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Mumbai, Nov. 22: A working group appointed by the Reserve Bank of India (RBI) on urban cooperative banks (UCBs) has recommended that these banks be allowed to raise long-term capital or quasi capital through four new instruments. These include non-convertible debentures, special shares which could be issued even at a premium, cumulative preference shares and long-term deposits having maturity of over 15 years.
The working group’s recommendations, whose mandate was to examine issues relating to augmenting capital of UCBs, is considered crucial as there are large number of such under capitalised banks. However, there are several restrictions on how UCBs could raise capital.
In such a background, the group headed by N.S. Vishwanathan, CGM-in-charge, UBD, RBI, suggested that as UCBs cannot raise stable and long-term funds having equity or quasi equity characteristics, they may be permitted to issue unsecured, subordinated, non-convertible, redeemable debentures / bonds, which can be subscribed to by those within their area of operations and outside.
According to the group, these bonds should have a minimum maturity of 10 years. While there need be no upper limit on maturity, liability of the bank to the bond holders would be subordinated to the claims of depositors and other creditors but would rank senior to shareholders, including holders of special shares. These bonds, the group added, can have a fixed or floating interest rate and they will not have any put option but can have a call option exercisable by the bank, not before five years, with prior permission of the Reserve Bank. The group stipulated that this may be granted if it does not result in the regulatory capital falling below the prescribed level.
UCBs may be allowed to issue special shares on specific terms and conditions. While they cannot issue shares at a premium now, the group recommended that these shares be allowed to be issued in premium as well. The special shares will be perpetual with a call option that can be exercised only after 10 years, with prior permission of RBI, which may be granted in the event of the redemption not resulting in the capital adequacy ratio (CRAR) falling below the prescribed minimum.
On preference shares, the group observed that the better managed medium-sized UCBs may be provided an instrument, which is neither a debt instrument like a bond nor a perpetual security like special shares referred to above. It, therefore, recommended that the banks be allowed to issue redeemable cumulative preference shares on specific terms and conditions.
While the funds raised through such shares may be treated as Tier II capital, the minimum maturity of the preference shares should be 10 years.
The working group also sought other relaxations for UCBs.