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Nov 27 – Dec 03

Top news of the week

RBI four tier classification norms on Urban Co-operative banks

The Reserve Bank of India announced a four-tiered regulatory framework for categorisation of Urban Co-operative Banks (UCBs), based on size of deposits of the UCBs. This will come into force with immediate effect.Besides, the central bank has come out with norms pertaining to the net worth and capital adequacy of these banks. 

This framework is needed to balance the spirit of mutuality and co-operation more prevalent in banks of smaller sizes and those with limited area of operation vis-a-vis the growth ambitions of the large-sized UCBs and undertake more complex business activities.

The four tier classification is as follows:

  • The RBI has categorised all unit UCBs and salary earners’ UCBs (irrespective of deposit size), and all other UCBs having deposits up to Rs 100 crore in Tier 1.
  • In Tier 2, it has placed UCBs with deposits more than Rs 100 crore and up to Rs 1,000 crore. 
  • Tier 3 will cover banks with deposits more than Rs 1,000 crore and up to Rs 10,000 crore.
  • UCBs with deposits more than Rs 10,000 crore have been categorised in Tier 4.

If a UCB transits to a higher Tier on account of increase in deposits in any year, it may be provided a glide path of up to a maximum of three years, to comply with higher regulatory requirements…,” the RBI said. 

RBI has also listed out the net worth and capital adequacy requirements of the UCBs.

  • Tier 1 UCBs operating in a single district should have a minimum net worth of Rs 2 crore. 
  • For all other UCBs (in Tier 1, 2 and 3) tiers), the minimum net worth should be INR 5 crore.

UCBs which currently do not meet the revised minimum net worth requirement will have to achieve the minimum net worth of Rs 2 crore or Rs 5 crore (as applicable) in a phased manner.

Minimum capital to risk weighted assets ratio requirement for UCBs: 

  • Tier 1 UCBs have to maintain, as hitherto, a minimum capital to risk weighted assets ratio (RAW) of 9% on an ongoing basis. 
  • Tier 2 to 4 UCBs have to maintain minimum capital to risk weighted assets of 12% of RWAs on an ongoing basis.

Other Highlights of the Week

AUM of NBFC are expected to grow to 12-13% in the current financial year- CRISIL report

According to CRISIL the assets under management (AUMs) of NBFC are likely to grow 12-13% in the current financial year, led by higher credit demand and adequate buffers. AUMs of NBFCs increased by 7% in FY22. In FY24, AUMs of the NBFC sector is likely to grow by 13-14%, as per the agency’s estimates.

The demand from home, vehicle and unsecured finance will continue to lead the growth in AUMs despite headwinds from higher borrowing costs and competition from banks. The shadow banks are capitalising on the alternative business models such as co-lending and partnerships. A strong balance sheet with high provisioning and lower leverage, receding asset-quality concerns and steadily normalising funding access provide a solid foundation for NBFCs to capitalise on credit demand. 

Despite the loan growth, NBFCs are likely to see a pressure on their margin on account of higher borrowing costs. The finance cost for NBFCs are likely to increase by 100-120 basis points (bps) in FY23 to 8.3% as compared to 7.1% in the previous year, leading to a contraction in spreads by 40-60 bps, the agency said.

Indian Bank system credit grew by 16.6%

According to the RBI data, Indian banking system outstanding credit grew by 16.6% for the fortnight ending November 18th. The bank credit grew to INR 133.29 Lakh crore for the fortnight ended November 18 this year as against Rs 113.96 lakh crore on November 19, 2021.

The deposit growth came at 9.30% with the overall base Rs 177.15 lakh crore as on November 18 as against Rs 162.06 lakh crore in the year-ago period.