RBI allows Urban Co-operative Banks to become Small Finance Banks

The move is an outcome of the recommendations made by the High Powered Committee on Urban Cooperative Banks in August 2015. The committee was chaired by R Gandhi, the then Deputy Governor of the RBI.

Jun 7, 2018 11:34 IST
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The Reserve Bank of India (RBI) on June 6, 2018 decided to allow voluntary transition of the Urban Co-Operative Banks (UCB) into Small Finance Banks (SFB), a move that is aimed at bringing UCBs into mainstream banking.

The Urban Co-Operative Banks can now covert into SFBs after meeting the prescribed criteria. The details of the scheme will be announced separately by the RBI.

The decision was taken during the meeting of the Monetary Policy Committee.

Recommendations made by the High Powered Committee

• The move is an outcome of the recommendations made by the High Powered Committee on Urban Cooperative Banks in August 2015. The committee was chaired by R Gandhi, the then Deputy Governor of the RBI.

• The panel recommended voluntary conversion of large Multi-State UCBs into Joint Stock Companies and conversion of other UCBs into SFBs, which meet certain criteria.

• The panel recommended converting UCBs with business size of Rs 20000 crore or more into regular banks in a bid to propel their growth.

• It also recommended that licenses may be issued to “financially sound and well-managed co-operative credit societies” having a minimum track record of five years which suit the regulatory prescriptions set by the RBI.

Criteria to be met by Cooperative Banks to become Small Finance Banks

The Cooperative Banks need to get over few limitations to become financial banks. These are:

  • Conflicts of interest
  • Limited capacity to raise capital
  • Lack of corporate governance
  • Limited resolution powers of RBI
  • Capital structure of UCBs
  • Supervision at par with commercial banks

The small finance banks are also required to extend 75 percent of their Adjusted Net Bank Credit (ANBC) to the priority sector lending (PSL).

 How transition into SFBs will be beneficial for UCBs?

• UCBs had been facing financial trouble for several years, prompting the RBI to stop issuing fresh licences to the UCBs.

• Though their performance has improved recently, their numbers have come down due to mergers and closures.

• UCBs operate under a 'dual control' regime with supervision by both the RBI and the State Governments.

• The non-availability of powers to the RBI to regulate and supervise UCBs at par with commercial banks restrains RBI from relaxing regulatory regimes, which in turn, is an obstacle for UCB’s commercialisation.

• By turning into SFBs, these co-operative banks will be regulated only by the RBI.

What is a Small Finance Bank?

  • The small finance banks provide basic banking services like accepting deposits and lending to the unbanked sections such as small farmers, micro business enterprises, micro and small industries and unorganised sector entities.
  • The small finance banks were created with an aim to encourage financial inclusion by provision of savings vehicles and supply of credit to small business units.
  • Resident individuals/professionals carrying 10 years of experience in banking and finance and companies and societies owned and controlled by residents are eligible to set up small finance banks.
  • Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into SFBs.
  • At present, there are ten SFBs operating in India:
    • Au Financiers (India) Ltd., Jaipur
    • Capital Local Area Bank Ltd., Jalandhar
    • Disha Microfin Private Ltd., Ahmedabad
    • Equitas Holdings P Limited, Chennai
    • ESAF Microfinance and Investments Private Ltd., Chennai
    • Janalakshmi Financial Services Private Limited, Bengaluru
    • RGVN (North East) Microfinance Limited, Guwahati
    • Suryoday Micro Finance Private Ltd., Navi Mumbai
    • Ujjivan Financial Services Private Ltd., Bengaluru
    • Utkarsh Micro Finance Private Ltd., Varanasi

What are Urban Cooperative Banks (UCBs)?

• The Urban Cooperative Banks (UCBs) are registered as cooperative societies under the provisions of, either the State Cooperative Societies Act of the concerned State or the Multi State Cooperative Societies Act, 2002.

• They are regulated and supervised by the Registrar of Cooperative Societies (RCS) of State concerned or by the Central Registrar of Cooperative Societies (CRCS), as the case may be.

• Banking Regulation Act, 1949 is partially applicable to co-operative banks. Thus RBI has partial control on co-operative banks.

 RBI constituted High Powered Committee headed by R Gandhi on Urban Cooperative Banks


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