Raising capital funds made easier for Cooperative Banks: Banknet India

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Raising capital funds made easier for Cooperative Banks

Jul 15, 2008: Reserve Bank of India has decided that in order to facilitate raising of capital funds (Tier I and Tier II) by Urban) Co-operative Banks (UCBs) for the purpose of compliance with the prescribed Capital Adequacy norms, they be permitted to issue the following financial instruments:

A) Preference shares Preference shares may be of the following types:

i) Perpetual Non-Cumulative preference shares (PNCPS)

ii) Perpetual Cumulative preference shares (PCPS)

iii) Redeemable Non-Cumulative preference shares (RNCPS)

iv)Redeemable Cumulative preference shares (RCPS)

While Perpetual Non-Cumulative Preference Shares (PNCPS) would be eligible to be treated as Tier I capital, Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) would be eligible to be treated as Tier II capital. UCBs, however, are not permitted to subscribe to the preference shares of other UCBs.

B) Long Term Deposits

UCBs may be permitted to raise term deposits for a minimum period of not less than 5 years, which will be eligible to be treated as Tier II capital.

2. Share Linkage Norms

As per the current regulatory prescriptions, borrowings from UCBs are linked to shareholdings of the borrowing members. At present, the shareholding requirement is 2.5% for secured borrowings and 5% for unsecured borrowings. Taking into account the recommendation of the Working Group and the feedback received in this regard, it has been decided that the extant share linking norm may be applicable for member’s shareholdings upto the limit of 5% of the total paid up share capital of the bank Where a member is already holding 5% of the total paid up share capital of an UCB, it would not be necessary for him to subscribe to any additional share capital on account of the application of the 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% of the total paid up share capital of the bank , whichever is lower.

3.Classification of Capital Funds

3.1 As per the extant instructions, capital funds are divided into Tier I capital and Tier II capital. Elements of Tier II capital are reckoned as capital funds up to a maximum of 100 per cent of Tier I capital. It has now been decided that Tier II capital may further be divided into upper and lower tiers. Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) would be treated as upper Tier II capital. Long Term Deposits would be treated as lower Tier II capital. PNCPS should not exceed 20 % of Tier I capital (excluding PNCPS). Long term deposit should not exceed 50 % of Tier I capital and that total Tier II should not exceed Tier I capital.

3.2 As stated above, elements of Tier II capital are reckoned as capital funds up to a maximum of 100 per cent of Tier I capital. It has now been decided that the above restriction may be kept in abeyance for five years, i.e, up to March 31, 2013 for banks that are having CRAR less than the 9 % in order to give time to the banks to raise Tier I capital. In other words, Tier II capital would be reckoned as capital funds for capital adequacy purpose even if a bank does not have Tier I capital. However, during this period, for the purpose of capital adequacy requirement, lower Tier II capital alone would be restricted to 50 % of the prescribed CRAR and the progressive discount in respect of Tier II capital would, be applicable.

4. UCBs may issue preference shares and Long Term Deposits subject to compliance with their bye-laws/provisions of the Co-operative Societies Act under which they are registered and with the approval of the concerned Registrar of Co-operative Societies /Central Registrar of Co-operative Societies, wherever applicable and the Reserve Bank of India. The Central/ State Governments are being requested separately to make necessary amendments to Multi-State Cooperative Societies Act / Co-operative Societies Acts /Rules, wherever necessary.

Note: The Reserve Bank constituted a Working Group (Chairman: Shri N.S.Vishwanathan) to examine the issues concerning raising of capital by UCBs and identifying alternate instruments / avenues for augmenting their capital funds. The Working Group had members drawn from the urban co-operative banking sector and state governments. The Group submitted its report in November 2006.

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