maggubhai

Arth Volume 5 (January 1st to 10th, 2020)

PCA like curbs will be faced by stressed urban co-operative banks

RBI has decided to impose restrictions on urban co-operative banks for deterioration of financial position, in line with the prompt corrective action (PCA) framework that is imposed on commercial banks.This move comes in the wake of the recent crisis at the PMC bank.

Keypoints-

  • Under this supervisory action framework, 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 governance issues.
  • 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.
  • 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.

Shivalik Mercantile- 1st urban cooperative bank to convert to SFB

Reserve Bank of India (RBI), gave approval to Uttar Pradesh based Shivalik Mercantile Co-operative Bank Ltd to convert to a small finance bank (SFB) and it became the 1st urban cooperative bank (UCB) to be converted into an SFB since the release of reformed RBI guidelines which came out 2 years ago.

The RBI will grant licence under Section 22 (1) of the Banking Regulation Act, 1949 as an SFB.

Keypoints-

  • RBI granted transition of an UCB into an SFB under the scheme on voluntary transition of urban co-operative bank into a small finance bank issued.
  • It was part of the recommendations made by the high powered committee on UCBs led by the then RBI deputy governor Rama Subramaniam Gandhi.
  • Under the guidelines, a promoter should be an Indian resident with 10 years of experience in banking and finance.
  • The promoter or the promoter groups should conform to the definition of the Securities and Exchange Board of India(SEBI)- (Issue of Capital & Disclosure Requirements) Regulations, 2009 and RBI guidelines on fit and proper.
  • The UCB will get 18 months (1.5years) to comply with the above mentioned scheme. Banks having a minimum net worth of Rs 50 crore and capital to risk weighted assets (RWA) ratio of 9% will be eligible to apply for voluntary transition to SFB.
  • The UCBs should also have to comply with the latest guidelines for on-tap licensing of SFBs in the private sector. Under this guideline, SFBs should maintain a minimum net worth of ₹100 crores from the date of commencement of business.
  •  SFBs will have to maintain a minimum capital adequacy ratio of 15% of RWA on a continuous basis. They should also have to increase the minimum paid-up voting equity capital to ₹200 crores within 5 years of the date of commencement of business.
  • The SFBs are required to extend 75% of their loans to sectors under priority sector lending (PSL) such as loans to agriculture, micro, small and medium enterprises, education, housing, and others.
  • 50% of the SFB loan portfolio should constitute loans and advances up to ₹25 lakhs.

RBI allows banks to offer round-the-clock forex market operations

In order to reduce the rising influence of offshore trading in the currency markets, the Reserve Bank of India (RBI) has enabled banks to offer round-the-clock (24×7) trading in the Indian rupee to allow Indians to safeguard their foreign exchange (Forex) risks at any time.Still now, the select banks in India offered Indian customers foreign exchange rates only in inter-bank market hours from 9 am – 5 pm.RBI accepted the key recommendations of the Task Force on Offshore Rupee Markets headed by Smt. Usha Thorat.

Keypoints:                                                                                

  • This decision will also make the offshore currency markets in countries like Dubai & Singapore less attractive for Indian investors.
  • The domestic banks will be allowed to freely offer foreign exchange prices to non-residents at all times, out of their Indian books, either by a domestic sales team or through their overseas branches.

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