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The Reserve Bank of India (RBI) has set the ball rolling on the conversion of urban co-operative banks (UCBs) into Small Finance Banks (SFBs), granting ‘in-principle’ approval to Shivalik Mercantile Co-operative Bank for transition into a SFB.

This is the first such approval after the central bank came up with a ‘Scheme on Voluntary Transition of UCB into SFB’ in September 2018.

The banking regulator, in a statement, said the in-principle approval granted is valid for 18 months to enable the applicant (Shivalik Mercantile Co-operative Bank, which is a multi-state UCB) to comply with the requirements under the scheme, the guidelines for ‘on-tap’ licensing of SFBs in the private sector, and fulfil other conditions stipulated by it.

The RBI seems to be encouraging UCBs to convert into SFBs to overcome the problem of dual regulation, whereby the the Reserve Bank is the regulator and supervisor of their banking activities, and the Registrar of Cooperative Societies (State/ Central) has jurisdiction over their incorporation, registration, management, amalgamation, merger and liquidation, among others.

“The RBI has to contend with several powers being vested away from it in hands of State governments…This duality also needs to be addressed as part of the broader banking sector reforms to improve credit culture and reduce fraudulent lending,” said the then RBI Governor Urjit R Patel in a speech in April 2018.

Shivalik Mercantile Co-operative Bank went into business in 1997 in the Saharanpur district of Uttar Pradesh. According to its annual report, as of March-end 2019, the bank had 31 branches and 57 ATMs spread across six clusters in three States – Uttar Pradesh, NCR and Madhya Pradesh. As of March-end 2019, the bank had deposits aggregating ₹1051.20 crore (₹953.40 crore as of March-end 2018) and advances of ₹715.24 crore (₹611.61 crore). As of March-end 2019, the bank had a net-worth of ₹77.21 crore (₹65.65 crore). In FY2019, the UCB reported a net profit of ₹3.85 crore (₹3.17 crore in FY2018).

UCBs with a minimum net worth of ₹50 crore and maintaining capital to risk (weighted) assets ratio of 9 per cent and above are eligible to apply for voluntary transition to SFB under the RBI’s scheme.

Minimum net worth

The minimum net worth of the proposed SFB should be ₹100 crore from the date of commencement of business.

As SFBs are required to maintain a minimum capital adequacy ratio of 15 per cent of its Risk Weighted Assets (RWA) on a continuous basis, the availability of adequate capital should be ensured. Promoters should maintain at least 26 per cent of the paid-up equity capital.

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