RBI Issues Guidelines For Amalgamation Of Urban Cooperative Banks
To enable consolidation in the urban cooperative banking space, the Reserve Bank of India, on March 23, approved fresh guidelines for amalgamation of two or more such banks. In its master circular, the regulator said it would also offer certain incentives to the urban cooperative bank that will become an acquirer in the process.
The RBI said it’s satisfied that the new amalgamation guidelines are “necessary and expedient in public interest”. With the issue of these fresh guidelines, the previous norms set in February 2005 would stand repealed.
The regulator said it may consider application for amalgamation of two or three urban cooperative lenders under three specific circumstances:
- When the net worth of the acquired bank is positive and the acquirer bank assures protection of all depositors of the acquired bank.
- When the net worth of the acquired bank is negative and the acquiring bank assures protection of all depositors on its own.
- When the net worth of the acquired bank is negative and the acquiring bank assures protection of all depositors with financial support of state government disclosed upfront as part of the merger.
The decision on the merger will need to be approved by two third majority of all board members of both the acquiring and acquired banks, the RBI said. The boards of these banks will also need to ensure the following points are addressed before approving the merger:
- Assets, liabilities and reserves of the acquired bank are incorporated in the books of the acquiring bank at their existing carrying amounts and does not result in a revaluation upward or credit taken for unrealised gains.
- Proper due diligence is conducted prior to the merger.
- Nature and quantum of consideration paid to shareholders of the acquired bank.
- The swap ratio is determined after independent evaluation of the value of both banks and whether the boards are convinced that the valuation is fair and proper.
- The amalgamation does not result in any individual shareholders violating the norms set by the RBI.
- The impact of the merger on profitability, asset quality, capital adequacy ratio, compliance with exposure norms. In all mergers, the RBI prescribes that the merged entity must meet the regulatory minimum on capital adequacy.
The boards will have to also ensure that the shareholders of each urban cooperative bank are given access to a draft scheme for amalgamation and at least two-thirds majority of those shareholders who are present vote in favour of the draft scheme at the shareholder meeting.
Once the board and the shareholders have approved the draft scheme, it may be submitted to the RBI for final regulatory approvals.
Dissenting shareholders may seek the value of the shares held by them in the final scheme within three months of the RBI’s approval. However, in case of dissenting shareholders who have borrowed money from the bank where they have shareholding, the settlement would be done only after a full and final settlement of their pending dues.
Incentives For Acquiring Banks
The acquiring banks will be given certain incentives by the RBI in lieu of the mergers.
- These banks may shut loss-making branches of the acquired bank or merge them with their own branches.
- The acquiring banks may also use the branch licenses of such closed branches to open new outlets in the expanded area of operations. The expanded area refers to combined locations of both the acquiring and acquired banks.
- Shifting or relocating branches within the expanded area of operations will be allowed only after acquiring banks ensure that the clientele of the merged bank are served.
- Acquiring banks will be allowed to retain facilities such as AD category I licenses of the acquired banks, even if they don’t meet the higher capital adequacy ratio requirements of 12% for such facilities. However, the acquiring banks must ensure that the regulatory minimum capital adequacy ratio of 9% is met at all times.
- The minimum entry point capital for multi-state cooperative banks will not be insisted upon if the acquiring bank becomes a multi-state cooperative bank on account of the merger.