Urban cooperative banks' business size may be capped at Rs 20,000 cr

R Gandhi and Y H Malegam report to be the bedrock of new guidelines

The new regulatory framework for urban co-operative banks (UCBs) is expected to stipulate a threshold business size of Rs 20,000 crore, beyond which it will not be life as usual for these entities. Curbs are also expected to be placed on UCBs on some of their specific activities (especially on sensitive sectors like realty), so as to restrain their growth, given the less-than-adequate oversight of them.

The Reserve Bank of India (RBI) and the Ministry of Finance are in discussions on the regulatory and business topography of UCBs after the blowout at the Punjab and Maharashtra Co-operative Bank. “The R Gandhi and Y H Malegam Committee reports of 2015 and 2011 on UCBs have given enough pointers on what needs to be done for the sector. These can be expected to form the bedrock of the new norms,” said a senior regulatory official. The official also mentioned that the “business size and scope of activities of UCBs as they stand today are points for consideration which have been flagged off in discussions by the central bank to the Ministry of Finance”.

On the issue of minimum net worth norms for UCBs, it was explained that given the capital structure of UCBs, the matter could be looked at from the liabilities side. It may take the form wherein UCBs are allowed to raise deposits of a certain size, and in some ways, linked to the insurable amount (which is speculated to be increased to Rs 5 lakh, from Rs 1 lakh); this will restrict their ability to grow as in the past.

A new life

• Unbridled growth of urban co-operative banks (UCBs) to be a thing of the past
• UCBs will come under the purview of systemically important entities as they are part of the settlement system
• Be it transition to a commercial bank, or an SFB, the business size & activities of UCBs will be looked at 
• A few among the UCBs may not be allowed to undertake certain business
• Caps can be expected on specific business lines, especially on the exposure to sensitive sectors like realty

The current deliberations between the central bank and the Ministry of Finance will settle, once and for all, the fallout of a contagion from the stress in the UCB sector. While financial entities have been classified as being “systemically important” — whether they are banks, or non-banking financial companies — no such classification has been extended to UCBs. 

As on date, some of the bigger UCBs are active in the foreign exchange, money, and government securities markets; have access to the central bank’s liquidity adjustment facility; and carry out businesses similar to scheduled commercial banks.

“While a UCB may not be as large as a commercial bank, the reality is that when matters go wrong, the effect of the contagion is no less severe, as these banks are part of the settlement system,” said another regulatory official.

The new UCB norms may also look to enable a transition of some of the larger players into commercial banks (if they so desire) and the specific issues involved if some of them were to aspire to a small finance bank (SFB) licence, which is in the works.

While a transition path to a commercial bank may or may not form part of the revised guidelines, in the case of SFB licences to UCBs, the banking regulator has to deal with the fact that some of them are doing businesses, which SFBs are not allowed to dabble in. This can lead to a situation where many UCBs may have to exit from them to be eligible for an SFB licence.