RBI Panel Moots Umbrella Entity, Tiered Settlement for Urban Co-operative Banks

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A committee set up by the Reserve Bank of India to review the functioning of urban cooperative banks suggested a four-tier structure to regulate these entities based on the size of deposits. The committee supports the creation of an umbrella organization to oversee these lenders and suggests that they be allowed to open more branches if they meet all regulatory requirements.

Comments on the suggestions have been requested until September 30, before final rules are set.

  • The committee suggests creating the umbrella organization, with a minimum capital of Rs 300 crore.

  • It can act as a self-regulatory body for small UCBs. The entity is envisioned as an arrangement that allows smaller entities to acquire scale.

  • It should provide cross-liquidity and capital support to UCBs when needed.

  • The umbrella organization, at a later stage, may consider transforming itself into a universal bank owned by member banks.

  • The RBI could consider a one-time grant to the umbrella organization to provide IT support to members. This will not be part of the capital base of the entity in order to avoid any conflict of interest.

  • The licensing of new UCBs can be considered once the apex has stabilized.

Small UCBs with the support of the umbrella organization can become the neighborhood bank of choice, the committee said.

The committee recommends that the capital required for UCBs be based on their size.

Level 1: UCB with deposits up to Rs 100 Crore

  • Minimum net worth of Rs 2 crore for banks operating in a district.

  • Other Tier 1 banks have a net worth of Rs 5 crore.

  • The minimum CRAR varies from 9 to 14% depending on certain conditions.

  • Possibility of opening 10 additional branches if the regulatory conditions are met.

Level 2: UCB with deposits of Rs 100-1000 Crore

Level 3: UCB with deposits of Rs 1,000 to 10,000 crore

  • Minimum CRAR of 15% applicable to SFBs.

  • When they meet the CRAR requirements, these UCBs may be authorized to operate on the lines of an SFB.

Level 4: UCB with deposits over Rs 10,000 Crore

  • CRAR applicable to universal banks.

  • UCBs meeting CRAR and other regulatory adequacy and relevance criteria may be permitted to operate as a universal bank.

  • UCBs meeting regulatory requirements will have no restrictions on opening branches.

Voluntary conversion, but …

The committee continues to promote the voluntary conversion of cooperative banks into joint stock companies.

According to the committee, recent changes to the Banking Regulation Act largely address the gaps in the legislative framework. “Therefore, given that UCBs have the potential to foster financial inclusion and extend credit to those with limited means, regulatory policies can now be more enabling,” the report says.

The committee was divided on the possibility of converting UCBs into joint stock companies.

One view was that converting UCBs into banking companies is contrary to cooperative principles because the retained earnings in the cooperative structure cannot be distributed. A contrary view was that voluntary conversion should not be prohibited by regulation.

The committee said, however, that powers to order mandatory mergers should be used as a safety net to encourage voluntary mergers of banks that do not meet regulatory capital requirements but are still solvent.

“It will also require surveillance interventions to be more timely and decisive,” the report says.

On the issue of raising capital, the committee said that a mechanism is needed to issue premium shares and facilitate bilateral transfer of shares.

  • Adequate disclosure requirements and guidance for determining the intrinsic value of shares should be provided.

  • Since cooperatives operate on the principle of open membership, which involves the primary issuance of shares on tap, it should be stipulated that such issues cannot be valued at a price lower than the book value of the shares.

  • To facilitate investor interest in subscribing to issues of non-voting securities such as perpetual non-cumulative preferred shares, authorization to lend to such investors on a limited basis should be explored.

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