The Reserve Bank of India (RBI)’s expert committee on primary (urban) co-operative banks (UCBs) has recommended a regulatory nudge for weak UCBs to explore voluntary merger or conversion into a non-banking society at an early stage.
The committee has submitted its report, which, among others, lays down a roadmap for the growth and development of the sector. The report was compiled by the expert committee
formed earlier this year, under the chairmanship of NS Vishwanathan, former deputy governor.
The committee also emphasised that all-inclusive directions (AID) should be treated on par with moratorium under Section 45 of the Banking Regulation Act.
If AID is imposed, a bank should not continue beyond the time permitted to keep a bank under moratorium — three months extendable by a maximum of another three months. About 50 UCBs are under AID currently.
This is especially significant since many UCBs have been under AID for many years, causing a lot of hardship to depositors as deposit withdrawals are capped.
In 2021, RBI has issued 101 directives imposing various regulatory measures on poorly run urban co-operative banks.
The RBI has so far cancelled the licence of seven co-operative banks in 2021-- Madgaum Urban Cooperative Bank, Dr Shivajirao Patil Nilangekar Urban Co-operative Bank, United Cooperative Bank, Karnala Nagari Sahakari Bank, Shivajirao Bhosale Sahakari Bank, Bhagyodaya Friends Urban Co-operative Bank Limited, Vasantdada Nagari Sahakari Bank.
Given the powers derived from the recent amendment to the Banking Regulation Act, the committee observed that the RBI might strive to begin the mandatory resolution process, including reconstruction or compulsory merger, as soon as a UCB reaches Stage III under the Supervisory Action Framework (SAF).
The RBI may also consider superseding the board if the bank fails to submit a merger or conversion proposal within the prescribed time frame and take steps to avoid undue flight of deposits once the news becomes public. A Stage III UCB is one where its capital to risk-weighted assets ratio (CRAR) is less than 4.5% and net non-performing assets (NNPAs) is greater than 12%.
The committee said that the RBI could prepare a scheme of compulsory amalgamation or reconstruction of UCBs, like banking companies.
The action may include compulsory amalgamation with another banking institution or transferring assets and liabilities to another financial institution. In such cases, the existing members of the transferor UCB may be disenfranchised for five years.
The amalgamation or reconstruction scheme may include a reduction in the rights of creditors, including depositors and members of the bank, or payment in cash or in any other manner to depositors or creditors regarding their entire claims or reduced claims the case may be.
The relevant section of the Banking Regulation Act also offers flexibility to allot the transferee bank's shares, long-term debt instruments (acquiring bank) to the depositors, creditors and members without reducing their claims.
It may be recalled that, earlier this month, the RBI refused to sanction the merger of the Rupee Cooperative Bank with the Maharashtra State Cooperative Bank (MSCB), the apex cooperative bank. The rejection of the proposal, which was submitted in 2020, will extend the woes of the Pune headquartered cooperative bank, which is under restrictions since 2013.
Given the growing bad loans, the RBI had superseded the board of directors of the Rupee cooperative bank and put severe restrictions on it. Since then, a board of administrators headed by Sudhir Pandit has been managing the bank, trying to either revive or merge the bank.
The committee recommended that large urban cooperative banks (UCBs) function along the lines of small finance banks (SFBs) and universal banks.
The exhaustive report has about 10 chapters and a vision document which says the primary UCBs play an essential role in furthering financial inclusion by generally providing traditional, if not the more modern, banking services to persons in the less included segments of the economic strata.
The expert committee says there is a need to understand the heterogeneity of the sector and frame regulations to harness the USP of each sub-segment. The UCB sector displays extreme heterogeneity.
There are many small UCBs which embrace cooperative principles and these banks may be allowed some operational freedom, but they should not be left to drift away from the inclusive finance model.
At the other end of the spectrum are very large UCBs, a few of which are larger than some of the smaller commercial banks permitted to function as universal banks. The legislative changes, which provide greater powers to the RBI and additional capital raising opportunities for UCBs, should be used to allow such banks to grow within the cooperative structure.
The EC also felt that umbrella organisation (UO) should be expedited and empowered as it can and should be seen as a game-changer for the sector and (NAFCUB) should accelerate setting it up.
The UO should be financially strong and be well governed by a professional board. The UO should provide cross liquidity and capital support to the UCBs when needed and cloud services for facilitating IT-enabled operations by the member banks.
The UO should be the branding partner for the member UCBs and both because of this and the business model itself, and the UO has a significant systemic role. It should therefore be regulated and supervised closely. Recognising the vital part of the UO in providing operational and financial strength to the smaller UCBs, the differentiated regulation should have a built-in incentive for the smaller UCBs to join in.
EC noted with satisfaction that the number of borrowers of UCBs is 67 lakh. This is not a small number by itself and there are many cases of transformational changes that UCBs have brought to its customers.
While NAFCUB President Jyotindra Mehta is the lone member from the UCB sector, the expert committee has a chairman, six members and a convenor. Besides Vishwanathan, Harsh Kumar Bhanwala, the former chairman of NABARD, Mukund M Chitale Chartered Accountant, retired IAS officers NC Muniyappa and RN Joshi IAS (Retired), Prof MS Sriram, IIM Bangalore, Jyotindra M. Mehta- President of NAFCUB (National Federation of Urban Cooperative Banks and Credit Societies) are the members.
Neeraj Nigam- Chief General Manager-in-Charge of RBI’s Department of Regulation is the convenor. The committee’s report has been placed on the RBI portal for comments of stakeholders and members of the public.
Comments on the report may be submitted by 30 September 2021 through email. RBI will examine the comments and suggestions before taking a final view on the recommendations made by the committee.