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Why cooperative banks don't want to convert into small finance banks

Anand Adhikari     December 3, 2019

The urban cooperative banks (UCBs) are comfortable operating under a cooperative structure with dual regulators of states and the Reserve Bank of Indian (RBI) than to transform into small finance banks (SFBs) with tighter regulatory framework.

Uttar Pradesh-based Shivalik Mercantile Cooperative Bank and Maharashtra-based Tirupati Urban Cooperative Bank are the two banks that have approached the RBI for converting into SFBs. Both the applications were pending with the RBI at the time of writing the story.

In September 2015, the RBI for the first time issued differentiated banking licences to payments banks and SFBs with separate regulatory framework. The RBI issued 10 SFB licences. The prominent ones include Equitas, Ujjivan, AU Small Finance, ESAF Small Finance Bank and Fincare. Last year, the RBI also opened the window for UCBs to convert themselves voluntarily into SFBs.

Post the debacle of Punjab and Maharashtra Cooperative (PMC) Bank, there was a view that RBI should nudge cooperative banks to transform into SFBs. Under the SFB guidelines, the UCBs require a net worth of Rs 50 crore and capital adequacy of 9 per cent. The minimum net worth requirement is Rs 100 crore.

The RBI's official version of allowing the UCBs to convert into SFBs was the expanded operations of some of the banks with operations in multi states. PMC Bank was also operating in half a dozen states with large operations in Mumbai. In fact, the RBI has been encouraging consolidation in the UCB segment because of poor governance structure, lack of professional managers, weak risk management systems and also lax credit appraisal system. In the past, the RBI has also asked UCBs to follow KYC norms more strictly along with priority sector guidelines. The number of UCBs have also reduced by 400 to 1,500 since early 2000. The whole move to monitor UCBs started post the involvement of Madhavpura Mercantile Co-operative Bank in the Ketan Parekh scam in 2001. The control of UCBs by the politicians also provides a protection to the sector.

In the larger scheme of things, the universe of UCBs is not large in terms of their share in the assets, deposits and advances. As per available statistics, the total deposits of UCBs are at Rs 4.56 lakh crore, which is below 4 per cent of the deposits of the entire banking system. The advances at Rs 2.80 lakh crore also have a similar share. Of late, UCBs have been trying to mirror the commercial banks by targeting business in metro and urban areas.

Today, commercial banks including the new generation private sector banks have reached out to rural and semi rural areas. The RBI is also encouraging new banking models to cover the underserved and unbanked areas. The last two full-scale banking licences went to micro finance institutions such as Bandhan Bank and IDFC Bank, which had a more convincing plan to reach out to the unbanked population. Similarly, the whole idea to create payments banks and SFBs was to cover the geographies left out by traditional banks.

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