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Paper Number :WP 15/2022
Publication Date :April 30, 2022

Ensuring the financial soundness of the Urban Cooperative Banks (UCBs) is crucial for protecting the interests of its depositors and other stakeholders. The capital adequacy ratio is considered an internationally recognized benchmark for measuring bank solvency. This has been popularized by the Basel Committee for Banking Supervision. The regulatory framework including the recent amendments has been designed with commercial bank operations in mind. In order to establish global standards in the capital structure of UCBs, India's central bank has recently issued prudential norms on capital adequacy to safeguard the interest of major stakeholders including the depositors. It has delineated a structured approach for defining the capital instruments and giving thrust on keeping core capital to absorb unexpected business losses. This article provides a comprehensible description of the new norms for capital recognition and risk weights estimation, its essence, and policy implications for the Banking and Financial Services sector. The new prudential standard is expected to encourage UCBs to strengthen their financials and enhance solvency positions.