RBI’s Regulation for UCBs

Why in News?

To strengthen 1,514 urban co-operative banks, the Reserve Bank of India has notified four key measures, including giving them two years more to meet the priority sector lending targets.

What are the Key Measures taken by RBI?

  • Four Key Measures:
    • Allowing UCBs to open new branches without prior approval from RBI, up to 10% (maximum 5 branches) of the number of branches in the previous financial year.
    • Allowing UCBs to do One-Time Settlement at par with commercial banks.
    • Extending the timeline for UCBs to achieve Priority Sector Lending (PSL) targets by two years, up to March 31, 2026.
      • The excess deposits, if any, after clearing the shortfall of PSL during FY 2022-23 will also be refunded to the UCB.
    • Notifying a nodal officer for closer coordination and focused interaction between RBI and the cooperative sector.
  • Possible Effects:
    • These initiatives will further strengthen the UCBs, which work in urban areas and were facing hardships in achieving PSL targets.
    • The Ministry of Cooperation is committed to strengthening cooperatives and treating them at par with other forms of economic entities.

What is Cooperatives Banks in India?

  • It is an institution established on a cooperative basis to deal with the ordinary banking business. Cooperative banks are founded by collecting funds through shares, accepting deposits, and granting loans.  
  • They are Cooperative credit societies where members from a community group together to extend loans to each other, at favorable terms.
  • They are registered under the Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, 2002.
  • The Co-operative banks are governed by the,
    • Banking Regulations Act, 1949.
    • Banking Laws (Co-operative Societies) Act, 1955.
  • They are broadly divided into Urban and Rural cooperative banks.

What are Urban Cooperative banks (UCB)?

  • The term Urban Cooperative Banks (UCBs) is not formally defined but refers to primary cooperative banks located in urban and semi-urban areas.
  • The Urban Cooperative Banks (UCBs), the Primary Agricultural Credit Societies (PACS), Regional Rural Banks (RRBs), and Local Area Banks (LABs) could be considered as differentiated banks as they operate in localized areas.
  • Till 1996, these banks were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
  • These banks were traditionally centred on communities and local workgroups as they essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

What are Recent Developments?

  • In January 2020, the RBI revised the Supervisory action Framework (SAF) for UCBs.
  • In June 2020, the Central government approved an Ordinance to bring all urban and multi-state cooperative banks under the direct supervision of RBI.
  • In 2022 RBI has announced 4 tier regulatory framework for categorization of UCBs
    • Tier 1with all unit UCBs and salary earner’s UCBs (irrespective of deposit size) and all other UCBs having deposits up to Rs 100 crore.
    • Tier 2with UCBs of deposits between Rs 100 crore and Rs 1,000 crore,
    • Tier 3with UCBs of deposits between Rs 1,000 crore and Rs 10,000 crore and
    • Tier 4with UCBs of deposits more than Rs 10,000 crore.
Source: BS
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