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CO-OP BANKING

The only option left for weak and small UCBs is to merge with bigger peers, feels Abhijit Lele

The mergers and acquisitions wave has finally hit the shores of co-operative banking. Of the 1,800 urban co-operative banks (UCBs) across the country, 12 have been absorbed by stronger ones since March 2005.

The Reserve Bank of India (RBI) says the consolidation drive is aimed at a non-disruptive exit of weak or unviable UCBs. But what compounds the problem is that over 80 per cent of the co-operative banks are weak or perceived to be weak, while there are just a handful of potential acquirers.

Bankers say the task is daunting but not impossible. At help is the Task Force on Co-operative Urban Banks comprising RBI, state governments and localcentral co-operative federation officials.

The main driver for consolidation is the urge of three Maharashtra-based co-operative banks -- Mumbai-based Saraswat Co-Operative Bank and Shamrao Vithal Co-operative Bank and Pune-based Cosmos Co-operative Bank -- to expand their reach given the freeze on opening new branches for the last two years. What has worked in the favour of M&As is that the number of weak UCBs acquired thus far were ideal targets to expand the branch network of the acquirer.

It doesn't matter for RBI what the intention of the acquirer is. The regulator is concerned about the financial impact of amalgamating a weak UCB into a stronger one and sees to it that the depositors' interests are protected.

Says D Krishna, chief executive of National Federation of Urban Co-operative Banks and Credit Societies, "The consolidation is driven by the objective to save small banks and does not have the spirit of corporate M&As, which are based on synergy."

The RBI has in the last one-and-a-half year cleared acquisition of 17 UCBs in distress. The process of merging 12 of these distressed banks is complete. Saraswat took control of Maratha Mandir in March 2006.

Shamrao Vithal merged Shree Saptashrungi Urban Co-operative Bank with itself in May 2006. Elsewhere, Premier Co-operative Urban Bank from Secunderabad merged with Cosmos in 2005. Premier was the only profit-making UCB to merge as it was hit by a crisis of confidence among UCBs in Andhra Pradesh.

Even the slightest excuse can make a good UCB weak. Many UCBs, especially in south-western Maharashtra had to bear the brunt of the moratorium on United Western Bank (UWB), a private commercial bank that has since been merged with the Industrial Development Bank of India.

Though the problems of Satara-based UWB had very little to do with UCBs in the region, panic spread and depositors queued up before co-operative banks to withdraw money. A few UCBs reported withdrawals in excess of Rs 200 crore in a couple of days.

The revelation of huge losses in Pune-based Suvarna Sahakari Bank only added to the frenzy. Cosmos Bank offered to take over Suvarna Bank, but the very next day Survarna Bank was placed under the control of an administrator.

"Initially, people associated with the working of urban banks were quite skeptical about the consolidation, as UCBs are democratically-run institutions. But now, they are pleasantly surprised with the experience thus far. M&As have been accepted as a fact," points out Krishna.

The instances of mergers, though few, have generated the right kind of pressure on the management of banks to put their houses in order. There are indications that at least some banks are proactively taking steps to consolidate.

For these banks, mergers are more influenced by emerging competition. In a first case of a strong co-operative bank merging with a bigger and stronger UCB, the Mumbai-based Mandvi Co-operative Bank was absorbed by Saraswat Bank. Mandvi has a strong client base among the Gujarati business community.

Says Ekanath Thakur, a director of Saraswat Bank, "Small co-operative banks face huge challenges with new regulations governing their business and it was wise to have merged the financially sound Mandvi."

The RBI's guidelines make it clear that the central bank would like to deal with a small number of large co-operative banks than large number of small banks.

Maharashtra State Urban Co-operative Banks' Federation chairman Mukund Ghaisas says, "Such union (merger of two strong banks) will give the benefit of scale and bring about cost savings. The duplication of structure and processing can be avoided."

The federation has decided to cajole its 210 financially weak members to explore possibilities of merging with stronger peers. "Most co-operative bankers have realised that allowing banks to go sick only adds to their problems. Timely action (restructuring or consolidation) can avert a crisis and help in keeping the confidence of customers intact," Ghaisas avers.

Most weak banks in Maharashtra came up during the 1990s when a liberal licensing policy was in vogue. Of the 1,872 urban banks in the country, over 650 are in Maharashtra with over 50 per cent share in total business.

The state-level TAFCUB may also suggest merger of potentially viable banks. However, the consolidation process is not without challenges. Most important being absorbing employees of target banks and retaining customers.

The churn happening in the sector could see the emergence of 10-15 large co-operative banks over the next few years. In fact, Saraswat Bank is already larger than some of the private sector commercial banks such as Ratnakar Bank and Catholic Syrian Bank, says Thakur.

Industry experts feel a greater degree of coaxing would be required to push for more mergers as co-operative bank managements won't find it easy giving up their identities.