Stressed urban cooperative banks to face PCA-like curbs

4 min read

News:The Reserve Bank of India has revised its supervisory framework for urban co-operative banks(UCBs) to expedite resolution of UCBs experiencing financial stress.

Facts:

About the revised framework:

  • The framework imposes restrictions on urban cooperative banks(UCBs) for deterioration of financial position in line with the prompt corrective action(PCA) framework that is imposed on commercial banks.
  • The framework was revised in the backdrop of recent crisis at the PMC Bank.

Features of the framework:Under this revised Supervisory Action Framework (SAF),UCBs will face restrictions for worsening of three parameters:

  • when net non-performing assets exceed 6% of net advances,
  • when they incur losses for two consecutive financial years or have accumulated losses on their balance sheets, and
  • if the capital adequacy ratio falls below 9%.

What will happen if UCBs breach the parameters?

  • UCBs may be asked to submit a board-approved action plan to correct the situation like reducing net NPAs below 6%, etc.
  • The board of the UCB may be asked to review the progress under the action plan on quarterly/monthly basis and submit the post-review progress report to the RBI.
  • The RBI can impose restrictions on declaration or payment of dividend or donation without prior approval if any one of the above mentioned parameters is breached.
  • The RBI may also seek a board-approved proposal for merging the UCB with another bank or converting itself into a credit society if CAR falls below 9%.
  • The RBI may also consider the issue of show-cause notice for cancellation of banking licence when continued normal functioning of the UCB is no longer considered to be in the interest of its depositors/public.

Additional information:

About Prompt corrective action(PCA):

  • Prompt corrective action(PCA) is a framework under which commercial banks with weak financial metrics are put under watch by the RBI.
  • The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
  • It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.

About Co-operative Banks:

  • A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
  • Co-operative banking in India started in the early 20th century with the passing of Co-operative Societies Act in 1904 and later with the Co-operative Societies Act, 1912.
  • They are often created by persons belonging to the same local or professional community of sharing a common interest.
  • They are classified into two categories namely Urban Co-operative Banks(UCBs) and rural co-operative banks.