A Reserve Bank of India (RBI) working group has sought deferment of imposition of income tax on urban cooperative banks (UCBs) for three years, to provide them time to develop alternative instruments for augmenting core capital.
As of now, retained profits form the only source of owned funds for UCBs, said the working group set up by RBI to examine issues relating to augmenting capital of the cooperative banks.
The working group, in its recommendations, have suggested that state governments exempt UCBs from the existing monetary ceiling on individual shareholding, as the cap comes in the way of banking entities with low capital or negative net worth shoring up their share capital.
The group has suggested a string of instruments and avenues for raising stable and long-term funds, which would have equity or quasi-equity characteristics.
It said UCBs could be permitted to issue unsecured, subordinated, non-convertible and redeemable bonds, which could be treated as tier-II capital. The bonds can be transferable by endorsement and delivery.
The other capital-raising options suggested include allowing UCBs to issue special shares on specific terms and conditions and which would be non-voting, perpetual and transferable by endorsement and delivery and considered as tier-I capital alongside equity and reserves.
UCBs should also be permitted to raise deposits of over 15 year maturity and which could be considered as tier-II capital provided the deposits are subordinate to other deposits and ineligible for deposit insurance cover.
The group has also called for allowing commercial banks to invest in special shares and tier-II bonds issued by UCBs within the ceiling prescribed for investment in unlisted securities.
It said the prescription of a share-to-loan ratio on a borrower-to-borrower basis should be dispensed with, as UCBs have been brought under the regime of linking capital adequacy in terms of a ratio-to-risk assets.