Category: Banking & Finance

The Reserve Bank of India (RBI), on Tuesday, said it will consider proposals for merger and amalgamation of two or more Urban Cooperative Banks (UCBs).

This comes even as the central bank is evaluating proposals by three investors for acquiring the scam-hit Punjab & Maharashtra Co-operative (PMC) Bank.

As per the ‘Amalgamation of Urban Cooperative Banks, Directions, 2020’, issued on Tuesday by the RBI, it may consider proposals for merger and amalgamation among UCBs under three circumstances, including when the net worth of the amalgamated bank is positive, and the amalgamating bank assures to protect entire deposits of all depositors of the amalgamated bank.

The second circumstance for considering proposals are when the net worth of amalgamated bank is negative, and the amalgamating bank on its own assures to protect deposits of the depositors of the amalgamated bank.

The third circumstance is when the net worth of the amalgamated bank is negative and the amalgamating bank assures to protect the deposits of all depositors of the amalgamated bank, with the financial support from the State government extended upfront as part of the process of merger.

The guidelines come in the backdrop of 52 UCBs being placed under All Inclusive Directions (since April 1, 2015 till December 11, 2020) by the Reserve Bank, according to the RBI’s latest ‘Report on Trend and Progress of Banking in India’. As of March-end 2020, there were 1,539 UCBs in the country.

The RBI said the decision of amalgamation shall be approved by two-third majority of the total number of board members of both amalgamating and amalgamated UCBs, and not just of those present and voting

The draft scheme of amalgamation shall be approved by the shareholders of each UCB by a resolution passed by a majority representing two-thirds of the shareholders, both in number and value, present in person at a meeting called for the purpose.

The RBI said it has discretionary powers to approve the voluntary amalgamation of UCBs under the provisions of Section 44A read with Section 56 of the Banking Regulation Act, 1949 as amended vide Banking Regulation (Amendment) Act 2020 (39 of 2020).

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Banks will be back to the usual way of recognising non-performing assets (NPA) and initiating normal recovery proceedings following the Supreme Court vacating its September 2020 interim order.

The earlier order had directed lenders that accounts that were not declared as NPA till August 31, 2020, shall not be declared as NPA till further orders.

‘Recognising NPAs’

Rajkiran Rai G, MD and CEO, Union Bank of India, and Chairman, Indian Banks’ Association, observed that banks are already recognising NPAs (where there was asset classification standstill) as proforma NPAs and have been proactively making provisions. “So, now only actual NPAs will get recognised at March-end in the book. Banks may have to make only incremental provisions in the fourth quarter. It will be back to normalcy. We will be able to go through our recovery process and all that,” said Rai.

Advantage for customer

The Union Bank chief noted that for a customer the advantage during the asset classification standstill period was that even though he was defaulting, it was not getting reported to the rating agencies and the credit information bureaus.

“Now the customer’s NPA status will be recorded everywhere. So, if a customer is defaulting, his rating may be impacted and banks may start normal recovery action.

“Till now, it has been a soft recovery effort because we have not actually marked the account as NPA,” he said.

Krishnan Sitaraman, Senior Director, Crisil Ratings, said the SC judgment clears the way for lenders to recognise NPAs as per the delinquency record of borrowers, which they had not been able to since the end of the moratorium period in August 2020.

Most lenders, however, had disclosed proforma NPAs and also made provisions against the same, which may limit the immediate impact on profitability.

“Standstill on recognition of NPAs had tied the hand of lenders and, consequently, impacted the credit discipline of borrowers.

“Withdrawal of the same will enable lenders to enforce various legal measures and support their recovery efforts,” said Sitaraman

Banking stocks gained on Tuesday soon after the Supreme Court pronounced its verdict on loan moratorium. Bank Nifty was up 1.73 per cent. Indusind Bank, Axis Bank, SBI, and HDFC Bank were among the gainers on the Sensex.

Rating agency Crisil said the verdict clears the way for lenders to recognise non-performing assets as per the delinquency record of borrowers, which they have not been able to since the end of the moratorium in August 2020.

Most lenders have, however, disclosed proforma NPAs and also made provisions against them, which may limit the immediate impact on profitability, it further said.

“Reported Gross NPAs of the banking system is estimated to be about seven per cent as of December 31, 2020. These would have clocked about 100 basis points higher at about eight per cent if the NPA standstill had not been announced by the Supreme Court earlier,” it said.

Standstill on recognition of NPAs had tied the hand of lenders and impacted the credit discipline of borrowers. Lenders will now be able to enforce legal measures and support their recovery efforts, said Crisil.

The Centre may have to allocate an additional ₹7,000 crore as relief to borrowers following the Supreme Court verdict on loan moratorium on Tuesday, according to ICRA.

“As per our estimates, the compounded interest for six months of moratorium across all lenders is estimated at ₹13,500 crore to ₹14,000 crore,” said Anil Gupta, Vice President, Financial Sector Ratings, ICRA.

Pointing out that the Centre has already announced relief for borrowers having borrowings up to ₹2 crore, which was estimated to cost about ₹6,500 crore to the Exchequer, Gupta said: “With the announcement of waiver for all borrowers, the additional relief of about ₹7,000 crore to ₹7,500 will need to be provided to borrowers.”

Satyam Kumar, CEO, and Co-founder, Loantap, also said the verdict will allow regular functioning of the banking system and ensure the economy continues its course to normalcy.

According to Samantak Das, Chief Economist and Head of Research and REIS, India, JLL, the refusal to not extend the moratorium period is unlikely to considerably impact the developers since not many of them opted for the moratorium in the first place.

“As far as home buyers are concerned, significantly low-interest rates offered by various banks have already pushed up affordability,” he said.