The issue of getting a level-playing field for urban co-operative banks vis-à-vis commercial banks with regard to raising capital and lowering the threshold for statutory investments will be taken up at a meeting of the Reserve Bank of India's standing advisory committee next week.

Currently, growth prospects for the 1,600-odd UCBs are hamstrung due to limited options for raising capital. These banks primarily depend on plough back of profits and borrowers' subscription to share capital at the time of loan disbursement, to shore up their capital.

Though UCBs, which as of March-end 2011 collectively had deposits and advances aggregating Rs 2,12,031 crore and Rs 1,36,341 crore, respectively, have been allowed to issue preference shares and long-term deposits to augment their capital, both these options are not preferred.

Investors' interest

The constraint for UCBs in issuing preference shares is that they can be issued only at face value. Investment in these shares is unattractive as no exit mechanism is available for investors wanting to liquidate them.

In the case of long-term deposits, the RBI's approval is required to pay back depositors even if a bank is financially sound. This is proving to be a deterrent for prospective investors.

“We should be allowed to issue shares at book value. Also, to impart liquidity to co-operative bank shares, a market-making mechanism in the form of a trust can be jointly put in place by all banks so that investors have an exit opportunity,” said Mr B.V.R. Sarma, CEO, Greater Bombay Co-operative Bank.

Review SLR requirement

Currently, commercial banks have to invest a minimum 24 per cent of their deposits in Government Securities. These investments are required to fulfil the statutory liquidity ratio (SLR) norm.

However, in the case of UCBs, this limit is set higher at 25 per cent. UCBs want at par treatment with commercial banks in this case.

Further, they want the SLR limit to be suitably split into two – investment in government securities, and cash holding, investment in gold and deposits with the apex bank of a State.

They are also seeking RBI's permission to tap its liquidity adjustment facility to tide over temporary liquidity mismatches.

“Many small banks do not have the expertise to trade in Government Securities. In a rising interest rate regime, these banks end up booking losses or making market-to-market provisioning on the balance sheet date.

“To overcome this, they should be permitted to hold a portion of their deposits in cash, invest in gold and park deposits with the apex bank of a State,” said Mr Sarma.

Allow repo transactions

To overcome short-term liquidity mismatches, UCBs want to leverage their non-SLR investments (or investment in corporate bonds) by offering them as collateral in repo transactions with commercial banks.

Currently, every branch that a co-operative bank opens has to be backed up by a networth of Rs 2 crore each. The UCBs want the RBI to do away with this stringent norm and take into account their overall financial health in granting future branch licences.

Other demands

Currently, UCBs cannot lend more than Rs 10 lakh against the pledge of shares. They want this limit to be doubled.

These banks want RBI to clearly define bill discounting under letter of credit as a permissible banking activity.

“There is some confusion on bill discounting under letter of credit as some RBI inspection officials allow it while others don't,” said a senior UCB official.

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