Tag: UCB

Large urban cooperative banks want to become ‘universal’, BFSI News, ET BFSI

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Large cooperative banks are considering turning into universal banks as the regulator has tightened norms, especially steep priority sector lending targets.

The RBI had increased the overall priority sector lending (PSL) target for UCBs to 75% of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure, whichever is higher from 40% earlier.

PSL portfolio comprises loans to agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, among others, which UCBs have to increase to 75% of their advances by March 2024.

The RBI said tier-1 capital as on March 31 of the preceding financial year shall be reckoned for the purpose of fixing the exposure limits.

“Tier-1 capital for the purpose will be the same as that prescribed for computation of capital adequacy of UCBs,” it said.

Under the new proposed rules by RBI in 2019, UCBs with deposits of Rs 100 crore are to set up a board for management with the board of directors carrying out due diligence for their appointment, bringing them at par with commercial banks.

Board of management norms

On December 31, 2019, the Reserve Bank of India had released the final guidelines for setting up a board of management (BoM) for such banks. According to the guidelines, UCBs with deposits of Rs 100 crore and will constitute the Board of management which will be a mandatory requirement for opening new branches.

“The board of directors (BoD) of a UCB perform both the executive and supervisory roles, and has the responsibility to oversee the functioning of UCB as a cooperative society, as well as its functions as a bank. Since UCBs are accepting public deposits, it is imperative that a separate mechanism be put in place to protect the interests of depositors,” said the RBI in its notification.

The BoM will comprise expert banking professionals. It will also exercise oversight on banking-related functions of the UCBs, assist the BoD on formulation of policies and any other related matter, specifically delegated to it by the board for proper functioning of the bank, it added.

Borrowing oversight

The BoM will also oversee the management of fund and borrowings, and recommend action for recovery of non-performing assets (NPAs). The Board of directors will continue to be the apex policy setting body and constitute various committees of the board, including the BoM, to assist the board in carrying out its responsibilities.

The BoM will be constituted by the BoD within a period of one year from the date of the circular, and have a minimum of five members and may have as many as 12 members. The chairman of the BoM may be elected by the members from among themselves, or appointed by the BoD, while the CEO will be a non-voting member.

Banks looking at going universal

Saraswat Co-operative Bank and Cosmos Co-operative Bank were planning to seek the Reserve Bank of India’s (RBI) approval to convert into full-fledged commercial banks, according to reports last year.

As at March-end 2020, there were 88 UCBs with deposits greater than or equal to Rs 1,000 crore and 50 UCBs with advances greater than or equal to Rs 1,000 crore, per RBI data.



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Shivalik Bank appoints Equirus Capital to raise growth capital, BFSI News, ET BFSI

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Shivalik Small Finance Bank (SSFB) has appointed Equirus Capital to raise Rs 100 crore as growth capital.

Shivalik SFB recently attained SFB status post successful transition as an Urban Co-operative Bank (UCB). The funds will be leveraed for digital expansion through fintech partnerships, physical expansion and product innovation.

Harsh Mittal, Chief Financial Officer, Shivalik Small Finance Bank said, “Our journey as a Small Finance Bank has been very exciting so far. The pace at which we have made progress to swiftly reach this stage is testimony to how meticulously we have planned our growth strategy, complemented by steps taken along the way to ensure we maintain a healthy balance sheet. We are pleased toappointEquirusCapital for the bank’s first fundraise as we look to onboard investors who believe in the vision of providing digital focussed financial services to the small and underserved segments.”

Also Read: After SFB license, Shivalik to raise its first fund of Rs 100 crore

Donald D’Souza, Managing Director and Co-Head at Investment Bank, Equirus Capital, “We are delighted to partner with Shivalik Small Finance Bank to assist them in executing their growth plans including in their capital-raising plans. We look forward to a long and fruitful association with the bank.”

The bank is in talks with a number of fintech and financial institutions for business collaboration in the area of deposits, loans and third-party products, including customer onboarding and digital payments.



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RBI proposes changes in fund raising norms of urban co-operative banks, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) has proposed changes in rules for fundraising by primary (urban) co-operative banks. On Wednesday, the central bank released a draft circular for issue and regulation of share capital and securities of primary (urban) co-operative banks.

“UCBs are permitted to raise equity share capital, as hitherto, by way of issue of equity shares to persons within their area of operation enrolled as members, in accordance with the provisions of their bye-laws, and issue of additional equity shares to the existing members,” it said.

The RBI has proposed that any refund of share capital to members, or their nominees, should be subject to the certain conditions — the bank’s capital adequacy ratio is 9 per cent or above, both as per the latest audited financial statements and the last CRAR as assessed by the RBI during statutory inspection.

Such refund should not result in the bank’s capital adequacy falling below regulatory minimum of 9 per cent. The RBI has directed cooperative banks to ensure their investors are educated on the risk characteristics of regulatory capital requirements.

It has also asked cooperative banks to have a specific sign-off from the investors to ensure they have understood the features and risks of the instruments. The urban co-operative banks have been asked to not benchmark floating rate instruments to the fixed deposit rate.



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RBI restricts continuous tenure of UCB MDs to 15 years, BFSI News, ET BFSI

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Mumbai: The Reserve Bank of India has limited the maximum continued term of managing directors and whole-time directors (WTD) of urban cooperative banks (UCBs) to 15 years in a series of steps taken to ensure professional management of these institutions that have often been found undertaking non-transparent activities right at the top.

In the latest directions given by the RBI on appointment, re-appointment and termination process of MD and WTD of UCBs, the apex bank has said that an individual will be eligible for re-appointment as MD/WTD in the same bank even after finishing continuous 15-year tenure but only after a minimum gap of three years, subject to meeting other conditions.

Moreover, during this three-year cooling period, the individual shall not be appointed or associated with the bank in any capacity, either directly or indirectly.

In general, the RBI has directed that the tenure of MD/WTD shall not be for a period more than five years at a time subject to a minimum period of three years at the time of the first appointment unless terminated or removed earlier, and shall be eligible for re-appointment. The performance of MD/WTD shall be reviewed by the Board annually, the apex bank said.

The UCBs shall ensure that the following ‘fit and proper’ criteria are fulfilled by the person being appointed as MD. The MD shall function under the overall general superintendence, direction and control of the Board of Directors (BoD).

With regard to age, the RBI has said that the person at the top of UCBs should not be below the age of 35 years and above the age of 70 years at any time during his/her term in office. But, within the overall limit of 70 years, as part of their internal policy, individual bank Boards are free to prescribe a lower retirement age, the RBI said.

To run the operations professionally, the person should also have adequate educational qualifications. He/she should be a graduate, preferably, with Qualification in banking/ co-operative banking or Chartered/Cost Accountant/MBA (Finance); or Post-graduation in any discipline.

They must also have a combined experience of at least eight years at the middle/senior management level in the banking sector, including the experience gained in the concerned UCB, or non-banking finance companies engaged in lending (loan companies) and asset financing.

The person should not be engaged in any other business or vocation or beholding the position of a Member of Parliament or State Legislature or Municipal Corporation or Municipality or other local bodies. He/she should also not be a director of any company other than a company registered under section 8 of the Companies Act, 2013. The RBI has given a long list of propriety criteria to ensure only the right candidate is appointed for the post.

The RBI also said that UCBs shall constitute a “Nomination and Remuneration Committee (NRC)” consisting of three directors from amongst the Board of Directors (BoD) and nominate one among them as Chairman of the NRC.



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RBI’s FAQs addresses some key concerns

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The Reserve Bank of India (RBI) has clarified that its “one year look back” stipulation introduced in its April 27 circular on appointment of statutory auditors in public sector banks, Urban Cooperative Banks and NBFCs will only be applicable prospectively, that is, from financial year 2022-23.

This look back stipulation was introduced to ensure that the audit firm had not provided any non-audit services to the Group entities during the 12 months period before the audit firm was appointed in the bank or NBFC concerned.

RBI clarifies

The RBI has now, in the Frequently Asked Questions (FAQ) on the April 27 circular, clarified that this look-back condition will not apply for auditor appointments for FY 2021-22.

In another significant clarification, the RBI has modified the earlier April 27 prescribed blanket kind of restriction on appointment of audit firms as auditors of banks and NBFCs in situations where the concerned audit firm had provided audit or non-audit service to any group entity of that bank or NBFC.

Cap on assignments

While earlier this norm was seen to be applicable across the Group, the RBI has now in the FAQ made it clear that this restriction does not apply to all group entities, but applies only to entities in the Group that are RBI regulated.

Also, the central bank has in the ‘Frequently Asked Questions’ issued on its April 27 circular made it clear that the cap (upper limit) on number of assignments an audit firm can undertake in a year in respect of banks, UCBs and NBFCs are applicable for audit of all RBI regulated entities, irrespective of their asset size. It maybe recalled that April 27 circular of RBI had stipulated that an audit firm cannot do audit of more than four commercial banks, eight NBFCs and eight UCBs in a year.

Experts’ speak

Jamil Khatri, Partner, BSR& Co LLP, said the concerns of the industry in the areas of the short rotation period, the requirements for joint audit and the cap on the number of audits that can be done by an audit firm, have not been addressed in the current set of clarifications.

Amarjit Chopra, former CA Institute President, said that RBI’s clarification on the one year look back norm and also on the group entity aspect is quite pragmatic and will provide flexibility in the appointment of auditors.

Ashok Haldia, former Secretary of the CA Institute, said that the FAQ has opened the door for an audit firm engaged in audit/non-audit work of group entity (not regulated by RBI) to be appointed as statutory auditor of any of the RBI regulated entity within the group. However, the board/audit committee may find it challenging to assess and take responsibility that there is no conflict of interest and independence of auditor is ensured, as required in FAQ, as in most cases it may be difficult to disentangle explicit and implicit relationship that exists between group entities. These may find it difficult to justify in case doubt arises in future, he added.

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How Shivalik Bank is transforming from cooperative to small finance bank, BFSI News, ET BFSI

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In a conversation with ETBFSI on its transition from an urban co-operative bank to a small finance bank. Shivali Mercantile Co-operative Bank’s Chief Executive Officer and Managing Director, Suveer Kumar Gupta talks about the reason behind the transition, how it’s relying and investing in digital capabilities and partnerships with FinTechs and MSMEs being a key focus customer base.

Journey from UCB to SFB

Shivalik Mercantile Co-operative Bank started in Saharanpur District in Uttar Pradesh is the first urban co-operative bank to transition into a small finance Bank. It acquired Bhoj Nagarik Sahakari Bank Maryadit in Dhar and became a multi-state co-operative bank and further expanded in Indore after acquiring Malwa Commercial Cooperative Bank Limited.

Suveer Kumar Gupta, Managing Director & Chief Executive Officer, Shivalik Bank

The bank has 31 branches and business size around Rs 2050 crore with a deposit base of Rs 1225 crore and advance of Rs 825 crore as of March 31, 2021.

Suveer Kumar Gupta, MD & CEO, Shivalik Mercantile Co-operative Bank Ltd on the transition towards the small finance bank said, “Right from the very start we wanted to be a strong and well managed one of the larger co-operative banks in the country and had aspirations to grow and be professional. For the past few years we’ve been improving our systems, controlling measures, risk management practices and most of all working towards building a strong technology infrastructure. At the same time our focus was on financial inclusion and MSMEs.”

When the Reserve Bank of India in 2015 put forward the small finance bank vision the bank realised they’re in sync with the vision they had set for Shivalik Bank. Gupta said, “The synergies were significant towards a transition to SFB and then RBI came up with voluntary transition guidelines and we jumped to the opportunity and applied for the transition and got an in-principle approval in January 2020 and the final license was in January 2021 and are in the last leg of the journey and hope to go live very soon.”

While the SFB transition will bring in more regulatory oversight and compliance norms, the bank sees numerous benefits with the transition to SFB as existing SFB proven the business model of lending to priority sector with small ticket sizes is successful and as a co-operative bank they have been following for some time.

Gupta said, “We are clear and no two thoughts on how the business will progress. Becoming an SFB will allow us to raise capital for growth and becoming a commercial bank will make it easier to approach investors and infuse a greater trust among the customer base. Further as co-operative banks miss out on government and institutional business, becoming a scheduled commercial bank will help them to reach out for institutional business.”

The bank is eyeing MSMEs as the key are of the focus and 90% of its book is fully secured and about 10% of their portfolio is microfinance. Going forward they tend to retain the philosophy of secured lending and are not shy of unsecured lending as well and will be looking forward to introducing some products in the unsecured side but major focus will be on the secured part.

We are clear and no two thoughts on how the business will progress. Becoming an SFB will allow us to raise capital for growth and becoming a commercial bank will make it easier to approach investors and infuse a greater trust among the customer base. Further as co-operative banks miss out on government and institutional business, becoming a scheduled commercial bank will help them to reach out for institutional business.Suveer Kumar Gupta, MD & CEO, Shivalik Mercantile Co-operative Bank

Ecosystem Partnerships

Gupta says as a bank they realised that the thought process of ownership mindset will not work for them because they are not experts in everything. He said, “ and have partnered with India Gold providing gold loan to customers at doorstep, Airtel Payments Bank for digital sourcing of loans, we’ve tied up Atyati, a microfinance banking correspondent partner and we are in discussion with other few fintechs as well some on customer onboarding side and some on digital sourcing side and invoice financing side where they’re using blockchain.”

They are very much open to digital partnerships and believe having a pan India license the best way to is by not being asset heavy with physical branches but can be done digitally too. “Any customer sitting anywhere can open and operate a Shivalik bank account just using a mobile phone and that is the way we want to go forward.”

We are bankers and will stick to banking. As for technology and other services, let’s seek experts and partner with them. We’ve been looking forward to partner with FinTechsSuveer Kumar Gupta, MD & CEO, Shivalik Mercantile Co-operative Bank


Physical Expansion

On Physical expansion, they want to be a global local bank. He adds, we would do it in the northern region and by physical I would not only consider bank branches but also digital assisted channels like banking correspondents moving around with micro-ATMs. We also have micro-ATMs which are being used by banking correspondents and are connected to the core-banking system in real time.

He explained, customers can withdraw by swiping card or Aadhar and deposit money too among other banking services like bank-in-a-box kind of thing. This would eventually help us in expansion.

Digital Savvy

As the bank is heavily relying on digital partnership and capabilities they’re adequately focusing on cyber-security. He said, “We are focused on the safety aspects of digital exposure. From a customer point of view, we’ve put in all safeguards like two factor authentication, info-sec testing before release, customer education programmes, vulnerability testing, applications have biometric logins. From an organisation perspective, there’s an information-security (info-sec) team in place and internal policy on info-sec has been designed by one of the Big 4 and are one of the first co-operative banks to get cyber-insurance much ahead of the RBI mandate. “

Gupta also said, The bank has hosted its data in a tier-4 data center which is considered to be the best in Asia and its core banking system provided by Infosys is on a hosted model making Shivalik Bank as the first bank to do it.

The bank is ready for the transition and is waiting for the final go-ahead from the regulator, concluded Gupta.



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RBI unveils risk-based internal audit guidelines for select NBFCs, UCBs

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The entities have to implement the RBIA framework by March 31, 2022

In order to strengthen the quality and effectiveness of the internal audit system, the Reserve Bank of India (RBI) on Wednesday issued guidelines on risk-based internal audit (RBIA) system for select non-bank lenders and urban co-operative banks (UCBs). While NBFCs and UCBs have grown in size and become systemically important, prevalence of different audit systems/approaches in such entities has created certain inconsistencies, risks and gaps, RBI said. The entities have to implement the RBIA framework by March 31, 2022, and have been asked to constitute a committee of senior executives, to be entrusted with the responsibility of formulating a suitable action plan.

The new framework will be for all deposit taking NBFCs, irrespective of their sizes, all non-deposit taking NBFCs (including core investment companies) with an asset size of `5,000 crore and also for all UCBs, having an asset size of `500 crore and above. The NBFCs and UCBs face risks similar to the ones faced by scheduled commercial banks, which require an alignment of processes, the central bank said.

Amit Tandon, founder and managing director (MD) of Institutional Investor Advisory Services (IiAS), said, “This aligns the supervision of NBFCs to those of banks. I view this as a step in easing of conversion of NBFCs to banks.”

To ensure smooth transition from the existing system of internal audit to RBIA, the NBFCs and UCBs concerned may constitute a committee of senior executives with the responsibility of formulating a suitable action plan, RBI said. The committee may address transitional and change management issues and should report progress periodically to the board and senior management. According to the new guidelines, the boards of NBFCs and UCBs are primarily responsible for overseeing their internal audit functions.

The regulator also specified that RBIA policy shall clearly document the purpose, authority, and responsibility of the internal audit activity, with a clear demarcation of the role and expectations from risk management function and risk -based internal audit function.

Shriram Subramanian, founder and MD of InGovern Research Services, a corporate governance advisory firm, said as NBFCs and UCBs have become large, it is pragmatic to have RBIA functionally and report to the board. “However, RBIA should not be seen as a panacea for failures and frauds, as even in large scheduled commercial banks like Yes Bank, Lakshmi Vilas Bank (LVB), etc. where there is directed lending and where RBIA existed, bank failures have occurred,” he added. RBI should also not see this as an abdication of its supervisory role and responsibilities, he said.

RBIA is an audit methodology that links with an organisation’s overall risk management framework and provides an assurance to the board of directors and the senior management on the quality and effectiveness of the organisation’s internal controls, risk management and governance-related systems and processes, the regulator said.

RBI, in its monetary policy statement on December 4, 2020, had announced that suitable guidelines would be issued to large UCBs and NBFCs for the adoption of RBIA to strengthen the internal audit function, which works as a third line of defence.

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Road ahead for co-operative banks

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Distressed depositors of several Urban Co-operative Banks (UCBs), including Punjab and Maharashtra Co-operative (PMC) Bank, Sri Guru Raghavendra Sahakara Bank, Rupee Co-operative Bank and Kapol Co-operative Bank, have been at their wits end.

With their hard-earned money stuck in these banks, which got into trouble for various reasons – deterioration in financial position, irregularities and deficiency in governance – the depositors have been desperately looking to the banking regulator for succour.

But the wait to get their money back is becoming excruciatingly long and arduous as the Reserve Bank of India (RBI) keeps extending its directions to these banks (ironically seeking to protect depositors’ interest) by three to six months. Depositors of Mumbai-based PMC Bank and Bengaluru-based Sri Guru Raghavendra Sahakara Bank have taken to the streets in the last one year or so amid the raging pandemic to draw the attention of the authorities to get their money back.

They have moved courts, written to the RBI Governor, Finance Minister, and Prime Minister’s Office. However, the uncertainty regarding the fate of their deposits, persists.

 

Faster resolution agenda

In its 2019-20 Annual Report, released on August 25, 2020, the RBI set for itself an agenda for “faster resolution of weak UCBs which are under All-Inclusive Directions” in 2020-21.

Also read: Tax query: What’s the taxability of interest on FD credited by a co-operative bank?

So, in a way, the clock is ticking for the regulator as it has to disclose the ‘implementation status’ with respect to the aforementioned agenda in its 2020-21 Annual Report, which is likely to be released in May-June 2021.

With the Banking Regulation (Amendment) Act 2020 handing the RBI powers to regulate and supervise UCBs on par with commercial banks, aggrieved depositors are hoping that the central bank will exercise the newly conferred powers to tackle some of the ills afflicting UCBs. Under the Act, the RBI now has powers relating to voluntary/compulsory amalgamation and preparation of scheme of reconstruction .

Once a UCB is placed under direction, deposit withdrawals are severely curtailed, acceptance of fresh deposits is prohibited, and grant or renewal any loans and advances are disallowed, among others.

‘No remedial measures’

Jyotindra Mehta, President, National Federation of UCBs and Credit Societies, alleged that while the government and the RBI take swift and timely action when public sector and private sector banks get into trouble, no remedial measures are initiated when UCBs find themselves in a similar predicament.

“On the contrary, penalties and directions are heaped on such banks in the name of safeguarding depositors’ interest,” he said, adding that this only hastens the deterioration of these banks’ health, paving the way for cancellation of licence, and resulting in a section of the depositors losing their deposits.

Mehta emphasised the need for a time-bound resolution of UCBs that can help restore depositors’ trust in these banks. Financial soundness of the UCB sector has been a matter of concern for the RBI over the last few years. According to the RBI’s latest Report on Trend and Progress of Banking, since April 1, 2015, 52 UCBs (till December-end 2020) have been placed under Directions.

As of March-end 2020, there were 1,539 UCBs operating in the country, with total business (deposits₹5,01,208 crore, plus advances ₹3,05,453 crore) aggregating ₹8,06,661 crore. Of the total claims settled by the Deposit Insurance and Credit Guarantee Corporation (DICGC) since inception, around 94.3 per cent of claims pertained to co-operative banks that were liquidated, amalgamatedor restructured, the report said.

UCBs’ deposit and loan growth

The RBI observed that as UCBs faced competition from small finance banks (SFBs) and non-banking financial companies (NBFCs) in recent years, and also had to reaffirm their credibility to depositors, their balance sheet growth has moderated.

It underscored that the recent collapse of a large UCB (PMC Bank) due to fraud and deficient corporate governance has dented public confidence in UCBs. Since 2017-18, the deposit deceleration in UCBs was starker than in scheduled commercial banks (SCBs), pointing to the difficulties faced by the former in raising resources, according to the RBI. In FY20, UCBs’ deposit growth was at 3.50 per cent year-on-year (y-o-y) (6.1 per cent in FY19). SCBs recorded a 8.44 per cent growth in deposits in FY20 vis-a-vis 9.26 per cent in the preceding year. Supervisory data available with the RBI suggest continuation of deceleration well into 2020-21, the report said.

Regulator tightening the screws

The central bank has tightened the screws on UCBs. However, it has also dangled sort of a carrot in front of them – conversion into a small finance bank (SFB) with lower capital requirement to begin with. UCBs have to comply with priority sector lending (PSL) target on par with SFBs –75 per cent of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher–by March 31, 2024.

Further, these banks have to ensure that 50 per cent of loans comprise loans of up to ₹25 lakh or 0.2 per cent of Tier I capital, whichever is higher, subject to a maximum of ₹1 crore per borrower or party by March 31, 2024.

Also read: Govt to soon initiate Bank Investment Company

UCBs with deposits of ₹100 crore and above have been asked to constitute Board of Management (BoM), in addition to the Board of Directors (BoD). Following the amendment to the BR Act, Mehta said the requirement of constituting a BoM becomes redundant as BoD is now under complete RBI control.

Referring to the RBI dropping enough hints about its preference for the larger UCBs to get converted into SFBs/commercial banks, the NAFCUB President wants the central bank to abandon its push for UCBs to become private banks in view of the full regulatory control it now has over co-operative banks.

In this regard, the NAFCUB is of the view that changes in regulations should be made taking the UCB sector into confidence and without diluting their co-operative character and democratic functioning.

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