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RBI panel recommends Rs 3 billion capital for umbrella body for UCBs

RBI may give a grant to the UO for providing IT support to its member banks; Guidelines related to the constitution of the board of management may be withdrawn

N. S. Vishwanathan, former Deputy Governor, RBI

In a move that will have far-reaching consequences in the urban co-operative banking sector, an expert committee constituted by the Reserve Bank of India has suggested that the proposed umbrella organization (UO) must be a financially strong body with adequate capital and a viable business plan.

The expert committee on urban co-operative banks, set up under the chairmanship of NS Vishwanathan, former deputy governor of RBI, has on its board Jyotindra Mehta, president, NAFCUB, among others. The committee, which submitted its report recently, has recommended that the minimum capital for the UO should be ₹3 billion with CRAR and a regulatory framework akin to the largest segment of NBFCs. It must be evaluated for the quality of internal controls. In the long run, the UO may take up the role of a self-regulatory organization (SRO) for smaller UCBs, where the UO can run an independent audit/inspection and supervisory division that may conduct both offsite and onsite supervision.

The committee has recommended that while financial co-operatives will use most of the services of the UO, the non-financial co-operatives can utilize certain specific services provided by it, such as wallet services, cash management services and restricted/regulated access to payments and remittance systems. Once the UO stabilizes, it may explore the possibilities of converting into a universal bank and offer value-added services on behalf of its member banks. With suitable structural flexibility to operate as a bank, the UO can be owned by the co-operative institutions even if it is a joint stock company, which may encourage the smaller UCBs to become an extended arm of such a bank.

The committee is of the view that the recent amendments to the Banking Regulation Act need to be supplemented by legislative enablement for the listing of certain securities, issued by the UCBs. Changes in the BR Act may be made for empowering the RBI to declare securities issued by UCBs, as covered under the Securities Contract Regulation Act, to facilitate their listing on the stock exchange. UCBs should be included as eligible banks under the government schemes such as Mudra and interest subvention/ subsidy scheme. UCBs should also be allowed to undertake government business provided they meet the prescribed criteria. TAFCUB as a forum for coordination should continue.

The RBI could consider providing a one-time grant to the UO for a specific objective tied to providing IT support to its member banks. Since aggregation of IT services will be a financial inclusion enabler and can also contribute to system stability through standardization of the IT interface, RBI’s financial support to the UO will be justifiable.

The committee has suggested to the RBI to expedite the creation of the UO to enable smaller UCBS to acquire scale through the network. RBI should use the route of mandatory mergers to resolve problematic co-operatives and be neutral to voluntary mergers. The larger ones should have scale on a standalone basis.

The committee noted that the restrictive approach of the earlier years towards branch expansion and scheduling, which continued to be pursued on top of a more enabling regulatory approach towards business operations of the other banking and non-banking entities, did hamstring the ability of the UCBs to grow.

The committee agreed that the deposit size can continue to be the basis for categorizing banks into regulatory tiers. Additional tiers can be created to cater to the aspirations of the larger UCBs to undertake business similar to that of SFBs and UNBs. It may not be desirable to expect smaller UCBs to switch over to Basel III, which is complicated and requires higher technical competence and skills. However, a higher level of CRAR needs to be prescribed to take care of the market and operational risks, particularly if operational freedom has to be enhanced. The committee recommends that the resolution framework may contain a twin indicator — CRAR and net NPA — with an emphasis on reducing the time spent by a UCB under supervisory action framework (SAF).

Based on the cooperativeness of the banks, availability of capital and other factors, UCBs may be categorized into four tiers for regulatory purposes. The level of regulation will depend on their scale of deposits as well as capital requirement and norms will get stringent with size.

Since the recent amendments to the BR Act largely address the issues related to management and governance in UCBs, the extant guidelines related to the constitution of a board of management may be withdrawn.

Stakeholders and members of the public can submit comments on the report through email by September 30, 2021, for the RBI to examine them before taking a final view.

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