The Reserve Bank of India (RBI) has decided to impose 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.
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 capital adequacy ratio falls below 9%.
Action can be also taken if there are serious governance issues, RBI said.
For breach of such risk thresholds, UCBs will be asked to submit a board-approved action plan to correct the situation like reducing net NPAs below 6%, for restoring the profitability and wiping out the accumulated losses, and increasing capital adequacy ratio to 9% or above within 12 months.
The board of the UCB will 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 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%. It can impose restrictions on declaration or payment of dividend or donation without prior approval if any one of the risk thresholds is breached. Some of the other curbs include restricting fresh loans and advances carrying risk-weights more than 100% on incurring capital expenditure beyond a specified limit and on expansion of the balance sheet.
The RBI said actions such as imposition of all-inclusive directions under Section 35A of the Banking Regulation Act, 1949, and issue of show-cause notice for cancellation of banking licence may be considered when continued normal functioning of the UCB is no longer considered to be in the interest of its depositors/public.
The move comes in the wake of the recent crisis at the PMC Bank.