Monetary policy review: No takers for RBI's move on small finance banks

The move is largely being perceived as a move to destabilise the cooperative sector

While the Reserve Bank of India (RBI) has allowed urban cooperative banks (UCB) to convert into small finance banks (SFBs), there are hardly any takers, as it is largely being perceived as a move to destabilise the cooperative sector. Notably, UCBs are the strongest sectors in cooperative banking sector, as its counterpart, the three-tier rural cooperative sector, has long been struggling with high NPAs and losses.

“When Gandhi committee released its report on cooperative banks, the general body resolved not to accept its recommendation. Conversion of UCBs into banks will weaken the cooperative structure, and hence we are not in its favour,’’ said Subhas Gupta, CEO, NAFCUB (National Federation of Urban Cooperative Banks and Credit Societies).

Some of the biggest UCBs, with a potential to convert into a full-fledged bank include Saraswat Co-operative Bank, Cosmos Co-operative Bank and Shamrao Vithal Co-operative Bank.

Saraswat Co-operative Bank had a total business of about Rs 585 billion, and a net profit of about Rs 2.41 billion last financial year. Cosmos Co-operative Bank had a total business of about Rs 263.69 billion at the end of FY16, with a net profit of about Rs 460 million. This is comparable to some of the biggest SFBs.

“Cooperative model works well for us, be it for business growth or raising capital. It is the largest UCB and is raising Rs 3 billion of capital through long-term deposits,” said Gautam Thakur, chairman, Saraswat Bank, the largest UCB. There were 1,562 UCBs and 94,384 rural cooperatives, including short-term and long-term cooperatives, at end-March 2017. The total deposits of UCBs at the end of March 31, 2017, stood at Rs 4,435 billion, while advances stood at Rs 2,612 billion. At the end of 2016-17, the gross NPA of UCBs was around 7.1 per cent, while net NPA was about 2.7 per cent, much lower than scheduled commercial banks. In 2016-17, UCBs clocked a collective net profit after tax of Rs 39 billion.

Earlier, RBI followed a liberal licensing policy for UCBs, and as a result the period 1993-2004 witnessed a proliferation in the number of UCBs. Their poor financial health prompted the regulator to conceive a Vision Document in 2005, following which mergers and exits led to a reduction in the number of UCBs from 1,926 in March 2004 to about 1,526 in March 2017, with Maharashtra accounting for the maximum number of mergers, followed by Gujarat and Andhra Pradesh.

The cooperative credit institutions are divided into two categories — urban and rural. The rural category is further sub-divided into short (along with medium-term) and long-term credit categories. The short-term rural credit follows a three-tier structure — state cooperative banks, DCCBs and PACS. The long-term credit is further divided into two categories — State Cooperative Agriculture and Rural Development Banks and Primary Cooperative Agriculture and Rural Development Banks. If UCBs exit from the cooperative banking structure, the remaining entities would constitute an even weaker cooperative sector. Data from the National Federation of State Cooperative Banks (NAFSCOB) showed that absolute NPAs of district central cooperative banks (DCCBs) at the end of March 31, 2016, stood at Rs 224 billion, while that of state cooperative banks was at Rs 51.47 billion.

“The cooperative banking sector is not being allowed to work as the government is destabilising the entire structure, in particular the mid-rung or the DCCBs,” said B Subramaniam, managing director, NAFSCOB (The National Federation of State Cooperative Banks).

As of March 31, 2016, about 9,015 branches of district cooperative banks were in profit, while about 4,322 were loss-making. The total loss of the DCCBs was around Rs 6.88 billion, while the profit-making ones posted a profit of around Rs 21.26 billion, according to NAFSCOB. Data showed as of March 31, 2016, out of nearly 93,367 PACS, about 62,050 were viable to run. About 37,112 PACS had reported a loss of Rs 70.09 crore, while 44,896 societies reported a profit of Rs 415 million.

The share of rural co-operatives in total institutional credit to agriculture fell from 64 per cent in 1992-93 to 17 per cent in 2015-16.

How they fare
 

• There were 1,562 UCBs at the end of March 2017
• In 2016-17, UCBs clocked a collective net profit after tax of Rs 39 billion
• At the end of 2016-17, the g ross NPA of UCBs was around 7.1 per cent