Concerned over the health of urban co-operative banks, the Reserve Bank of India has frozen issuance of fresh licences till a comprehensive policy on urban cooperative banks, including an appropriate legal and regulatory authority, is formulated.

"To make the UCB sector strong, it is proposed to consider issuance of free licences only after a comprehensive policy on UCBs including an appropriate legal and regulatory framework for the sector, is put in place and a policy for improving the financial health of the sector is formulated early," RBI said in its annual policy statement.

• RBI Credit Policy 2004-05: Complete Coverage

After the liberalisation of licencing norms in May 1993 up to June 2001, 823 licences were issued and it was observed that 31 per cent of the new UCBs became financially unsound within a short period.

An RBI committee has recommended it should be made mandatory for all newly proposed UCBs to come into being through a process of graduation from a co-operative credit society of strength and verifiable track record.

On reconstruction of UCBs, the bank has proposed to consider only such schemes of reconstruction which envisage re-capitalisation by stakeholders including the shareholders, co-operative institutions and government, to the extent of achieving the prescribed capital norms.

This would be without infusion of liquidity through settlement of insurance claims by DICGC and schemes which lay a clear roadmap for reducing the non-performing assets level to a tolerable limit within a stipulated timeframe.

RBI is also considering various restructuring options to rationalise the structure of regional rural banks and the Vyas Committee would explore the various options for making appropriate recommendations to the government.

The gross NPAs of RRBs stood at Rs 32,000 crore (Rs 320 billion), about 14.4 per cent of their total loans.

The central bank said the government is considering a restructuring plan for weak co-operative banks and a scheme to revitalise the cooperative credit structure envisaging an outlay of about Rs 15,000 crore (Rs 150 billion) to be shared between the central and state governments in an appropriate ratio has been announced.

The government has proposed that this scheme would be initiated as soon as the revised regulatory framework was put in place, it said.