In a letter to the CEOs of State and Central Co-operative Banks, the RBI has issued fresh guidelines aimed at helping them raise funds, after reviewing the provisions of the Banking Regulation (Amendment) Act, 2020.
The Reserve Bank of India has allowed Rural Cooperative Banks (RCBs) to raise funds from people in their area of operation or existing shareholders through preference shares and debt instruments, RBI said in a notification.
Titled “Issue and regulation of share capital and securities”, the regulator has allowed RCBs (Rural Co-op Banks) to raise share capital by way of issue of shares to persons within their area of operation, in accordance with the provisions of their bye-laws, and issue additional shares to the existing members.
Clarifying further RBI says in its notification “RCBs are also permitted to issue the following instruments to augment their capital: Preference Shares- Perpetual Non-Cumulative Preference Shares (PNCPS) eligible for inclusion in Tier I capital, Perpetual Cumulative Preference Shares (PCPS) eligible for inclusion in Tier II capital, Redeemable Non-Cumulative Preference Shares (RNCPS) eligible for inclusion in Tier II capital and Redeemable Cumulative Preference Shares (RCPS) eligible for inclusion in Tier II capital
On Debt instruments, RBI says “Perpetual Debt Instruments (PDI) eligible for inclusion in Tier I capital and Long Term Subordinated Bonds (LTSB) eligible for inclusion in Tier II capital. For the purpose of enhancing investor education on the risk characteristics of regulatory capital requirements, RCBs, which issue regulatory capital instruments shall adhere to the following conditions: For floating rate instruments, banks should not use their Fixed Deposit rate as benchmark, A specific sign-off as quoted below, from the investors, for having understood the features and risks of the instruments, may be incorporated in the common application form of the proposed issue:
“By making this application, I / we acknowledge that I / we have understood the terms and conditions of the issue of [Name of the share/security] being issued by [Name of the bank] as disclosed in the Prospectus and Offer Document”.
RCBs shall ensure that all the publicity material / offer document, application form and other communication with the investor should clearly state in bold letters (Arial font, size 14, equivalent size in English / Vernacular version) how a PNCPS / PCPS / RNCPS / RCPS / PDI / LTSB, as the case may be, is different from a fixed deposit, and that these instruments are not covered by deposit insurance.
The procedure for transfer to legal heirs in the event of death of the subscriber of the instrument should also be specified.
RBI says “A co-operative bank shall not withdraw or reduce its share capital, except to the extent and subject to such conditions as the Reserve Bank may specify on this behalf. Accordingly, it has been decided to permit RCBs to refund the share capital to their members, or nominees / heirs of deceased members, on demand, subject to the following conditions:
a) The bank’s capital to risk-weighted assets ratio (CRAR) is 9 percent or above, both as per the latest audited financial statements and the last CRAR as assessed by NABARD during statutory inspection.
b) Such refund does not result in the CRAR of the bank falling below the regulatory minimum of 9 per cent.”
The notification further says “It is clarified that for the purpose of computing CRAR as above, accretion to capital funds after the balance sheet date1, other than by way of profits, may be taken into account. Any reduction in capital funds, including by way of losses, during the aforesaid period shall also be considered.”
The list of circulars, that stand repealed fully or partially, is furnished in Appendix to the circular, reads the notification. These instructions shall come into force with immediate effect, signs off Usha Janakiraman, Chief General Manager RBI.