Financially Sound and Well Managed (FSWM) banking entities
- December 2, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Financially Sound and Well Managed (FSWM) banking entities
Subject: Economy
Context:
Reserve Bank of India prescribed revised norms to categorise UCBs as Financially Sound and Well Managed (FSWM) banking entities and announced a four-tiered regulatory framework
Details:
- The four-tiered regulatory framework is based on the size of deposits of the UCBs.
- The extant regulatory framework classifies UCBs into two tiers — Tier I and Tier II.
- Four- tier Categorization:
- Tier 1-UCBs deposits up to Rs 100 crore.
- Tier 2–UCBs with deposits more than Rs 100 crore and up to Rs 1,000 crore.
- Tier 3 -UCBs with deposits more than Rs 1,000 crore and up to Rs 10,000 crore.
- Tier 4-UCBs with deposits more than Rs 10,000 crore.
- If a UCB transits to a higher Tier it may be provided a glide path of up to a maximum of three years to comply with higher regulatory requirements.
- Net worth and capital adequacy requirements of the UCBs:
- Tier 1 UCBs operating in a single district-minimum net worth of Rs 2 crore.
- For all other UCBs– the minimum net worth should be Rs 5 crore.
- Tier 1 UCBs– minimum capital to risk weighted assets ratio of 9 percent of Risk Weighted Assets (RWAs).
- Tier 2 to 4 UCBs -a minimum capital to risk weighted assets of 12 percent of RWAs on an ongoing basis.
- For categorising UCBs as FSWM category banks:
- The capital adequacy ratio- at least one percent above the minimum CRAR applicable to an UCB.
- Net non-performing Assets (NPAs) -not be more than three per cent.
- Reported Net profit for at least three out of the preceding four years.
- Not have incurred a net loss in the immediate preceding year.
- Not have defaulted on maintaining Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) during the preceding year.
- It should have a sound internal control system with at least two professional directors on the board and fully implemented core Banking Solution (CBS).
- No monetary penalty should have been imposed on the bank for violation of RBI’s directives and guidelines during the last two financial years.
- Process of categorizing UCBs as Financially Sound and Well Managed (FSWM) banking entities
- UCBs can decide the eligibility based on the assessed financials and findings of RBI inspection report or audited financial statements, whichever is latest.
- The boards of the banks have to examine the compliance with the FWSM criteria and pass necessary resolutions and inform RBI immediately.
- UCBs may review the compliance with FSWM criteria every year at Board level immediately after the audit of the financial statements and RBI inspection report as and when received.
- This process will be subject to supervisory review of RBI.
Concept:
- A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
- Co-operative banks in India are registered under the States Cooperative Societies Act.
- The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulations Act 1949,Banking Laws (Co-operative Societies) Act, 1955.
- The rural co-operative credit system in India is primarily mandated to ensure flow of credit to the agriculture sector.
- It comprises short-term and long-term co-operative credit structures.
- The short-term co-operative credit structure operates with a three-tier system –
- Primary Agricultural Credit Societies (PACS) at the village level and the are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by the Reserve Bank of India. ,
- Central Cooperative Banks (CCBs) at the district level and
- State Cooperative Banks (StCBs) at the State level. StCBs/DCCBs are registered under the provisions of State Cooperative Societies Act of the State concerned and are regulated by the Reserve Bank. Powers have been delegated to National Bank for Agricultural and Rural Development (NABARD) to conduct inspection of State and Central Cooperative Banks.
- The short-term co-operative credit structure operates with a three-tier system –
- Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs), cater to the financial needs of customers in urban and semi-urban areas.
- UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries of one state.
- There is duality of control over these banks with banking related functions being regulated by the Reserve Bank of India and management related functions regulated by respective State Governments/ Central Government.
- It comprises short-term and long-term co-operative credit structures.