Cooperative banks: India
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Politicians as whole-time director in urban co-op banks
Over six months after the NDA government at the Centre amended the Banking Regulation Act, the RBI has issued a notification to provide for a ban on the appointment of MPs, legislators and members of local bodies as whole-time directors of urban cooperative banks, reports Prafulla Marpakwar.
Once appointed a wholetime director, a person cannot hold any position in any other bank or private firm. The person appointed should not have been convicted of an offence involving moral turpitude.
The notification provides for stringent rules for the appointment of the MD and CEO; the appointed person should be a graduate in economics, finance or banking. It was found that in several urban cooperative banks, MDs and CEOs are appointed on the basis of their political clout and lack the basic qualifications required to be in the banking sector. Now banks will have to examine if the MDs and CEOs have been appointed in accordance with the RBI notification. While most district central cooperative banks in the state are NCPcontrolled, urban cooperative banks are controlled by BJP, NCP and the Congress.
Urban cooperative banks (UCBs)
Transition to ‘small finance banks’
Mumbai: Shivalik Mercantile Co-operative Bank has become the first in the sector to get permission from the Reserve Bank of India (RBI) to convert into a small finance bank (SFB). The Saharanpur-headquartered Shivalik MCB is a multi-state co-operative lender with presence in Uttar Pradesh, Delhi, Madhya Pradesh and Uttarakhand. The bank had deposits of Rs 1,051 crore and advances of Rs 715 crore as of end-March 2019.
Meanwhile, the RBI also decided to rationalise the supervisory action framework (SAF) to make it more effective in bringing about the desired improvement in urban co-operative banks (UCBs) as also expeditious resolution of UCBs experiencing financial stress. The RBI will continue to monitor asset quality, profitability and capital/net worth of UCBs under the revised SAF.
Co-operatives are governed under state laws as well as by RBI norms. They are owned by the customers and have restrictions on their activities. SFBs are like corporate entities limited by shares. They have much more flexibility in raising finances from the banking system. They are a new category of commercial banks that have been created to cater to small borrowers. Initially, only microfinance companies could convert into SFBs. However, in December 2019, the RBI came out with guidelines allowing co-operatives also to convert.
In a statement issued here, the RBI said that the permission has been granted under the ‘Scheme on voluntary transition of urban co-operative bank into a small finance bank’ issued on September 27, 2018. “The ‘in-principle’ approval granted will be valid for 18 months to enable the applicant to comply with the requirements under the scheme and fulfil other conditions as stipulated by the RBI. On being satisfied that the applicant has complied with the requisite conditions laid down by it as part of ‘in-principle’ approval, the RBI would consider granting it a licence for commencement of banking business under Section 22 (1) of the Banking Regulation Act, 1949 as an SFB,” the RBI said.
The RBI had decided to allow co-operatives to convert into SFBs in pursuance of the recommendations of a high-powered committee on UCBs chaired by R Gandhi in 2015. Until now, DCB Bank (erstwhile Development Credit Co-operative Bank) was the only co-operative lender to convert into a commercial bank and receive a new private bank licence in 1995.
Other lenders like Saraswat Co-operative Bank had shown an interest into transitioning into commercial banks. However, the RBI has decided to allow conversions only into SFBs, which cannot give loans to corporates.