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During March 2001, certain UCBs faced liquidity and insolvency problems. A major factor behind the problem had been non-adherence by these UCBs to prudential norms prescribed by the Reserve Bank, such as lending to stockbrokers, exceeding prudential exposure to single party/group and the limit on unsecured advances and failure to meet inter-bank payment obligations.

At the centre of the problem was a multi-state scheduled UCB, which witnessed a sudden withdrawal of deposits.


The Reserve Bank felt that in the interest of financial stability, it was important to take measures to strengthen the regulatory framework for the cooperative sector.

Issues such as removal of ‘dual’ control of the UCBs, laying down of clear-cut guidelines for their management structure, enforcement of further prudential standards in respect of access to uncollateralised funds, lending by the UCBs against volatile assets, etc., were considered in this context.


The Reserve Bank identified the following areas for immediate regulatory response:


(a) The extent of access of the UCBs to call/notice money markets,

(b) The asset-liability management system of the UCBs,

(c) Inter-bank exposure of the UCBs in the form of deposits maintained by one UCB with another and

(d) The maintenance of SLR portfolio by the UCBs. In order to address these issues, the Reserve Bank has announced a series of measures relating to UCBs in the April 2001 monetary and credit policy statement. The salient features of these measures are given below.


Lending to Stock Market: It is important to point out that even before the policy changes were initiated in April 2001, co-operative banks were not permitted to invest directly in stock markets nor to lend to stock brokers. They could, however, lend to individuals against pledge of shares up to a certain limit.

Available information revealed that a few UCBs ignored these guidelines and established a nexus with certain stockbrokers in order to operate in the stock market.

In order to prevent any possible misuse in the future, Reserve Bank had put a stop on lending by UCBs directly or indirectly against also advised to unwind existing lending to stockbrokers or direct investment in shares on the contracted dates.

In response to representations received from UCBs and their federations, the October 2001 Mid-term Review proposed to allow UCBs to grant loans to individuals against security of shares, subject to certain conditions

Access to Call/Notice Money Markets: In order to reduce the excessive reliance of some UCBs in the call money market, it was announced that their borrowings in the call/notice money market on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end-March of the previous financial year. The freedom to lend in the call/ notice money market, however, continues.


Inter-UCB Term Deposits: As parking of funds by UCBs with other UCBs may pose a systemic risk, as a safety precaution, UCBs were advised not to increase their term deposits with other UCBs. The outstanding deposits with other UCBs as on April 19, 2001 have to be unwound before end of June 2002. UCBs may maintain current account balances at their discretion with other UCBs to meet their day-to-day clearing and remittance requirements.


Maintenance of SLR: UCBs are required to maintain their SLR equivalent to 25.0 per cent of net demand and time liabilities (NDTL). They can maintain it in the form of investments in government and other approved securities or as deposits with StCBs/CCBs.


In the April 2001 policy statement, it was announced that with effect from April 1, 2003 all scheduled UCBs would need to maintain their entire SLR assets of 25.0 per cent of NDTL only in government and other approved securities and that compliance with CRR requirements on par with scheduled commercial banks would be prescribed in due course.


All scheduled UCBs and non-scheduled UCBs with deposits of Rs. 25 crore and above now have to maintain investments in government securities only in Subsidiary General Ledger (SGL) Accounts with Reserve Bank or in constituent SGL Accounts with public sector banks, Primary Dealers (PDs), scheduled commercial banks, state co-operative banks and depositories.


Non-scheduled UCBs with deposits of less than Rs. 25 crore would have the facility of maintaining government securities in physical or scrip form. The UCBs were required to achieve certain higher proportion of their SLR holding in the form of government and other approved securities as a percentage of their NDTL by March 31, 2002.


In response to the representations received from UCBs and their federations it has been proposed to modify the time-frame for achieving the prescribed levels of SLR holding.


Dual Control: Apart from initiating the policy changes, the Reserve Bank has also addressed the issue of dual control of UCBs. At present, three authorities are involved in regulatory and promotional aspects concerning the UCBs – the Central Government (in case of banks having multi-State presence), State Governments and the Reserve Bank. Doing away of dual control entails amendments to the Constitution of India, which can be a long drawn legislative process. In view of this, the Reserve Bank felt that one of the options that deserves to be seriously considered is setting up of a new apex supervisory body which can take over the entire inspection/supervisory functions in relation to scheduled and non-scheduled UCBs.


This apex body could be under the control of a separate high-level supervisory board consisting of representatives of the Central Government, State Governments, the Reserve Bank as well as acknowledged experts in the areas of co-operative banking, etc. The body may be given the responsibility of inspection and supervision of UCBs and ensuring their conformity with prudential, capital adequacy and risk-management norms laid down by the Reserve Bank.

 


During March 2001, certain UCBs faced liquidity and insolvency problems. A major factor behind the problem had been non-adherence by these UCBs to prudential norms prescribed by the Reserve Bank, such as lending to stockbrokers, exceeding prudential exposure to single party/group and the limit on unsecured advances and failure to meet inter-bank payment obligations.

At the centre of the problem was a multi-state scheduled UCB, which witnessed a sudden withdrawal of deposits.


The Reserve Bank felt that in the interest of financial stability, it was important to take measures to strengthen the regulatory framework for the cooperative sector.

Issues such as removal of ‘dual’ control of the UCBs, laying down of clear-cut guidelines for their management structure, enforcement of further prudential standards in respect of access to uncollateralised funds, lending by the UCBs against volatile assets, etc., were considered in this context.


The Reserve Bank identified the following areas for immediate regulatory response:


(a) The extent of access of the UCBs to call/notice money markets,

(b) The asset-liability management system of the UCBs,

(c) Inter-bank exposure of the UCBs in the form of deposits maintained by one UCB with another and

(d) The maintenance of SLR portfolio by the UCBs. In order to address these issues, the Reserve Bank has announced a series of measures relating to UCBs in the April 2001 monetary and credit policy statement. The salient features of these measures are given below.


Lending to Stock Market: It is important to point out that even before the policy changes were initiated in April 2001, co-operative banks were not permitted to invest directly in stock markets nor to lend to stock brokers. They could, however, lend to individuals against pledge of shares up to a certain limit.

Available information revealed that a few UCBs ignored these guidelines and established a nexus with certain stockbrokers in order to operate in the stock market.

In order to prevent any possible misuse in the future, Reserve Bank had put a stop on lending by UCBs directly or indirectly against also advised to unwind existing lending to stockbrokers or direct investment in shares on the contracted dates.

In response to representations received from UCBs and their federations, the October 2001 Mid-term Review proposed to allow UCBs to grant loans to individuals against security of shares, subject to certain conditions

Access to Call/Notice Money Markets: In order to reduce the excessive reliance of some UCBs in the call money market, it was announced that their borrowings in the call/notice money market on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end-March of the previous financial year. The freedom to lend in the call/ notice money market, however, continues.


Inter-UCB Term Deposits: As parking of funds by UCBs with other UCBs may pose a systemic risk, as a safety precaution, UCBs were advised not to increase their term deposits with other UCBs. The outstanding deposits with other UCBs as on April 19, 2001 have to be unwound before end of June 2002. UCBs may maintain current account balances at their discretion with other UCBs to meet their day-to-day clearing and remittance requirements.


Maintenance of SLR: UCBs are required to maintain their SLR equivalent to 25.0 per cent of net demand and time liabilities (NDTL). They can maintain it in the form of investments in government and other approved securities or as deposits with StCBs/CCBs.


In the April 2001 policy statement, it was announced that with effect from April 1, 2003 all scheduled UCBs would need to maintain their entire SLR assets of 25.0 per cent of NDTL only in government and other approved securities and that compliance with CRR requirements on par with scheduled commercial banks would be prescribed in due course.


All scheduled UCBs and non-scheduled UCBs with deposits of Rs. 25 crore and above now have to maintain investments in government securities only in Subsidiary General Ledger (SGL) Accounts with Reserve Bank or in constituent SGL Accounts with public sector banks, Primary Dealers (PDs), scheduled commercial banks, state co-operative banks and depositories.


Non-scheduled UCBs with deposits of less than Rs. 25 crore would have the facility of maintaining government securities in physical or scrip form. The UCBs were required to achieve certain higher proportion of their SLR holding in the form of government and other approved securities as a percentage of their NDTL by March 31, 2002.


In response to the representations received from UCBs and their federations it has been proposed to modify the time-frame for achieving the prescribed levels of SLR holding.


Dual Control: Apart from initiating the policy changes, the Reserve Bank has also addressed the issue of dual control of UCBs. At present, three authorities are involved in regulatory and promotional aspects concerning the UCBs – the Central Government (in case of banks having multi-State presence), State Governments and the Reserve Bank. Doing away of dual control entails amendments to the Constitution of India, which can be a long drawn legislative process. In view of this, the Reserve Bank felt that one of the options that deserves to be seriously considered is setting up of a new apex supervisory body which can take over the entire inspection/supervisory functions in relation to scheduled and non-scheduled UCBs.


This apex body could be under the control of a separate high-level supervisory board consisting of representatives of the Central Government, State Governments, the Reserve Bank as well as acknowledged experts in the areas of co-operative banking, etc. The body may be given the responsibility of inspection and supervision of UCBs and ensuring their conformity with prudential, capital adequacy and risk-management norms laid down by the Reserve Bank.


Hey abhi, thanks for sharing this article explaining about the RBI measures and it would help many help. Well, as we know that RBI is the central bank which control all the financial and economic polices of the nation. I am also uploading a document where you would find more details.
 

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