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System Based Asset Classification for Urban Co-operative Banks (UCBs)

Urban Co-operative Bank

In a recent notification released by the Reserve Bank of India (RBI), it has decided to implement a system based asset classification for Urban Co-operative Banks. The RBI asked UCBs with assets of 2000 crore rupees or more to implement the system based asset classification from June 30, 2021.

What is Urban Co-operative Banks (UCBs)?

UCBs are also called Primary Co-operative Banks. They are distinct from Commercial banks and were born out of the concept of co-operative credit societies where members of a community group come together to extend loans to each other at favourable terms.

The Reserve Bank regulates and supervises the functioning of UCBs under the provisions of Banking Regulation Act, 1949, and also the aspects such as registration, management, and administration.

What do you mean by System based Asset Classification?

System based Asset Classification refers to asset classification (downgrading and upgrading) carried out by computerized systems of a bank in an automated manner on an ongoing basis, based on the relevant instructions or guidelines of the RBI.

Why was it decided by the RBI to implement a System based Asset Classification in Urban Co-operative Banks?

The RBI[1] stated in the notification that with a view to improving the efficiency, transparency, and integrity of the asset classification process, it had been decided to implement a System based Asset Classification in UCBs.

What were the key highlights of the RBI notification regarding system based asset classification for UCBs?

The key highlights of the RBI notification regarding system based asset classification for UCBs are as follows:

  • The UCBs having total assets of over 2000 crore rupees as of 31st March 2020 will be required to implement the system based asset classification from 30 June 2021.
  • UCBs having total assets of more than 1000 crore rupees but less than 2000 crore rupees as on 31st March 2020, having self-assessed as being under Level III or Level IV in terms of the circular dated 31st December 2019 on Comprehensive Cyber Security Framework for UCBs shall be required to implement a System based Asset Classification from 30th September 2021.
  • The UCBs that meet the above criteria as at the end of the current or subsequent financial year will be required to implement the System based Asset Classification within a period of six months from the end of the financial year concerned.
  • The RBI stated that for the smooth implementation of the system all concerned UCBs may conduct pilot/parallel run and evaluate the results for accuracy/integrity of the asset classification in compliance with the applicable instructions of RBI so as to ensure that they are ready for the implementation of the system based asset classification from the appointed date.
  • As per the RBI, the UCBs not meeting the criteria are also encouraged to voluntarily implement the system based asset classification in their own interest.
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Conclusion


In the month of March RBI had lowered the single borrower and group exposure limit for Urban Co-operative Banks to 15% and 25% of tier I capital in order to reduce the concentration risks arising out of such jumbo loans.

Read our article:The Banking Regulation (Amendment) Ordinance, 2017 – a positive step for the banking industry 

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