The Reserve Bank of India (RBI) on Thursday revised the supervisory action framework for urban co-operative banks, saying in case of financial woes, banks must be the first to take corrective steps.
Earlier, RBI had initiated action against ailing urban co-operative banks, based on its assessment of their financial positions.
The central bank said an urban co-operative bank's management should initiate corrective action if its capital adequacy ratio fell below nine per cent. "The corrective action should include measures for augmenting capital, close monitoring of NPAs (non-performing assets) and its recovery, especially large NPAs, improving profitability by curtailing expenses and mobilising low-cost deposits, depending on the nature of the deficiency," RBI said in a notice.
Urban co-operative banks must prepare a time-bound action plan, and the progress must be monitored by their boards, RBI said.
In the absence of such action by the bank, RBI would take supervisory action in two stages. The central bank would first monitor the performance of the bank — if the capital adequacy ratio fell below six per cent or gross bad loans exceeded 10 per cent of the loan book or deposits were concentrated in the hands of a few depositors or the credit deposit ratio was more than 70 per cent.
"In the second stage, the supervisory action would be through pre-emptive action, aimed at arresting further deterioration in the bank's financial position," RBI said.
If such a bank's capital adequacy ratio falls below four per cent and its net worth turns negative, RBI would take appropriate steps, depending on the extent of the erosion in deposits. If the erosion in deposits is up to 10 per cent, the bank would have to explore the option of merging with another bank and would not be allowed to raise more deposits.
RBI would issue a show cause notice for cancelling the licence of a bank if the erosion in deposits exceeds 25 per cent.