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RBI canceled the Licence of The Vasavi Co-operative Urban Bank Ltd., Hyderabad

Aug 2, 2014 14:44 IST

The Reserve Bank of India (RBI) on 14 July 2014 cancelled the licence of The Vasai Co-operative Urban Bank Ltd., Hyderabad (Telangana). The order came into effect with the notification.

The order was issued in view that the bank has ceased to be solvent and all its efforts to revive the bank have also failed and the depositors were being inconvenienced by continued uncertainty.

Apart from this, RBI has also requested Registrar of Co-operative Societies, Telangana State to issue an order for winding up the bank and appoint a liquidator.

On liquidation, each depositor in the bank will be entitled for repayment of his/her deposits up to a monetary ceiling of one lakh rupees from the Deposit Insurance and Credit Guarantee Corporation (DICGC) under the usual terms and conditions.


With cancellation of licence and commencement of liquidation proceedings, the process of paying the depositors of The Vasavi Co-operative Urban Bank Ltd., Hyderabad, the amount insured as per the DICGC Act, 1961 will be set in motion subject to the terms and conditions of the Deposit Insurance Scheme.

Background

The Vasavi Co-operative Urban Bank Ltd., Hyderabad (Telangana) was granted the licence on 13 July 1982. Since July 2000, the bank has been classified, as weak. The statutory inspection of the bank under section 35 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies) with reference to its financial position as on 31 March 2013 had revealed that the financial position of the bank had deteriorated and the bank was not considered to have adequate assets to meet its outside liabilities as required under section 22(3)(a) of the Banking Regulation Act. The bank also did not comply with the requirements of minimum capital and reserves prescribed under section 11(1) of the Banking Regulation Act. The highly unsatisfactory financial position and the consequent strain on liquidity were largely on account of the poor governance of the bank.

With a view to enabling the bank to recover from its critical financial position the State Government of Andhra Pradesh, with the prior approval of the Reserve Bank, notified a scheme of restructuring of the bank in 2008. As a result, deposits of large depositors were converted into equity and institutional deposits were converted into Perpetual Debt Instruments (PDIs) after paying 30 percent and 20 percent, respectively, of the deposits amount. Subsequently, in January 2009, the Reserve Bank permitted the bank to treat the entire PDI as Tier I capital for a period of five years ending on 31 March 2013. As a result of these measures the financial position of the bank improved and Directions imposed on the bank were replaced with certain operational instructions. However, the improvements in the financials were short lived as the bank did not use the opportunity provided by the regulator to improve its financial performance.

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Having exhausted all the recovery avenues and any prospects of revival of the bank, the Reserve Bank issued a Show Cause Notice (SCN) to it in February, 2014 asking why it should not cancel the bank’s licence and take it into liquidation. The bank’s replies to the show cause notice were examined, but not found to be satisfactory. The Reserve Bank, therefore, decided to cancel the licence of the bank in the interest of bank's depositors.

Consequent to the cancellation of its licence, The Vasavi Co-operative Urban Bank Ltd., Hyderabad (Telangana State), is prohibited from carrying on ‘banking business’ as defined in Section 5(b) of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies) including acceptance and repayment of deposits.

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