RBI ISSUES A DRAFT CIRCULAR ON FUNDRAISING FOR UCBs

Following the Banking Regulation (Amendment) Act, 2020 which allows UCBs to raise funds in the market, the RBI came up with the Draft Circular on ‘Issue and regulation of share capital and securities - Primary (Urban) Co-operative Banks. Comments on the Draft Circular are invited to UCBs, sector stakeholders, and other interested parties on August 31, 2021, the RBI media report said. The RBI also sought comment from State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs).

In a letter to UCBs CEOs, the RBI states that extant instructions for UCBs in issue and regulation of capital funds have been reviewed keeping in view, under the provisions of Section 12 read with Section 56 of the Banking Regulation Amendment Act, 1949 (BR Act).

UCBs have been allowed to increase the share capital, to date, by using

• equitable shareholding for locals registered as members, subject to the provisions of their disposal rules, and 

• Issuing additional cash shares to existing members.

UCBs are also allowed to increase their revenue by issuing Preferential Shares and Debt Instruments. Guidelines governing instruments that reflect legal requirements are included in the annexes. The RBI suggests that for floating rate instruments, banks should not use their fixed deposit rate as a measure. Certain signatures from investors, with an understanding of the features and risks of the instruments, may be included in the standard application form for the proposed issue.

UCBs will ensure that all the offer document/publicity material, documents, application form, and other contact details of the investor should clearly state in bold letters that are different from the fixed deposit, and that these instruments are not covered by the deposit insurance.

It is determined that UCBs should be allowed to return the share capital to their members, or nominees/beneficiaries of deceased members, on-demand, provided the capital of the bank on risk items (CRAR) is 9 percent or more. In this framework or draft, the RBI has also set out borrowing conditions as they are linked to the shares of borrowers. 5 percent of the borrowings, if the borrowings are less unsecured and 2.5 percent borrowings, in the event of safe and secured borrowings.

Comments on the Circular Draft are invited to UCBs, sector stakeholders, and other interested parties on August 31, 2021, to study release.

Author:

Damini Nagar
Indore
B.A LLB from Indore institution of Law