The Reserve Bank of India (RBI) is set to outline new norms for capital-raising instruments, including the issuance of premium shares for urban cooperative banks (UCBs). This initiative aims to enhance flexibility in resource mobilization and foster growth of the sector.
RBI Governor Shaktikanta Das announced that a discussion paper will be released to gather feedback and suggestions from stakeholders on various capital-raising avenues for UCBs. In a statement regarding developmental and regulatory policies, the RBI noted that initial guidelines for the issuance and regulation of share capital and securities for UCBs were introduced in 2022 to ensure alignment with the Banking Regulation (Amendment) Act, 2020. However, these guidelines did not address newly enabled capital-related provisions. The Reserve Bank of India said in a statement on developmental and regulatory policies accompanying the monetary policy review.
These provisions including the issuance of special shares and shares at a premium, both new to the cooperative banking sector, mark a significant development.
The Expert Committee on Primary (Urban) Co-operative Banks, led by former RBI Deputy Governor N.S. Vishwanathan, had earlier outlined essential capital requirements for cooperative banks. These new capital-raising options will enable UCBs to fund their potential transition to small finance banks (SFBs).
As per an RBI scheme, UCBs with a minimum capital of Rs. 200 crore, a 15% Capital to Risk-Weighted Assets Ratio (CRAR) and appropriate governance standards can be approved to transition into SFBs. Once approved, these banks can expand their operations nationwide, obtain an AD license, and are required to establish 25% of their branches in unbanked areas. This voluntary initiative offers UCBs greater operational flexibility and allows them to compete more effectively with commercial banks within the SFB regulatory framework.
To implement the recommendations of the Vishwanathan committee, the RBI had constituted a Working Group focused on operationalizing the new capital-raising strategies. Following the group’s findings, the RBI will release a discussion paper on the capital raising avenues for urban co-operative banks to solicit feedback from stakeholders.
In July 2021, the Expert Committee on UCBs recommended minimum capital and reserve requirements, suggesting a net worth of Rs. 2 crore for UCBs with deposits under Rs. 100 crore operating within a district, and Rs. 5 crore for others.
Clearly the Reserve Bank of India is focused on integrating urban cooperative banks (UCBs) into the Indian financial ecosystem. This will enhance their competitiveness and expand their capacity to meet their customers’ needs.
