Mumbai: An RBI panel Thursday recommended converting urban cooperative banks (UCBs) with business size of Rs 20,000 crore or more into regular banks to allow them to grow and proliferate further for financial inclusion.
Large Multi-State Urban Cooperative Banks (MS-UCBs) having a presence in more than one state, dealing in forex and participating in the money market and payment systems could be systemically important.
"Their failure may have a contagion effect and unsettle the UCB sector. The systemic risk could be minimised if the large UCBs convert themselves into commercial banks as the statutory framework and prudential regulations with respect to commercial banks are more stringent and structured than those for UCBs," the panel said.
The Reserve Bank has placed on its website the report of the High Powered Committee on UCBs headed by its Deputy Governor R Gandhi.
The report comes a day after RBI gave 'in-principle' approval to 11 entities, including Reliance, Vodafone, Airtel and Department of Posts, to start niche payments banks.
"A business size of Rs 20,000 crore or more may be the threshold limit beyond which a UCB may be expected to convert to a commercial bank," the report recommended while discussing the size and conversion of MS-UCBs into joint stock bank.
The conversion, it said "need not be de jure compulsory" and large UCBs can continue the way they operate currently in terms of balance sheet/asset size.
However, they would not be permitted to extend all services or products "currently offered by commercial banks, unless they convert to commercial banks", it added.
Though UCBs were set-up as small banks offering banking services to people of small means belonging to lower and middle classes, the panel noted that there was an immediate need to chart a future path for them including a well laid out transition path to convert themselves into universal/niche commercial banks.
"This transition is required due to the changing financial landscape in the country and also for giving an opportunity to well-run UCBs to play a major role going forward," it said.
As conversion of UCBs into commercial banks requires requisite amendments in the provisions of the Cooperative Societies Acts of all states which is a long drawn out process, the Committee recommended that only UCBs which are registered under the Multi-state Co-operative Societies Act, 2002 may be considered for conversion to commercial banks.
The panel further said smaller UCBs with business size of less than Rs 20,000 crore willing to convert to Small Finance Banks (SFBs) can apply to the Reserve Bank for conversion.
"During conversion, a transition period should be provided to UCBs to iron out any difficulties in the process," the report suggested.
Due to consolidation in the sector on account of closures and mergers, the number of UCBs came down from 1770 as at end-March 2008 to 1589 as on March 31, 2014 and further to 1579 by end-March 2015.
The deposits and advances of UCBs increased from Rs 1,398.71 billion and Rs 904.44 billion as at end-March 2008 to Rs 3155.03 billion and Rs 1996.51 billion, respectively, as at end-March 2014.
With such phenomenal growth, the aspirations of UCBs have also grown and some of them have already expressed a desire to convert to commercial banks, the panel noted.
It has also suggested that licenses may be issued to financially sound and well-managed cooperative credit societies having a minimum track record of 5-years to operate as UCBs.
In case of cooperative societies, the Committee suggested that to operate as a Multi State Urban Cooperative Bank the entry point should be Rs 100 crore of capital and to operate beyond two districts and as a State level UCB it should be Rs 50 crore.
The panel further noted that the concept of having an 'Umbrella Organisation' for UCBs in India has been mooted for a long time.
"The Committee recommends that given the importance of the issue RBI may expedite the decision on the structure of the urban co-operative banking system and appropriate Umbrella Organization/s," it said.
