What changed
RBI reviewed capital fund instructions for UCBs under the amended Banking Regulation Act, 2020. UCBs can now issue specific preference shares (PNCPS, PCPS, RNCPS, RCPS) and debt instruments (PDI, LTSB) for capital augmentation, with detailed guidelines in annexes. Refund of share capital to members is permitted subject to CRAR of 9% or above, ensuring no breach of the minimum.
What it means for you
UCBs get a clearer framework to raise regulatory capital through market instruments, improving their ability to meet Basel norms. The refund condition ties capital management to CRAR, encouraging prudent capital planning. Banks must educate investors on risk differences from deposits and ensure no deposit insurance coverage for these instruments.
What you must do
- Review and update your bank's capital raising policy to include the new instruments (PNCPS, PCPS, RNCPS, RCPS, PDI, LTSB) as per Annex I and II.
- Ensure all offer documents and application forms include the mandatory investor sign-off and bold disclaimer about risk and no deposit insurance.
- For share refunds, verify CRAR is 9% or above from latest audited statements and RBI inspection, and that refund does not drop CRAR below 9%.
- Train compliance and treasury teams on the new instrument features and investor communication requirements.
Who it affects
All Primary (Urban) Co-operative Banks (UCBs), UCB shareholders and potential investors in capital instruments, RBI supervision teams inspecting UCB capital adequacy
Can UCBs now issue perpetual bonds for Tier 1 capital?
Yes, UCBs can issue Perpetual Non-Cumulative Preference Shares (PNCPS) and Perpetual Debt Instruments (PDI) eligible for Tier 1 capital, subject to the guidelines in Annex I and II.
What happens if a UCB's CRAR falls below 9% after refunding share capital?
The refund is not permitted if it would cause CRAR to drop below the regulatory minimum of 9%. Banks must ensure CRAR stays at or above 9% post-refund.
Are these capital instruments covered by deposit insurance?
No, the circular explicitly requires banks to state in bold that these instruments are not covered by deposit insurance, and they differ from fixed deposits.