Four-tiered Regulatory Framework for Urban Co-operative Banks (UCBs)

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Need for four-tiered regulatory framework:

According to RBI, such framework is needed to balance the spirit of mutuality and co-operation more prevalent in banks of smaller sizes and those with limited area of operation vis-a-vis the growth ambitions of the large-sized UCBs and undertake more complex business activities.
Based on size of deposits of the UCBs, the four-tiered regulatory framework will come into force with immediate effect.
The extant regulatory framework classifies UCBs into two tiers – Tier I and Tier II.
- The RBI has categorised all unit UCBs and salary earners’ UCBs (irrespective of deposit size), and all other UCBs having deposits up to ₹100 crore in Tier 1.
- In Tier 2, it has placed UCBs with deposits more than ₹100 crore and up to ₹1,000 crore.
- Tier 3 will cover banks with deposits more than ₹1,000 crore and up to ₹10,000 crore.
- UCBs with deposits more than ₹10,000 crore have been categorised in Tier 4.
Net worth and capital adequacy:
- RBI also has come out with norms pertaining to the net worth and capital adequacy of these banks.
- Tier 1 UCBs operating in a single district should have minimum net worth of ₹2 crore.
- For all other UCBs (in Tier 1, 2 and 3) tiers), the minimum net worth should be ₹5 crore.
- The UCBs, which currently do not meet the revised minimum net worth requirement, will have to achieve the minimum net worth of ₹2 crore or ₹5 crore (as applicable) in a phased manner.
Minimum capital to risk weighted assets ratio:
- The central bank also prescribed minimum capital to risk weighted assets ratio requirement for UCBs.
- Tier 1 UCBs have to maintain a minimum capital to risk weighted assets ratio of 9 per cent of Risk Weighted Assets (RWAs) on an ongoing basis.
- Tier 2 to 4 UCBs have to maintain a minimum capital to risk weighted assets of 12 per cent of RWAs on an ongoing basis.

Q1) What is the difference between urban cooperative bank and rural cooperative bank?

Rural Co-Operative Banks mainly finance agriculture-based activities including farming, dairy, fish culture, along with some small-scale industries and self-employment activities, while Urban Co-Operative Banks mainly finance various categories of people for self-employment, industries, small scale units and home finance.

Q2) What is risk weighted assets?

Risk-weighted assets are the loans and other assets of a bank, weighted (that is, multiplied by a percentage factor) to reflect their respective level of risk of loss to the bank These assets are used to determine the minimum amount of capital that banks should hold in order to reduce their insolvency risk.