Draft norms for small banks fail to cheer urban co-op banks

Want road map to convert into commercial bank

The draft norms for forming small and payment banks have failed to enthuse urban cooperative banks (UCBs), as they find the scope of operation for niche banks too restrictive. In fact, they are seeking a road map for converting healthy urban banks into full-fledged commercial ones.

Last week, the Reserve Bank of India (RBI) came out with draft guidelines for small and payment banks to aid the task of financial inclusion.

Bank officials across banks with varying size said UCBs already have wide flexibility to take up business, subject to prudential norms like single client and group exposure limit. The scope for working is akin to what universal banks get to operate in.

Many scheduled urban banks are raring to convert themselves into universal commercial banks. In fact, they are awaiting for a word from the banking regulator about the framework for conversion and the road ahead. Large banks such as Saraswat Bank and Shamrao Vithal Cooperative Bank have been preparing themselves for such an eventuality. Recently, Shamrao Vithal changed its logo to position itself as a savvy bank ready for competition. Its board of directors has informally discussed plans to convert to a private commercial bank.

A senior executive with Saraswat said urban banks will show very little or no interest in transforming into an entity which will be allowed work on a limited mandate and small-ticket loans. His bank has also been working internally on plans for such a conversion.

RBI draft norms (for small banks) prescribe that those with a focus on small business will need to have at least 50 per cent of the loan portfolio with credit limits up to Rs 25 lakh.

UCBs believe the current framework they work in allows them far greater flexibility vis-a-vis the norms on niche banks, which are fairly limiting in nature. Vikrant Ponkshe, managing director, Cosmos Bank, said, "The net worth of banks would be changing every year, depending on the activities. In that scenario, having a minimum of 50 per cent loans up to Rs 25 lakh would be a challenge. Now, property loans are also over Rs 25 lakh, so in order to meet the need, one will have to look at different kinds of loans and that might not necessarily suit some banks."

Many small UCBs in towns would hardly be interested in becoming a small bank for furthering of financial inclusion. At present, regulatory oversight is minimal and their use of Know Your Customer norms is lax.

An executive with one small UCB in Maharashtra said they might not lap up the idea since it will restrict the scope for business and bring them under the close scanner of the banking regulator. They might not be comfortable to be under constant scrutiny, he said.

Another challenge in front of the niche banks, especially payment banks, would be of profitability, another dampener that leaves UCBs not interested.

While they might not be game for becoming niche banks, UCBs admit to competition the payment banks and small banks would pose to them. Those with the backing of a pan-India network, such as telecom players starting payment banks, would have a definite edge in grabbing the remittance business.

"These banks could work out to be profitable only for organisations that have a huge technological advantage on their side. For instance, telecom companies, etc, who will be able to leverage on their technology and make the operations cost-effective and thus, profitable, something that might not be possible for other existing banks to do," Ponkshe added.