RBI Allows Co-Operative Banks to Raise Fund From Preference Shares, Debt Instruments

After evaluating the provisions of the Banking Regulation (Amendment) Act, 2020, the RBI sent a letter to the CEOs of State and Central Co-operative Banks with new instructions aimed at assisting them in raising capital.

Rural Cooperative Banks (RCBs) can now collect funds through preference shares and debt instruments from people in their service area or current shareholders, according to a statement from the Reserve Bank of India.

The regulator has permitted RCBs (Rural Co-op Banks) to raise share capital by issuing shares to persons within their area of operation, in accordance with their bye-laws, and to issue additional shares to current members in a document titled “Issue and regulation of share capital and securities.”

“RCBs are also permitted to issue the following instruments to augment their capital,” the RBI clarifies in its notification. Perpetual Non-Cumulative Preference Shares (PNCPS) are eligible for Tier I capital, Perpetual Cumulative Preference Shares (PCPS) are eligible for Tier II capital, Redeemable Non-Cumulative Preference Shares (RNCPS) are eligible for Tier II capital, and Redeemable Cumulative Preference Shares (RCPS) are eligible for Tier II capital.

“Perpetual Debt Instruments (PDI) are eligible for Tier I capital, and Long Term Subordinated Bonds (LTSB) are suitable for Tier II capital,” the RBI adds of debt instruments. RCBs that issue regulatory capital instruments must comply with the following rules in order to improve investor education on the risk characteristics of regulatory capital requirements: Banks should not use the rate on their fixed deposit as a benchmark for floating rate securities. A special signature from the investors, as described below, attesting to their understanding of the instruments’ features and dangers, could be included in the proposed issue’s common application form:

“By submitting this application, I/we agree that I/we have read and understood the terms and conditions of the [Name of the share/security] issue by [Name of the bank] as described in the Prospectus and Offer Document.”

RCBs must ensure that all publicity material, offer documents, application forms, and other communications with investors clearly state in bold letters (Arial font, size 14, equivalent size in English / Vernacular version) how a PNCPS / PCPS / RNCPS / RCPS / PDI / LTSB differs from a fixed deposit, and that these instruments are not covered by deposit insurance.

In the event that the instrument’s subscriber dies, the method for transferring the instrument to legal heirs should be indicated as well.

“A co-operative bank shall not withdraw or reduce its share capital, except to the extent and subject to such circumstances as the Reserve Bank may specify in this regard,” according to the RBI. As a result, RCBs have been given permission to refund share capital to its members, or nominees / heirs of dead members, on demand, subject to the following conditions:

a) According to the most recent audited financial statements and the most recent CRAR as determined by NABARD during statutory inspection, the bank’s capital to risk-weighted assets ratio (CRAR) is at least 9%.

b) The bank’s CRAR does not fall below the legal minimum of 9% as a result of the return.”

“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 earnings, may be taken into account,” according to the notification. During the aforementioned period, any decrease in capital funds, including losses, will be taken into account.”

According to the notification, a list of circulars that have been repealed in whole or in part can be found in the circular’s appendix. Usha Janakiraman, Chief General Manager RBI, checks off on these directives, which will take effect immediately.