inspection of ucb-br act 1949

RBI Inspection of Urban Co-operative Banks under B.R.Act 1949 (AACS)

Reserve Bank of India

N.GopalDeputy General Manager & MOF

CAB Pune

Background

Urban cooperative credit societies organized oncommunity basis

Lending operations confined to meeting theconsumption oriented credit needs of theirmembers.


members.

There was no well defined concept of UCB

Growth and Development

1931 to 1966

Various committees and study groups commendedthe working of the UCBs in extending support tothe micro agencies to whom the commercialbanking sector was quite wary of lending.


Despite absence of State support (unlike itscounter part viz. agricultural cooperative creditsector) the UCB sector as a whole registered afairly good rate of progress.

Gaining Importance

Economic boom created by the World War II

The urban co-operative banking sector receivedtremendous impetus and started diversifying itscredit portfolio, branching out from meetingtraditional consumption oriented credit needs tocatering to the needs of artisans, small businessmenand small traders.


and small traders.

Background…. Cont….

Steady growth in volume of deposits and significantincrease in the operations of the UCBs led to thedemand for extension of deposit insurance.

Bitter experience of failure of Palai Central Bank inearly 1960s.

Call for depositor protection in the cooperativesector gained ground


sector gained ground

Can there be some of protection to the depositorsupto a certain amount?

Can the DICGC play this role?

DICGC is an organization under RBI- Does RBI needto have some sort of control?

Amendment to B.R. Act… 1966Extension of deposit insurance presupposes certaincontrol over UCBs by the RBI.

Some provisions of the BR Act,1949 were madeapplicable to the UCBs in March 1966 after intensedeliberations among the State Governments, RBI and theGovernment of India.


Government of India.

Sec 56 added to the act and some portions of the B.R. Act1949 made applicable to Cooperative Banks through thissection.

The cooperative banks came under dual control of theRBI and the State Governments

Relevant sections of B.R. Act 1949 Section 56 – The RBI exercises its regulatory,

supervisory and developmental control on UCBsthrough the applicability of select provisions of theparent Act through this Sec

Section 5(ccv) – Definition of UCBs - UCBs as aCooperative Society, other than a primaryagricultural credit society, the principal business of


agricultural credit society, the principal business ofwhich is to conduct banking business, the paid-upshare capital of which is not less than Rs. 1 lakh, andthe bye-laws of which do not permit any othercooperative society as its member. However, if aCooperative Bank has subscribed to the share capitalof such cooperative society out of funds provided bythe State Government then it can become a member

Relevant provisions of B.R. Act 1949

Section 11 – Minimum Paid-up Share Capital –The minimum paid-up share capital required forUCBs to carry out banking business is Rs. 1 lakh.

Section 18 – Cash Reserve – Non-Scheduled UCBsare required to maintain Cash Reserve Ratio on adaily basis in the following assets

Section 20 – Restriction on Loans and Advances


Section 20 – Restriction on Loans and Advances– No UCBs are allowed to grant unsecured loans andadvances Directors and to any firms where any ofthe Directors is having interest. Presently there is acomplete ban on loans and advances to Directorsand their relatives.

Section 22 and 23 – Bank and Branch Licensingof UCBs –

Relevant provisions of the B.R. Act 1949

Section 24 – Statutory Liquidity Ratio - Every UCB(scheduled/non-scheduled) is required to maintainliquid assets in the form of cash, gold orunencumbered approved securities which should notbe less than 25 per cent of the total of its demand andtime liabilities.

Section 29 – Account and Balance Sheet – At the


Section 29 – Account and Balance Sheet – At theend of each year UCBs are required to preparebalance-sheet and profit and loss account as on thelast working day of the year in the forms set out inthe Third Schedule or is near thereto.

Section 35 – Inspection of UCBs

Section 35 A – Power of the Reserve Bank to giveDirections

Relevant provisions of the B.R. Act 1949

Section 36 – Further Powers of Reserve Bank

Section 46 – Penalties

Section 47 – Cognizance of Offences - No Courtshall take cognizance of any offence punishableunder Section 46 except upon complaint in writingmade by an officer of RBI.

Section 47 A – Power of Reserve Bank to Impose


Section 47 A – Power of Reserve Bank to ImposePenalty enables the RBI to levy penalty specifiedunder sec 46.

Division of ResponsibilitiesReserve Bank Control andRegulation (Banking relatedfunctions)

State Government JurisdictionPowers under State Co-operativeSocieties Act.

Licensing,Branch Licensing,Area of operation,InspectionDirectionsImposition of Penalty

Incorporation, RegistrationConstitution of Board,Removal of DirectorsSuperseding the BoardAudit,Enquiry into the conduct of


Imposition of PenaltyPrudential NormsCapital, (CRAR)Asset Quality,Earnings,Liquidity, CRR and SLRSystems and Control,Customer Service etc

Enquiry into the conduct ofDirectorsWinding up

Objectives of RBI inspection

Inspection can be under section 22 and 35 of BR Act 1949(AACS).

Normally conducted under section 35 to ensure thatobjectives of licensing under section 22 are fulfilled andcontinue to be fulfilled.

Objectives are:


Objectives are:

the co-operative bank is or will be in a position to pay itspresent or future depositors in full as their claims accrue[Section 22 (3) (a) of BR Act (AACS)]

Objectives of licensing

The affairs of the co-operative bank are not being or arenot likely to be conducted in a manner detrimental tothe interests of its present or future depositors[Section 22 (3) (B)]

the general character of the proposed management ofthe co-operative bank will not be prejudicial to thepublic interest or the interest of its depositors;


public interest or the interest of its depositors;

The co-operative bank has adequate capital structureand earning prospects [Section 11(1) ]

The public interest will be served by the grant of alicense to the co-operative bank to carry on bankingbusiness in India

Objectives of licensing cont..

Having regard to the banking facilities available in theproposed principal area of operations of the co-operative bank, the potential scope for expansion ofbanks already in existence in the area and other relevantfactors, the grant of the licence would not be prejudicialto the operation and consolidation of the bankingsystem consistent with monetary stability and economic


system consistent with monetary stability and economicgrowth and

Any other condition, the fulfilment of which would, inthe opinion of the RBI, be necessary to ensure that thecarrying on of banking business in India by the co-operative bank will not be prejudicial to the publicinterest or the interests of the depositors.

RBI Inspectioni. Evaluation of its financial safety and soundness,

ii. Review of compliance with the BR Act (AACS); specificdirections issued there under as well as supervisoryguidance conveyed on specific policies

iii. Compliance with the prudential norms appraisal of thesoundness of the bank’s assets, analysis of the keyfinancial factors such as capital, earnings and liquidity


financial factors such as capital, earnings and liquidityand determination of the bank’s solvency,

iv. Appraisal of the quality of board and management andassessment of the quality of its management team

v. Evaluation of its policies, system management, internaloperations and controls,

vi. Identification of areas where corrective action isrequired to strengthen the institution and improve thequality of its performance

Core Assessment of RBI inspection

A. Financial condition and performance

B. Management, systems and controls

C. Regulatory and other guidelines compliance.


RBI inspection-types

On-Site Inspection- Periodical inspection

Off-Site inspection – OSS

Fortnightly, quarterly, monthly returns, statements etc.

Special scrutiny


On-Site Inspection

Four key elements

I. System of continuous / on going supervision;

II. Focussed monitoring and examination powers;

III. Discrimination between sound and unsound banks; and

IV. Enforcement of regulatory requirements and correctionof deviations.


of deviations.

Scrutiny under section 35 (1A) (a)

The on-site inspections could be followed up by appraisalsof specific portfolios in between two inspections or shortmonitoring visits for follow up or review of selected areasof concern arising from a previous inspection, any returns/ reviews, commencement of new business or even marketintelligence reports.


intelligence reports.

Scrutinies in terms of Section 35(1A)(a) of the BR Act(AACS).

Failure to furnish information

Attention of the Registrar (RCS)

Attention of the executives to section 35(2)

Penalties under section 46(2)


Penalties under section 46(2)

Power to examiner the executives/officials under oathsection 35(3)

RBI inspection, RCS audit, Statutory Audit

RBI inspection statutory under Section 35 of the BR Act(AACS)

to ensure their sound financial position, satisfactoryconduct of affairs and generally to tone up the wholeorganization.

RCS audit

to ensure proper observance of the provisions of the


to ensure proper observance of the provisions of theCooperative Societies Act and Rules.

Statutory Audit

• To ensure that the Balance sheet is drawn up as per theAccounting standards

• Whether the balance sheet represents the true and fairvalue of the assets and liabilities

Statutory Audit

Whether the balance sheet has been properly drawn up. Whether the profit and loss account shows a true position

of profit or loss for the period concerned. Whether proper books are maintained. Whether the assets shown in the balance sheet as at the

year ending date physically exist and their condition issatisfactory.

Whether documents obtained are complete and


Whether documents obtained are complete andenforceable.

Whether the bank is having proper internal controlsystem.

Whether the transactions of the banks are within thepowers of the bank as stipulated in the bye-laws / Act /Rules.

Whether the bank is complying with the instructions ofthe regulators such as RBI / RCS etc.

Pattern of RBI inspection Banks

CAMELS


CAMELS

Capital

Whether the Bank has the capital requirement as perthe laid down prudential norms

Whether the bank has the CRAR as per BASEL Inorms – 9%

What is the quality of capital- Tier I and Tier II

Is the capital being augmented- growth in Capital vis-


Is the capital being augmented- growth in Capital vis-à-vis its business expansion

Rate of growth of capital vis-à-vis its Risk WeightedAssets

Are the components considered in capital reallycapital in nature?

What is the Networth –Solvency angle

Capital cont…..

Computation of Networth

Transfer from various reserves

IFR and IDR

Transfer of certain Items to Reserves- DDs Payable etcUnclaimed Deposits


Transfer of IFR to P & L account to show increased profits

LIABILITIES : CAPITAL

TIER I CAPITAL / CORE CAPITAL Authorized Capital

Paid up share capital

Free reserves

Capital Reserves from surplus from sale of assets


TIER II CAPITAL Provisions

Long term Deposits

Investment Fluctuation reserves

LIABILITIES : DEPOSITS/BORROWINGS

Composition : High Cost / Low Cost

Know Your Customer

Window Dressing

Cost of Deposits

Borrowings


Borrowings

LIABILITIES : OTHER LIABILITIES

Bills payable

Branch Adjustments / Inter-office adjustments

Interest Payable

Suspense / Sundry Creditors

Provisions


Provisions

Asset quality

Realizable value of the assets

Extent of Impaired Assets

Provision for Impaired Assets

Provision for Standard Assets

Adherence to Prudential Exposure Norms

Single borrower exposure 15%- Capital Funds


Single borrower exposure 15%- Capital Funds

Group borrower exposure 40% - Capital Funds

Credit Appraisal- Procedure for loan sanction

Different types of loans and advances- sampleexamination of the appraisal notes

Connected lending- loans to Directors

Quality of Post sanction supervision and monitoring

Asset Quality

Asset Classification & Provisioning Age wise classification of Impaired Assets

Provision for Standard Assets

Provision for Impaired Assets

Restructuring of Accounts

Provision for restructured assets

Upgrading of Impaired Assets


Upgrading of Impaired Assets

Loaning process, Credit Appraisal, Follow-up Loan Policy- review of policy periodically

Adherence to the loan policy of the bank

Contents of the loan policy- exposure limits,

Credit rating and pricing of loans

Post sanction and monitoring, follow-up supervision etc

Asset Quality

Categorization of Advances Commercial Real Estate, housing loans

Priority Sector advances

Unsecured and Secured Advances

Gold Loans

Personal loans


Director Related loans- Prohibited

Loans to Associate or Nominal Members- restricted

Government Guaranteed Loans

Off Balance Sheet Exposures LCs, BGs, etc

Interbank Exposure Limits

Sampling of Accounts

High value loan accounts covered, irrespective of the branch

Top 20 accounts in each standard/NPA loan category

Security-wise; few accounts from each category

Loan statement beyond cut off point decided by the IO


CRITICAL AREAS

Underestimation of NPAs

Erroneous classification of NPAs

Adequacy of Provisions

Diminution in value of various assets –particularlyinvestments, deposits with banks

Interbank Exposure limits


Interbank Exposure limits

Government Securities Transactions

Non-SLR investments

Exposure to real estate sector

ASSETS --CASH

Custody

Strong Room

Safe keys

Insurance

Security Arrangements


Security Arrangements

Checks and Balances

ASSET QUALITY--SLR

Investment in Govt Securities- Close look since 31 March

2012.

Fixed deposits with DCCBs / SCBs- Interbank exposurenorms

Eligibility of securities / Bonds- only AAA rated Non-SLR


Eligibility of securities / Bonds- only AAA rated Non-SLRinvestments

Unencumbered securities

ASSETS – LOANS & ADVANCES

Various Exposure Limits

Loans to Non-members

Loans by guarantee of Employer

Prohibition on loans to directors:

Date of effect


Date of effect

Continuation of earlier limits

Relatives of directors

Cash Credit, Term Loans,

End use of Funds

Ever-greening

Management

Composition of the Board- Elections-Democraticprocess

Professional Directors on the Board

CEO and his functioning

Board and at its functioning

Various Committees – functioning of the committee


Various Committees – functioning of the committee

Decision making in the Board

Earnings

Net Profit- growth and trend

Net Interest Income

Net Interest Margin

Non-Interest Income

Return on Assets –ROA


Return on Equity

Provisioning and provision coverage

Dividend Distribution

Transfer to Statutory Reserve

Liquidity

Asset Liability Management system

Measurement of Liquidity- Flow Approach

Measurement of Liquidity-Stock Approach

Preparation of Liquidity measurement Statements-SLS, DLS

Interest Rate Risk Management


Interest Rate Risk Management

ALM policy

ALCO

Breach of Regulatory time buckets in liquidity

CRR and SLR compliance

Systems

Efficacy of Internal controls, checks and balances

Efficacy of Internal

Inspection machinery

House keeping – Balancing of books

KYC/AML- systems and procedures- adherence toguidelines, submission of CTRs and STRs, Risk


guidelines, submission of CTRs and STRs, RiskProfiling of customers- KYC of old accounts

Frauds- reporting mechanism

Customer service

PERIODICITY

Scheduled --- Annual

Non-scheduled Grade C & D --- Annual

Non-scheduled A & B 24 months


Post inspection

Finalizing the Inspection report

Principal Inspecting officer to address the Board-discuss the report

Issue of the inspection report

Seek Compliance

CAMELS rating


CAMELS rating

Apply SAF- if warranted

COMPLIANCE

First compliance within 6 weeks from the date ofreceipt of the Inspection Report

To verify previous inspection reports

Priority Sector/ Weaker Section Advances

Customer service

Technological up-gradation


Submission of various statutory returns / statements

Pitfalls to be avoided in compliance

Noted for future

Will do

Vague submissions Incomplete submissions etc

Supervisory action framework


Reserve Bank of IndiaThank You

inspection of ucb-br act 1949

Documents

acooperative bank

reserve bank of indiamembers

cooperative banks

br act

aacsreserve bank of

palai central bank

provisions of theparent

banking business