Saraswat Co-op Bank, Shamrao warm up to the idea of private bank

Both co-op banks have begun groundwork to travel the path and are awaiting RBI norms for conversion

The Reserve Bank of India (RBI)’s idea of allowing urban cooperative banks (UCBs) to transform themselves into private entities has impressed many. UCBs Saraswat Bank and Shamrao Vithal Co-operative Bank have begun preparing for this.

If such a move is implemented, it would free UCBs from dual regulatory control. Currently, these are regulated by RBI, as well as state governments. As many of these banks have grown, these need constant injection of capital, not easy to come by in the existing legal framework for cooperative banks.

Eknath Thakur, chairman of Saraswat Bank, India’s largest UCB, told Business Standard the bank’s board of directors unanimously favoured converting it into a scheduled commercial bank.

Such a step would protect it from the vagaries of the economic cycle by enabling substantial augmentation of risk capital, said the bank’s annual report released last week.

In a discussion paper, RBI had said there was a case for converting multi-state UCBs into commercial banks. As UCBs expanded into more states, the familiarity and bonding among members diminished, it said, adding the commercial interests of the members overshadowed collective welfare.

In the process, some UCBs became “too big to be a co-operative” and the collective ownership and democratic management no longer suited their size, it said.

Suresh Hemmady, chairman of Shamrao Vithal Cooperative Bank, said the proposal would make these banks more competitive and boost financial inclusion. The bank’s board had decided to appoint consultants to explore and assess growth possibilities and impact, he said.

Another bank that may be interested in becoming private bank is Pune-based Cosmos Coop Bank. A senior bank executive said, “We are already on a par with commercial banks in working, except for few regulatory matters. We will look at the pros and cons and wait for a clear road map.”

An executive at Abhyudaya Coop Bank said the bank wasn’t really interested in becoming a commercial bank.

While any move in this regard would open windows of opportunities, UCBs have to cross many legal hurdles. The existing Multi-State Cooperative Societies Act has to be amended to allow the conversion of a cooperative into a company. Changes would also have to be incorporated in the banking Act, the companies Act, etc.

Not many would be eligible for such a conversion. A senior RBI official said, “It (UCB) is pocket borough and they (those in command) won’t let that go. Else, they may lose a base for local influence and distributing favours.”

Likely gains:
* More avenues to raise capital to fund growth
* Freedom from dual supervision---registrar and RBI
* More business opportunities

Risks:
* Loss of influence/clout of political section
* Relatively limited power to attract and retain talent
* Shift from being top UCB to low-rung bank