The Reserve Bank of India (RBI) has released a Master Circular on Prudential Norms for Capital Adequacy in Primary (Urban) Co-operative Banks (UCBs), which consolidates and updates all the instructions and guidelines on the subject issued up to 19 April 2023.
The circular emphasises the importance of capital adequacy as a buffer during times of crisis or poor performance by a bank, instilling confidence in depositors. It also states that adequacy of capital is a precondition for licensing a new bank, and its continuance in business.
As per the statutory requirements outlined in the Banking Regulation Act, no co-operative bank can commence or carry on banking business unless the aggregate value of its paid-up capital and reserves is not less than INR100,000.
Additionally, the RBI prescribes minimum entry point capital for setting up a new UCB under section 22(3)(d) of the act.
Tier 1 UCBs operating in a single district should have a minimum net worth of INR20 million, while all other UCBs, irrespective of their tier, should maintain a minimum net worth of INR5 million.
UCBs that currently do not meet the minimum net worth requirement must achieve at least 50% of the applicable minimum net worth by 31 March 2026, and the entire stipulated minimum net worth by 31 March 2028.
Regarding capital adequacy norms, tier 1 UCBs must maintain a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9% on an ongoing basis. tiers 2-4 UCBs should maintain a minimum CRAR of 12% on an ongoing basis.
UCBs in tiers 2-4 that do not meet the revised CRAR must achieve the same in a phased manner. They should achieve a CRAR of at least 10% by 31 March 2024, 11% by 31 March 2025 and 12% by 31 March 2026.
