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The Reserve Bank of India (RBI) revised the Supervisory Action Framework
(SAF) for Urban Cooperative Banks (UCBs) on January 6, with triggers more
stringent than before, in order to take corrective action against weak banks. The
SAF, if implemented in a timely manner, may help cooperative banks improve
their financial conditions and avert restrictions on basic services like deposit
withdrawals that are imposed by the regulator as a last resort. The imposition of
restrictions on Punjab and Maharashtra Cooperative (PMC) Bank last year drew
public ire when deposit withdrawals were capped overnight, leaving the bank’s
customers in a frenzy. “Keeping in view the experience gained, it has been
decided to further rationalize the SAF to make it more effective in bringing
about the desired improvement in the UCBs, as also the expeditious resolution
of UCBs experiencing financial stress,” the RBI said. Structured on the lines of
Prompt Corrective Action (PCA) plan for scheduled commercial banks, the
SAF has a set of triggers based on the asset quality, capital adequacy and
profitability of the cooperative banks. A UCB may be placed under SAF when
its net non-performing assets (NPA) ratio exceeds 6 percent, capital adequacy
ratio falls below 9 percent and if it incurs losses for two consecutive financial
years or has accumulated losses on its balance sheet. As per previous norms, the
trigger on asset quality was set at 10 percent of gross NPA ratio. However, RBI
said it will not be precluded from taking appropriate supervisory action in case
stress is noticed in other important parameters or in case of serious governance
issues.

“Reserve Bank will also not be precluded from taking any supervisory actions
other than those indicated in this circular, based on merits of each case,” the
regulator said. Under SAF, the bank’s board will have to submit a board-
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approved action plan for improving these parameters. There will be a restriction
on declaration and payment of dividend or donation without RBI’s prior
approval.
Other restrictions include lending restrictions to sectors with high defaults and
incurring capital expenditures beyond specified limits. The UCB will also have
to take measures to cut operating and administrative costs. RBI said supervisory
action will normally be initiated on the basis of the financial position of UCBs
as assessed during the statutory inspection. Also, actions such as cancellation of
banking licence may be considered by the regulator if necessary. The health of
scheduled urban cooperative banks (SUCBs) worsened in the second quarter,
with fall in capital adequacy and rise in gross non-performing assets (NPAs),
according to the Financial Stability Report released on December 27. The
capital adequacy ratio of SUCBs’was down 9.8 percent in the September
quarter, from 13.5 percent in the March-ended quarter. Also, the gross NPA
ratio rose to 10.5 percent from 6.4 percent in the same period. In another report
released last month, RBI said dual control with state governments hampered
timely action against weak lenders in this category. The RBI also said there was
a need for an independent audit system while existing regulations were being
reviewed to improve supervision for cooperative banks.