subject to
compliance by the banks with their respective
bye-laws
Mahila UCBs to comply with the entry point
norms for general category banks
CAMELS Framework
Parameters Weights
Capital Adequacy 18%
Asset Quality 18%
Management 18%
Earnings 10%
Liquidity 18%
Systems 18%
Camels Framework (contd.)
Weighted Average/ marks Rating
Below 45 D
45 49 C-
50 54 C
55 59 C+
60 64 B-
65 69 B
70 74 B+
75 79 A-
80 85 A
Above 85 A+
Health of the Sector
Stress tests were carried out on 52 scheduled
UCBs accounting for 43 per cent of the total
assets at end-March 2007 of all scheduled UCBs
Tests restricted to the credit portfolio of these banks
The credit portfolios of the UCBs were given shocks in
the form of an increase in the provisioning requirement
and an increase of 25 per cent and 50 per cent in the
non-performing assets
Tests revealed that as at end-March 2007, 27
banks (accounting for 38 per cent of scheduled
UCBs assets) would not have been able to
comply with the 9 per cent with CRAR norm with
an increase in NPA levels by 25 per cent
Health of the Sector (contd.)
At the system level, the CRAR declined from 11.4
per cent to 5.6 per cent at 25 per cent stress in
NPAS
Further, with an increase in NPA levels by 50 per
cent, the number of banks that would not have
been able to comply with the stipulated minimum
increased to 31
At the system level, the CRAR dipped sharply to
2.8 per cent
Umbrella Organisation
Professionally Managed organsation that would
provide
Offering credit facilities
Providing liquidity to meet short term mismatches
Fund management services
Investment banking services
Payment and settlement services/gateway
IT Services
ATM Network and services
Management consultancy
Capacity building services

Umbrella Organisation (contd.)
Membership to UO voluntary
Will be an NBFC. Can be converted to a bank
later
Authorised capital Rs. 200 crore
Paid up capital Rs. 100 crore
Membership at 10 paise per Rs. 100 asset
One time membership of Rs. 1 lakh
Being a non-deposit taking NBFC, it would have
access to the following sources for its working
capital:
Borrowings from banks/financial institutions
Deposits: term deposits from UCBs
Debt instruments: bonds/debentures
Refinance: against financial assets (loans and advances)
including securities
Other miscellaneous sources

Deposits kept by the UCBs with the UO qualifying
as CRR/SLR
Permitting the UO membership of the Payment &
Settlement systems
Any other support that may be required in future,
such as setting up of ATM networks, etc.
Emergency Fund Facility Scheme under a
tripartite Industry Support Agreement (ISA)
UCBs under State Cooperative Act to contribute 0.5 per
cent of their asset to the fund as deposits at a specified
rate of interest
Fund would be available to the participating UCBs as a
soft loan (liquidity support) carrying interest, say at 8%
[cost of funds (6%) +2% markup] for a period of not
more than six months/one year
The quantum of liquidity support at a soft rate (First
Tranche) may be capped at 50% of net worth of the
UCB concerned

Under the ISA, a participating UCB should also commit to
provide a line of credit to the Emergency Fund when called
upon to do so (say additional 0.05% of its assets) at a
specified rate of interest (say, the prevailing interest rate
for one year deposit)
The amount may be used for providing liquidity support
under Second and Third Tranches to UCBs, at rates higher
than the loan under First Tranche say at 10% [ cost (8%)+
2%mark up} and 12%[cost(10%)+2% mark up)
respectively. The Second and Third Tranches may also be
to the extent of 75% and 100% of the net worth of the UCB
concerned, respectively
TAFCUBs may be entrusted with the responsibility of
working as the Steering Committee for setting up of trust
fund
Revival Fund
UCBs with negative net worth were to be brought to positive net worth, an
enormous sum of about Rs.2, 500 crore may be required
RBI may pursue a menu of options, including mergers, with or without DICGC
support
The total net profit of the sector being about Rs.1,000 crore,
mobilization of this magnitude of resources from the sector may
not be feasible
Such a fund could only be raised out of contribution from the net
profits of UCBs
Further, contribution from the profits to the Revival Fund would be
resisted by UCBs
The Working Group also felt that the State and Central
Government may not come forward to contribute to the Revival
Fund for UCBs
Therefore, creation of separate Revival Fund for UCBs is not
recommended
Report on IT Support for UCBs
This minimum level of IT infrastructure should
include the following:
Computerized front-end i.e. customer interface
Automatic backend accounting (through
software)
Computerized MIS reporting; and
Automated regulatory reporting

Report on IT Support for UCBs (contd.)
Application Service Provider (ASP) Model
Agency like IDRBT could short-list/select one/ few
vendors and be the conduit and service quality assuror
to the banks
Payment model for the ASP option includes a one time
payment and a small charge every month combined with
per transaction fee
Initial Investment in ASP model would be less and by
combining the requirements of a large number of banks
the cost could be further reduced
Good for smaller UCBs

Models Suggested
Outright Purchase Model
Only UCBs which have a business of more than 100
crores, CRAR of over 9% and have been profit making
for the past 3 years could be provided support for
outright purchase
Outright purchase of the Core Banking, including data
centre, the cost would be in the range of 1.5 crore to 2
crore for 5-10 branches per bank

Models Suggested
Only those banks which are well capitalised and with good track record, who give
confidence and comfort that the end use of funds are assured, and that they haveIT
savvy personnel to implement/oversee and deal with the vendors and for whom investing
in an outright purchase option is financially a preferable option should be given the option
to choose this model

Support will be available to all UCBs but it should
not be treated as a grant
Support may be in the form of a loan and not
subsidy
Interest free loan for 7 years for both hardware
and software

Delivery Mechanism
If required, IDRBT may develop an area of expertise within itself to cater to the IT
needs of small banks, including UCBs. National and State Federation of
cooperatives may also think of creating such IT facilities for UCBs in the long run
for the benefit of the sector
Big banks preferring to go for outright purchase
of software and hardware
Interest free with only service charge of percent to 1
percent to be charged by the SCB routing the loan may
be considered
Weak / sick banks, the moratorium may be for two
years
In case the UCB defaults on its repayment
obligations even after that, a view may be
taken at that point regarding other options
like continuation of management, non-
disruptive exit of the bank etc.
Delivery Mechanism
Banks adopting ASP Model
Interest-free loan by the Reserve Bank could be through
IDRBT, which could prepare Systems Requirement
Specifications, select vendors, prepare development /
testing & implementation plans, and vetting the SLA
(Service Level Agreement) between users i.e. UCBs and
the service providing entity
UCBs adopting outright purchase model
The Group felt that the Reserve Bank may not be able to
extend direct loans
However, NABARD has a separate fund for IT usage in
co-operative sector, a portion of which can be routed to
UCBs, through SCCB / DCCBs
Delivery Mechanism
Thank You

Regualtion and Supervision of UBD - 220210

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