RBI Panel Moots Umbrella Entity, Tiered Regulation For Urban Cooperative Banks
A committee set up by the Reserve Bank of India to look into the functioning of urban cooperative banks has suggested a four-tiered structure to regulate these entities based on size of deposits. The committee favours setting up an umbrella organisation to oversee these lenders and suggests that they be allowed to open more branches if they meet all regulatory requirements.
Feedback on the suggestions have been sought till Sept. 30, before final rules are framed.
The committee suggests setting up the umbrella organisation, with a minimum capital of Rs 300 crore.
It can act as a self-regulatory body for small UCBs. The entity is envisaged as an arrangement for the smaller entities to acquire scale.
It should provide cross liquidity and capital support to the UCBs when needed.
The umbrella organisation, at a later stage, can consider converting into a universal bank owned by member banks.
The RBI could consider a one-time grant to the umbrella organisation for providing IT support to members. This will not be part of the entity's capital base to avoid any conflict of interest.
Licencing of new UCBs can be considered after the umbrella entity stabilises.
The small UCBs with the support of the umbrella organisation can emerge as the neighbourhood bank of choice, the committee said.
The main principle behind setting up of an umbrella organisation is that smaller UCBs—that form an important part of the co-operative culture, especially at the grassroots level and are unable to mobilise adequate capital to invest in their IT interface, digital banking and skilled manpower, will be able to achieve scale through the network of umbrella organisations. The umbrella organisation, structured as an NBFC, will be able to raise capital from the market and also on-lend it to member UCBs.NS Vishwanathan, Chairman - Committee On UCBs To BloombergQuint
The committee recommends that the required capital for UCBs be based on their size.
Tier 1 : UCBs With Deposits Up To Rs 100 Crore
Minimum net worth of Rs 2 crore for banks operating within a district.
Other tier-1 banks to have net worth of Rs 5 crore.
Minimum CRAR ranges from 9-14% based on certain conditions.
Can open 10 additional branches if regulatory conditions met.
Tier 2: UCBs With Deposits Of Rs 100-1,000 Crore
Minimum CRAR of 15%; may be reduced by 1 percentage point if member of umbrella organisation.
May be allowed to open branches in existing or contiguous districts.
Tier 3: UCBs With Deposits Of Rs 1,000-10,000 Crore
Minimum CRAR of 15% as applicable to SFBs.
On meeting CRAR requirements, these UCBs may be allowed to function on the lines of an SFBs.
Tier 4: UCBs With Deposits More Than Rs 10,000 Crore
CRAR as applicable for universal banks.
UCBs meeting CRAR and other regulatory fit and proper criteria may be allowed to function as a universal bank.
UCBs meeting regulatory requirements will have no restrictions on branch opening.
Voluntary Conversion, But...
The committee continues to favor voluntary conversion of cooperative banks to joint stock companies.
According to the committee, recent amendments to the Banking Regulation Act address the gaps in the legislative framework to a large extent. "Consequently, since the UCBs have the potential of driving financial inclusion and credit delivery to those with limited means, the regulatory policies can now be more enabling," the report said.
The committee was divided on allowing UCBs to convert into joint stock companies.
One view was that conversion of UCBs into banking companies is against the co-operative principles as the retained earnings in co-operative structure cannot be distributed. A contrary view was that voluntary conversion should not be barred by regulation.
The Committee, therefore, recommends the continuation of the existing regulatory neutrality in regard to the voluntary conversion of co-operative banks to joint stock companies as per the operating framework in place.RBI Committee Report
The committee, however, said that the powers to order compulsory amalgamation should be used as the backstop to encourage voluntary mergers of banks that are not complying with the regulatory capital requirements but are still solvent.
"This will also require that supervisory interventions are more timely and decisive," the report said.
On the issue of capital raising, the committee said that a mechanism is needed for issue of shares at a premium and facilitating bilateral transfer of shares.
Adequate disclosure requirements, guidance for determining the intrinsic value of shares should be provided.
Since the cooperatives work on the principle of open membership, which implies primary issuance of shares on tap, it must be stipulated that such issues cannot be priced at below the book value of shares.
To facilitate investor interest in subscribing to issuances of non-voting securities like perpetual non-cumulative preference shares, allowing limited lending to such investors should be explored.
In sum, the vision of the Committee has been to make space for more and more operational and strategic autonomy of co-operative institutions and introducing larger regulatory requirements that provide system stability. This, the Committee hopes, will foster a healthy co-operative as well as a stable banking sector.RBI Committee Report