In A First, A Co-Operative Bank May Convert To A Small Finance Lender

Shivalik Mercantile Co-operative Bank Ltd. will be the first cooperative bank to transition to a small finance bank structure under the Reserve Bank of India’s voluntary transition scheme.

The central bank said in a notification today that it has granted in-principle approval for the conversion of the urban co-operative bank into a small finance bank under its scheme on voluntary transition.

“The in-principle approval granted will be valid for 18 months to enable the applicant to comply with the requirements under the scheme, the guidelines for ‘on tap’ licensing of small finance banks in the private sector and fulfill other conditions as stipulated by the RBI,” the notification said.

Guidelines for the voluntary conversion of an urban cooperative lender to a small finance bank were released in September 2018, essentially to allow stronger cooperative banks to expand their lending and deposit businesses under a different regulatory structure and business model.

Shivalik’s Banking Operations

The cooperative bank started operations in September 1998 and has 29 branches in Uttar Pradesh, five in Madhya Pradesh and a few in Uttarakhand and Delhi.

According to a presentation on its website, the lender had, as of FY19:

• Net worth of Rs 77.2 crore with over Rs 1,051 crore in deposits. In the previous fiscal year, its deposit base was Rs 953 crore.
• Total advances of a little over Rs 715 crore compared to Rs 611.6 crore in FY18.
• Posted a net profit of Rs 3.85 crore compared to Rs 3.17 crore in FY18.
• Gross non-performing assets at 1.57 percent, compared to 2.14 percent in the previous fiscal.
• Capital to risk-weighted assets ratio of 13.07 percent, compared to 12.68 percent in FY18.

Allegations In Past

The National Bank for Agriculture and Rural Development had disproportionately disbursed grants to the Janhit Foundation, a non-governmental-organisation close to the bank, The Hindu had reported in July 2013.

The report alleged that during his term, DK Mittal, former secretary of the department of financial services in the Finance Ministry, had permitted urban cooperative banks to promote and finance joint liability groups in rural areas, which unfairly benefited Shivalik Mercantile Bank.

Mittal—whose brother Sanjeev at present is a director on the bank’s board—declined to comment.

Conversion To SFB

According to the RBI’s guidelines, UCBs with a minimum net worth of Rs 50 crore and maintaining a CRAR of at least 9 percent would be eligible to apply for voluntary transition to SFB under the scheme.

The UCB would then need to comply with the scheme’s requirements within of 18 months before commencing business as a SFB.

The promoters of the UCB would need to provide evidence to the RBI that they can raise equity quality “so as to ensure that the SFB commences operations with a minimum net-worth of Rs 100 crore and minimum promoters’ contribution of 26 percent of the paid-up equity capital”.

It will also have to maintain a capital to risk weighted-assets-ratio of 15 percent on a continuous basis.

Once the SFB starts business, the UCB entity must surrender its banking licence to the RBI and the cooperative society will be wound up in due course, it said.

Thereafter, entities that convert to a SFB under the central banks’ scheme would need to comply with the RBI’s guidelines on small finance banks in the private sector.