RBI issues guidelines for merger of urban cooperative banks


To enable consolidation in the urban cooperative banking space, the Reserve Bank of India on March 23 approved new guidelines for the merger of two or more of these banks. In its main circular, the regulator said it would also offer certain incentives to the urban cooperative bank, which will thus become an acquirer.

The RBI said it was convinced the new merger guidelines were “necessary and timely in the public interest.” With the publication of these new guidelines, the previous standards set in February 2005 would be repealed.

The regulator said it could consider a request to merge two or three urban cooperative lenders in three specific circumstances:

  • When the equity of the acquired bank is positive and the acquiring bank provides protection for all depositors of the acquired bank.
  • When the net worth of the acquired bank is negative and the acquiring bank itself provides protection for all depositors.
  • When the equity of the acquired bank is negative and the acquiring bank provides protection for all depositors with the financial support of the state government, disclosed upfront as part of the merger.

The decision on the merger will need to be approved by a two-thirds majority of all board members of the acquiring and acquired banks, the RBI said. The boards of directors of these banks will also need to ensure that the following points are addressed before approving the merger:

  • The assets, liabilities and reserves of the acquired bank are incorporated in the books of the acquiring bank at their existing carrying amounts and do not result in upward revaluation or credit for unrealized gains.
  • Appropriate due diligence is performed prior to the merger.
  • Nature and amount of the consideration paid to the shareholders of the acquired bank.
  • The swap ratio is determined after an independent assessment of the value of the two banks and if the boards of directors are satisfied that the assessment is fair and appropriate.
  • The merger does not result in any individual shareholder violating the standards set by the RBI.
  • The impact of the merger on profitability, asset quality, solvency ratio, compliance with exposure standards. In all mergers, the RBI prescribes that the merged entity must meet the regulatory minimum for capital adequacy.

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