Co-op banks may come under banking act, forced conversion not ruled out

In the revised scheme, the inspection of the UCBs solely under the Banking Regulation Act will be done by the central bank

Large urban co-operative banks (UCBs) may come to be solely under the provisions of the Banking Regulation (BR) Act, even as the smaller among them are to remain within the exclusive fold of the Registrar of Co-operative Societies (RoCS). The upcoming changes will bring the curtains down on the vexed issue of dual control of UCBs, which has been in vogue for 54 years. 

These banks came to be within the ambit of the Reserve Bank of India (RBI) when certain provisions of the BR Act were extended to them — effective March 1966 — even as the RoCS remained vested with significant powers regarding the functioning of their boards and management.

In the revised scheme, the inspection of the UCBs solely under the BR Act will be done by the central bank, with those of others being carried out by the RoCS. Both categories of UCBs will get cover from the Deposit Insurance and Credit Guarantee Corporation. And the hike in the deposit insured, which is in the works, will also be extended to them. 

The new framework will affect 1,551 UCBs in the country, which had a total business of Rs 7.36 trillion.

According to the last consolidated number available in the RBI’s Report on Trend and Progress of Banking in India 2017-18 they have deposits of Rs 4.56 trillion and advances of Rs 2.80 trillion in 2017-18.

“The RBI and the Ministry of Finance are in advanced talks and the changes are to be incorporated in the Bill (unnamed as yet), which may be introduced in this session of Parliament. Dual regulation will go,” said a source, adding, “the nodal ministry for UCBs is the Ministry of Agriculture, and you will see inputs coming in from state governments as well.”

It was pointed out that the R Gandhi Committee’s (2015) suggestion of business size of Rs 20,000 crore for conversion into a commercial bank could be revisited, and “even those below this threshold may be brought under the BR Act”. 

Incidentally, PMC Bank had a business size under Rs 12,000 crore. “While Rs 20,000 crore as a threshold is what is being weighed, there is no reason why this may not be lowered,” said another source. This is also in line with the R Gandhi Committee’s nuanced view that “such a conversion need not be de jure”, and UCBs’ expansion in terms of branches, area of operations, and business lines can be carefully calibrated to restrict unrestrained growth.

The larger UCBs — largely multi-state in nature — and above a certain threshold may now have no option but to convert into a scheduled commercial bank over a period of time. A conversion into a small finance bank (SFB) is ruled out, given the inherent restrictions under the licence terms, which place restrictions on the ticket size of loans, and the nature of businesses they can undertake.

The RBI in its monetary policy review last week signalled what is in store for UCBs when it said fresh exposure guidelines are to be drawn up, even as it gave them access to its Central Repository of Information on Large Credits as part of the move to make database available to a wider audience of financial sector stakeholders. 

UCBs, which are to come fully under the BR Act, will be subject to Basel III guidelines like commercial banks — as on date, they are under the dated Basel I. And these banks can be expected to get a transition period to comply with the same. The only conversion to date of a UCB into a commercial bank is DCB Bank in 1996, which was not a forced one. The smaller UCBs continue to remain under the RoCS, with limited opportunities for growth, given their capital structures, and over time, may get acquired by some of the SFBs or commercial banks if they are found to be commercially viable.

A key point which is up for consideration is if UCBs — be they fully compliant under the BR Act or under the RoCS — are to specifically mention ‘UCB’ on customer-facing signages, rather than the generic ‘bank’. This issue had come up before the RBI’s Board of Financial Supervision in the past, but no decision had been taken; this could well change.

As on date, dual control impinges on the RBI’s oversight of UCBs. Part V of the BR Act makes provision for its application, subject to certain modifications. As a result, several of the powers which the Act gives to the RBI for supervision and regulation of commercial banks are diluted, or are denied to it when it comes to UCBs. Then, under various State Co-operative Societies Acts, and to a lesser extent, under the Multi-State Co-operative Societies Act, the RoCS have significant powers.