What changed
RBI permitted UCBs to issue four types of preference shares (PNCPS, PCPS, RNCPS, RCPS) and long-term deposits (min 5 years) as capital instruments. Share linkage norms were relaxed: borrowing members need not hold shares beyond 5% of the bank's paid-up capital, with existing norms of 2.5% for secured and 5% for unsecured borrowings still applicable below that ceiling. Tier II capital was split into upper (PCPS, RNCPS, RCPS) and lower (long-term deposits) tiers. PNCPS should not exceed 20% of Tier I capital (excluding PNCPS). Long-term deposits should not exceed 50% of Tier I capital. Total Tier II should not exceed Tier I capital, but this restriction is kept in abeyance for five years up to March 31, 2013 for banks with CRAR below 9%, with lower Tier II restricted to 50% of prescribed CRAR and progressive discount applicable.
What it means for you
UCBs now have more flexibility to raise capital, especially Tier I via PNCPS, which helps meet CRAR requirements. The relaxation of share linkage reduces the burden on borrowing members, potentially boosting lending. The temporary waiver of the Tier I cap for weak banks gives them breathing room to shore up core capital without immediate penalty.
What you must do
- Review your bank's capital adequacy position and assess eligibility to issue preference shares or long-term deposits.
- Update internal policies to reflect the new share linkage norms (5% of paid-up capital ceiling, with existing 2.5%/5% norms below that).
- Ensure compliance with the sub-limits: PNCPS ≤20% of Tier I (excluding PNCPS), long-term deposits ≤50% of Tier I, total Tier II ≤ Tier I (with abeyance for weak banks).
- If CRAR is below 9%, document the plan to raise Tier I capital within the five-year window (by March 2013) and note that lower Tier II is restricted to 50% of prescribed CRAR with progressive discount.
Who it affects
All Primary (Urban) Co-operative Banks, Borrowing members of UCBs, State governments involved in UCB oversight
Can UCBs subscribe to preference shares of other UCBs?
No, the circular explicitly prohibits UCBs from subscribing to preference shares of other UCBs.
What is the minimum tenure for long-term deposits to qualify as Tier II capital?
The minimum period is not less than 5 years.
How long is the Tier II cap relaxation available for weak banks?
The restriction that Tier II cannot exceed Tier I is kept in abeyance for five years, i.e., up to March 31, 2013, for banks with CRAR below 9%.