RBI expected to directly supervise urban cooperative banks by allowing them to convert into small finance banks
The Reserve Bank of India (RBI) said that it would allow urban cooperative banks to voluntarily convert themselves into small finance banks. This will bring them under small finance banks. The committee on urban cooperative banks, chaired by then RBI Deputy Governor R Gandhi, had recommended “the voluntary conversion of large multi-state UCBs into joint stock companies and other UCBs which meet certain criteria into small finance banks,” the regulator said in its statement on developmental and regulatory policies. The RBI will release detailed guidelines in this regard separately.
The committee, which submitted its report in July 2015, had stated that a business size of Rs20,000 crore could be considered the threshold limit, beyond which UCBs may convert themselves into commercial banks.
“Though UCBs were set up as small banks offering banking services to people of small means belonging to the lower and middle classes, a well laid out transition path is required for at least the larger UCBs to convert themselves into universal/ niche commercial banks due to the changing financial landscape in the country and providing further growth opportunity to well managed UCBs,” the committee report had said. The report had also proposed a transition period for these UCBs to convert into commercial banks.
RBI has received demand from some quarters to allow this conversion, Deputy Governor NS Vishwanathan said. “We will come out with a detailed scheme on conversion from urban cooperative banks into small finance banks,” he told reporters after RBI’s second bi-monthly monetary policy announcement.
It has been recommended that licenses may be issued to “financially sound and well-managed co-operative credit societies” having a minimum track record of five years which suit the regulatory prescriptions set by the RBI.
Small finance banks provide basic banking services like accepting deposits and lending to the unbanked sections such as small farmers, micro business enterprises, micro and small industries and unorganised sector entities. The small finance banks were created with an aim to encourage financial inclusion by provision of savings vehicles and supply of credit to small business units.
Resident individuals/professionals carrying 10 years of experience in banking and finance and companies and societies owned and controlled by residents are eligible to set up small finance banks.
UCBs operate under a 'dual control' regime with supervision by both the RBI and the State Governments. The non-availability of powers to the RBI to regulate and supervise UCBs at par with commercial banks restrains RBI from relaxing regulatory regimes, which in turn, is an obstacle for UCB’s commercialisation. By turning into SFBs, these co-operative banks will be regulated only by the RBI.