So far, there is only one example of a multi-state UCB getting converted to a commercial bank
So far, there is only one example of a multi-state UCB getting converted to a commercial bank | Photo Credit: ANUJ ARORA

Urban co-operative banks (UCBs) seem to have said thanks but no thanks to the Reserve Bank of India for its scheme for their voluntary transition into small finance banks (SFBs).

While the detailed scheme for voluntary transition of UCBs into SFBs was announced in late September 2018, so far only Uttar Pradesh-based Shivalik Mercantile Co-operative Bank has converted into an SFB, commencing operations with effect from April 26, 2021.

That only one among the 1,500 odd UCBs has transitioned into an SFB in the last four years or so is an indication of lack of interest in the scheme.

Mumbai-based New India Co-operative Bank had drawn up plans to convert into an SFB about two years back. However, there is no word yet on whether it is pursuing the plan.

To encourage UCBs to transit into SFBs, the central bank has set the initial requirement of net worth lower at ₹100 crore, which has to be increased to ₹200 crore within five years from the date of commencement of business.

Co-operative sector experts say members/ shareholders of UCBs are wary of losing control of the banks once they pivot to SFBs.

PSL norms

Though RBI brought priority sector lending (PSL) norms (loans given to micro, small and medium enterprises, housing, weaker sections, and education among others) for UCBs at par with SFBs, taking away the earlier advantage of lower PSL target, these banks want to grind it out.

UCBs have been asked to comply with the targets of 45 per cent, 50 per cent, 60 per cent and 75 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher, by end-March 2021, 2022, 2023 and 2024, respectively. And they seem up for it.

The RBI has noted that UCBs have historically lent higher than the prescribed targets to the priority sector. Earlier, the PSL target was 40 per cent.

When it comes to capital, UCBs were constrained as they could raise it only from their members. This was a hindrance to growing their loan book at a faster clip, absorb unforeseen losses, be in conformity with the regulatory requirements, and invest in infrastructure and technology. But this issue has been resolved following amendment to the Banking Regulation (BR) Act, 1949 -- BR (Amendment) Act, 2020.

The aforementioned amendment has given more autonomy to UCBs to raise capital. They are allowed to issue debentures or bonds with maturity of not less than ten years, equity shares, preference shares, or special shares on face value or at a premium, with certain conditions.

“A co-operative bank may, with the prior approval of the Reserve Bank, issue, by way of public issue or private placement, — (i) equity shares or preference shares or special shares, on face value or at premium; and (ii) unsecured debentures or bonds or other like securities with initial or original maturity of not less than ten years, to any member of such co-operative bank or any other person residing within its area of operation, subject to such conditions and ceiling, limit or restriction on its issue or subscription or transfer, as may be specified by the Reserve Bank in this behalf,” per the amendment.

The amendment has a good and not-so-good implication. While the government and RBI have addressed the issue of capital constraints, it has taken away the incentive for UCBs to convert into SFBs, according to co-operative banking experts.

It may be pertinent to note that the RBI’s Expert Committee on UCBs observed that there are very large UCBs, a few of which are larger than some of the smaller commercial banks permitted to function as universal banks.

Legislative changes

The committee opined that the legislative changes, which not only provide greater powers to the RBI but also additional capital raising opportunities for UCBs, should be used to allow such banks to grow within the co-operative structure. Depending on the level of capital, the UCBs should be regulated and enabled to function on the lines of an SFB or Universal Bank as the case may be, it added.

So far, there is only one example of a multi-state UCB getting converted into a commercial bank. Point in case is the Aga Khan Fund-led DCB Bank, earlier known as Development Cooperative Bank formed out of the merger of two Maharashtra-based cooperative banks.

Therefore, while one could say there is precedence in the form of DCB Bank and Shivalik SFB, the very large UCBs such as Saraswat Co-operative Bank (with deposits + advances as at March-end 2022 at ₹71,573 crore), SVC Co-operative Bank (₹31,680 crore), Cosmos Co-operative Bank (₹28,815 crore), and Thane Janata Sahakari Bank (₹20,059 crore) may not want to take the circuitous route of first converting into an SFB and then into a universal bank. They would rather set their end vision at a universal bank licence.