For Tier 2, Tier 3 and Tier 4 UCBs, while retaining the current capital…

2021

For Tier 2, Tier 3 and Tier 4 UCBs, while retaining the current capital adequacy framework, it has been decided to revise the minimum CRAR to _______ so as to strengthen their capital structure-

  1. A.

    5%

  2. B.

    6%

  3. C.

    9%

  4. D.

    11%

  5. E.

    12%

Show answer & explanation

Correct answer: E

Concept

CRAR (Capital to Risk-weighted Assets Ratio) is the regulatory measure of a bank's capital strength: it is the ratio of a bank's eligible capital to its risk-weighted assets, and a regulator prescribes a minimum CRAR to ensure a bank holds enough of a capital cushion to absorb losses. Under RBI's revised regulatory framework, Urban Co-operative Banks (UCBs) are classified into four tiers, and the minimum CRAR requirement is set tier-wise: smaller/lower-tier banks face a lower floor, while larger banks in higher tiers are held to a stricter floor.

Application

  1. RBI retained the existing capital-adequacy framework for the lowest tier (Tier 1 UCBs), which continues to maintain a minimum CRAR of 9%.

  2. To strengthen the capital structure of the larger banks, RBI revised the floor upward for Tier 2, Tier 3 and Tier 4 UCBs.

  3. The revised minimum CRAR mandated for these Tier 2, Tier 3 and Tier 4 UCBs is 12%.

Cross-check

12% is the higher of the two prescribed floors, which fits the stated aim of strengthening the capital structure of the larger UCBs (a stricter capital floor means a thicker loss-absorbing cushion). The banks that did not already meet 12% were given a phased path - reaching at least 10% by March 2024, 11% by March 2025 and the full 12% by March 2026 - confirming that 12% is the final target, not an interim figure.

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