What changed
RBI reviewed capital rules for Rural Co-operative Banks (StCBs and DCCBs) under the amended Banking Regulation Act, 1949. It now allows these banks to issue specific preference shares and debt instruments for Tier I and Tier II capital. Additionally, refund of share capital to members is permitted if CRAR is at least 9% and remains above the regulatory minimum after refund.
What it means for you
Co-operative banks can now diversify their capital raising options beyond traditional shares, using instruments like perpetual preference shares and subordinated bonds. This helps them strengthen capital buffers while complying with regulatory norms. However, strict disclosure requirements and investor sign-offs add compliance burden, and refund restrictions ensure capital adequacy is not compromised.
What you must do
- Review and update your bank's capital raising policy to include the newly permitted instruments (PNCPS, PCPS, RNCPS, RCPS, PDI, LTSB).
- Ensure all offer documents and application forms include bold disclaimers (Arial 14) that these instruments differ from fixed deposits and are not insured.
- Obtain a signed investor acknowledgment confirming understanding of terms and risks before issuing any regulatory capital instrument.
- Before refunding share capital, verify CRAR is 9% or above from latest audited statements and NABARD inspection, and that refund won't drop CRAR below 9%.
- Update internal procedures for transfer of instruments to legal heirs in case of subscriber's death.
Who it affects
State Co-operative Banks (StCBs), District Central Co-operative Banks (DCCBs), Investors in co-operative bank capital instruments, NABARD (as assessing authority for CRAR)
What are the new capital instruments allowed for StCBs and DCCBs?
RBI permits issuance of Perpetual Non-Cumulative Preference Shares (PNCPS) for Tier I capital, and Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS), Redeemable Cumulative Preference Shares (RCPS), and Long Term Subordinated Bonds (LTSB) for Tier II capital. Perpetual Debt Instruments (PDI) are also allowed for Tier I capital.
Can co-operative banks refund share capital to members?
Yes, but only if the bank's CRAR is 9% or above as per the latest audited financials and NABARD's statutory inspection, and the refund does not reduce CRAR below the regulatory minimum of 9%. Accretion to capital after balance sheet date (excluding profits) can be considered for CRAR calculation.
What disclosure requirements apply when issuing these instruments?
Banks must state in bold (Arial 14) in all communications that the instrument is different from a fixed deposit and not covered by deposit insurance. Investors must sign an acknowledgment that they understand the terms and risks. Floating rate instruments cannot use the bank's fixed deposit rate as benchmark.