Tag: UCBs

Revised PSL target: Large UCBs to take hard look at ‘co-operative’ structure

Banking & Finance

[ad_1]

Read More/Less


Large urban co-operative banks (UCBs) such as Saraswat Co-operative Bank and SVC Co-operative Bank may take a hard look at their co-operative structure in the backdrop of the steep priority sector lending (PSL) target prescribed by the Reserve Bank of India (RBI).

UCBs have to increase their PSL portfolio – comprising loans to agriculture, micro, small and medium enterprises, export credit, education, housing, social infrastructure, among others – so that it accounts for 75 per cent of their advances by March 2024.

So, to align their overall loan composition with the revised PSL norms, large UCBs may either cut/stop growing their wholesale lending portfolio or buy priority sector lending certificates (PSLCs) or do both even as they simultaneously grow PSL portfolio under their own steam, according to a co-operative banking expert.

Conversion into universal bank?

As the PSL target is steep, the larger ones among the UCBs may consider converting into universal banks as and when RBI opens up this route.

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

Currently, though RBI allows UCBs to convert into small finance banks (SFBs) under the Scheme of Voluntary Transition, large UCBs do not see any advantage in doing so.

PSL and minimum capital adequacy ratio (CAR) for SFBs are both high at 75 per cent (of advances) and 15 per cent (of their risk weighted assets/RWA), respectively.

While PSL target for UCBs will get aligned with that for SFBs by March 2024, they are required to maintain a lower minimum CAR of 9 per cent (under Basel I norms) of their RWA.

UCBs have to reach the PSL target in phases — 45 per cent by March 2021 (from 40 per cent as at March-end 2020), 50 per cent by March 2022, 60 per cent by March 2023 and 75 per cent by March 2024.

PSL portfolio: Where it stands

As at March-end 2021, Saraswat Bank and SVC Bank increased their PSL portfolio to 52.14 per cent (42.30 per cent as at March-end 2020) of advances and 44.34 per cent (41.13 per cent), respectively.

In fact, in FY21, Saraswat Bank purchased PSLCs (general portfolio) aggregating ₹2,452.75 crore (₹650 crore in FY20).

PSLCs enable banks to achieve PSL target and sub-targets by purchase of these instruments in the event of shortfall and at the same time incentivise the surplus banks, thereby enhancing lending to the categories under priority sector.

Gautam E. Thakur, Chairman, Saraswat Co-operative Bank, observed that the retail clients to whom the bank has extended commercial advances of less than ₹10 crore are substantial in number.

“As these retail clients grow in their respective businesses, their requirements of commensurate bank funding will also increase. Today’s retail banking client is tomorrow’s wholesale banking client.

“With increase in ticket size of the advances granted to such customers, we slowly plan to handhold these retail customers as they undergo their transition to the wholesale banking segment. The growth potential in this segment is huge,” Thakur said in the bank’s latest annual report.

Saraswat Bank’s wholesale advances portfolio came down by about ₹273 crore in FY21 to stand at around ₹12,687 crore as at March-end 2021.

“Due to pandemic impact and the strategic decision of the bank to mitigate the risk of credit concentration… the level of wholesale advances reduced marginally.

“…Also, due to Covid-19, customers were more cautious, resulting into large undrawn positions throughout the year. LCBD (letter of credit backed bill discounting) exposure too declined,” the report said.

The bank mitigated credit concentration risk by reducing exposure in large value borrowal accounts, restricting entry level exposures at a reasonable level, restricting entry into large size consortium, and restricting exposures to existing borrowal accounts by forming consortiums.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , , ,

Madhya Pradesh High Court stays RBI notification on UCBs

Banking & Finance

[ad_1]

Read More/Less


The Reserve Bank of India (RBI) may need to introspect on the notification related to the appointment of managing director/whole-time director in primary (urban) co-operative banks (UCBs). After a ruling by the Gujarat High Court in 2013, which was upheld by the Supreme Court in 2021, the Madhya Pradesh High Court has stayed the implementation of RBI’s notification.

The stay may attract more such petitions in different courts as stakes are very high for States in this matter. Also, traditionally, politicians have a larger say in the affairs of the co-operative sector. As per RBI data on May 31, there are 1,531 UCBs in the country — 53 scheduled and 1,478 non-scheduled.

The Centre recently carved out a Ministry exclusively for co-operatives, seen as questioning States’ authority on the subject.

Although the Banking Regulation (Amendment) Act notified on September 29, 2020 was meant to provide additional power to the central bank for effectively regulating co-operative banks, there is a feeling that it may not be easy, given the Centre-States tussle on the issue. In the latest case, the petitioner, Bairagarh (Madhya Pradesh)-based Mahanagar Nagrik Sahakari Bank had moved the State High Court challenging the constitutional validity of the amended Section 4 of the Banking Regulation Amendment Act, 1965. It had argued that the RBI order dated June 25, 2021, is ‘absolutely incompetent and lacks in authority’.

 

Eligibility criteria

The RBI’s order debarred persons such as Member of Parliament or State Legislature or Municipal Corporation or Municipality or other local bodies from holding the post of MD/WTD.

Also, persons engaged in any other business or vocation, director of a company (except non-profit one), a partner of any firm which carries on any trade, business or industry, having substantial interest in any company or working as director, manager, managing agent, partner or proprietor of any trading, commercial or industrial concern will not be eligible.

The order states that the tenure of the posts will not be for more than five years at a time, subject to a minimum period of three years at the time of first appointment, unless terminated or removed earlier, and will be eligible for re-appointment. The performance of MD/WTD shall be reviewed by the board annually. Also, the post cannot be held by the same incumbent for more than 15 years. However, after a cooling period of three years, reappointment is possible.

In State’s domain

The petitioner submitted that Bairagarh-based Mahanagar Nagrik Sahakari Bankit was an UCB registered under the MP State Co-operative Societies Act, 1960. The Act governs service conditions of the MD/CEO of the co-operative banks registered under it. It added that the co-operative is part of the State List in the Seventh Schedule of the Constitution while banking is a part of the Union List.

It was argued that the power to legislate co-operative societies falls exclusively with the State and not within the domain of the Union, much less the RBI.

The petitioner’s counsel also submitted that the 97th Constitution Amendment (2011) provided that in case of a co-operative society carrying on the business of banking, the provisions of the Banking Regulation Act 1949 will apply.

This provision was struck down by the Gujarat High Court and recently upheld by the Supreme Court.

The Madhya Pradesh High Court has stayed the operation and effect of the RBI’s order dated June 25. The matter will be listed for further hearing after eight weeks.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , ,

Inclusion of retail and wholesale trade in MSMEs to help UCBs achieve higher PSL target

Banking & Finance

[ad_1]

Read More/Less


The classification of retail and wholesale trade as Micro, Small and Medium Enterprises (MSMEs) has come at an opportune time for urban co-operative banks (UCBs) as they are up against the challenge of a steep rise in priority sector lending (PSL) targets.

The Reserve Bank of India (RBI) had revised upwards the PSL target for UCBs in March 2020 from the then prevailing 40 per cent of net credit target.

So, UCBs had to achieve a PSL target of 45 per cent of net credit by March-end 2021. Further, they have to achieve PSL milestones of 50 per cent by March-end 2022, 60 per cent by March-end 2023, and 75 per cent by March-end 2024.

Bankers in the UCB sector were somewhat anxious whether they can achieve the 75 per cent PSL target by 2024. Now, with the inclusion of retail and wholesale trade within the ambit of MSMEs, this target seems attainable.

Under PSL, banks have to give loans to segments such as agriculture, micro, small and medium enterprises (MSEs), export credit, education, housing, social infrastructure, among others.

Employment opportunities

Satish Marathe, Founder-Member, Sahakar Bharati, and Director, Central Board, RBI, said UCBs will get a big relief as advances to retail and wholesale trade, and traders will now come under PSL.

He emphasised that this will promote self-employment and open up several other employment opportunities.

The classification of retail and wholesale trade as MSMEs was announced by the Government on July 2, 2021. Under the revised guidelines, loans to these segments will be classified as PSL.

Jyotindra Mehta, President, The National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB), said: “This is a good move. Most of the UCBs are mid and small-sized banks. Their loan exposure limit is less.”

“So, by default, the loans these banks give is classified as MSME only. Since retail and wholesale trading has now come under the ambit of MSME, it widens the scope of lending for UCBs.”

Mehta observed that UCBs are cut-out for lending to MSMEs.

As at March-end 2020, the share of PSL in UCBs total advances was 50.4 per cent against 44.2 per cent as at March-end 2019, as per RBI data.

Of the 1,539 UCBs as at March-end 2020, majority (71 per cent) had advances of less than ₹100 crore and about 57 per cent had deposits of less than ₹100 crore.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , ,

Banks under Directions: Govt, RBI working on allowing depositors withdraw up to ₹5 lakh

Banking & Finance

[ad_1]

Read More/Less


Depositors of Urban Co-operative Banks (UCBs), under Directions, may not have to sweat it out to get back their savings up to the ₹5 lakh insured amount, going by the amendments being considered to the Deposit Insurance and Credit Guarantee Act (DICGC), 1961.

The Government and the Reserve Bank of India (RBI) are believed to be examining the feasibility of allowing depositors of banks, especially UCBs, under regulatory Directions to withdraw up to the ₹5 lakh insured amount to alleviate their misery.

 

At present, when a bank is placed under Directions, deposit withdrawals are capped — it ranges from ₹1,000 to ₹1 lakh of the total balance held by a depositor. This withdrawal cap is applicable for the entire period that a bank is under Directions.

Given that depositors of UCBs under Directions are finding it difficult to get by due to the severe restrictions on withdrawal of their savings, the Finance Ministry and RBI seem to be wanting to address this issue by allowing withdrawal up to the insured amount of ₹5 lakh, according to bankers in the co-operative sector.

DIF fortified

The possibility of allowing deposit withdrawal up to the insured amount has brightened with the Deposit Insurance Fund (DIF) swelling to ₹1,10,380 crore at March-end 2020 from ₹93,750 crore of March-end 2019.

 

Further, following the deposit insurance limit being hiked five-fold to ₹5 lakh with effect from February 4, 2020, the deposit insurance premium rate per ₹100 deposit has also been increased to ₹0.12 (or 12 paise) with effect from April 1, 2020 against ₹0.10 (10 paise) earlier.

Since April 1, 2015, 52 UCBs have been placed under All Inclusive Directions by the Reserve Bank, per RBI’s Report on Trend and Progress of Banking in India 2019-20.

Out of the total claims settled by DICGC since inception, around 94.3 per cent of claims pertained to co-operative banks that were liquidated, amalgamated, or restructured.

RBI Directions

Section 35A of the Banking Regulation Act, 1949, empowers RBI to give Directions to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a way prejudicial to the interests of the banking company; or to secure the proper management of any banking company.

A Bank under Directions cannot, without prior RBI approval, grant or renew any loans and advances, make any investment, incur any liability including borrowal of funds and acceptance of fresh deposits, among others.

If such a bank’s license is cancelled by RBI, triggering the commencement of liquidation proceedings, it is only then that depositors are entitled to repayment of their deposits from DICGC up to the ₹5 lakh monetary ceiling.

So far, very few banks under Directions have been revived. The time lag between a UCB first being placed under Directions till its license cancelled is fairly long.

For example, in the case of Mumbai-based CKP Co-operative Bank, it was six years. During this entire period, deposit withdrawal was capped at ₹10,000 per depositor.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , ,

RBI sets up panel to suggest steps for strengthening, consolidating urban co-operative banks, BFSI News, ET BFSI

Banking & Finance

[ad_1]

Read More/Less


Mumbai: The Reserve Bank on Monday set up a committee to draw a vision document for strengthening urban co-operative banks (UCBs) and exploring the potential of consolidation in the sector. The committee, to be headed by former RBI Deputy Governor N S Vishwanathan, will suggest “effective measures for faster rehabilitation and resolution of Urban Cooperative Banks (UCBs) and also assess their potential for consolidation in the sector.”

The panel will “draw up a vision document for a vibrant and resilient urban co-operative banking sector having regards to the Principles of Cooperation as well as depositors’ interest and systemic issues,” said the terms of reference of the committee which will be required to submit its report to the RBI in three months.

The eight-member panel, including former chairman of Nabard Harsh Kumar Bhanwala, will also review the current regulatory and supervisory approach and recommend suitable measures to strengthen the sector, taking into account recent amendments to the Banking Regulation Act, 1949.

As per the terms of reference of the committee, it will “take stock of the regulatory measures taken by the Reserve Bank and other authorities in respect of UCBs and assess their impact over the last five years to identify key constraints and enablers, if any, in fulfilment of their socio-economic objective.”

Among other things, the committee will consider the need for differential regulations and examine prospects to allow more leeway in permissible activities for UCBs with a view to enhancing their resilience.

As part of the Statement on Developmental and Regulatory Policies released along with the Monetary Policy Statement on February 5, the Reserve Bank has announced setting up of an Expert Committee on UCBs to examine the issues and to provide a road map for strengthening the sector, leveraging on the recent amendments to Banking Regulation Act, 1949.

Following the amendment all urban cooperative banks and multi-state cooperative banks have come under the supervision of the Reserve Bank of India.

There are 1,482 urban cooperative banks and 58 multi-state cooperative banks having about 8.6 crore depositors with total savings deposit of about Rs 4.85 lakh crore.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , ,

RBI unveils risk-based internal audit guidelines for select NBFCs, urban co-op banks, BFSI News, ET BFSI

Banking & Finance

[ad_1]

Read More/Less


The Reserve Bank of India (RBI) on Wednesday unveiled the risk-based internal audit (RBIA) system for select non-bank lenders and urban co-operative banks, with a view to enhance the quality and effectiveness of their internal audit system. All the deposit-taking non-banking financial companies (NBFCs) and the ones with an asset size of over Rs 5,000 crore, and urban co-operatives banks (UCBs) with assets of over Rs 500 crore will have to migrate to the new system, the RBI said.

Currently, all the entities supervised by the RBI have their own approaches on internal audit, resulting in certain inconsistencies, risks and gaps in the system, the RBI said.

The NBFCs and UCBs face risks similar to the ones for scheduled commercial banks which require an alignment of processes, it added.

The central bank said the RBIA is an audit methodology that links an organisation’s overall risk management framework. It 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, it added.

The internal audit function is an integral part of sound corporate governance and is considered as the third line of defence, it said.

Historically, the internal audit system at NBFCs/UCBs has generally been concentrating on transaction testing, testing of accuracy and reliability of accounting records and financial reports, adherence to legal and regulatory requirements, which might not be sufficient in a changing scenario.

A shift to a framework which focuses on evaluation of the risk management systems and control procedures in various areas of operations, in addition to transaction testing, will help in anticipating areas of potential risks and mitigating such risks, the RBI said.

RBIA should undertake an independent risk assessment for the purpose of formulating a risk-based audit plan, which considers the inherent business risks emanating from an activity/location and the effectiveness of the control systems for monitoring such inherent risks, it said.

The entities have to implement the RBIA framework by March 31, 2022, and have been asked to constitute a committee of senior executives with the responsibility of formulating a suitable action plan.

The panel may address transitional and change management issues and should report progress periodically to the board and senior management, the central bank said.



[ad_2]

CLICK HERE TO APPLY

69 Comments , , , ,

Budget proposes tax neutral benefit for conversion of UCBs into banking company

Banking & Finance

[ad_1]

Read More/Less


In a move that will help cooperative banks to convert to banks, the Budget has proposed tax exemptions.

It has provided tax neutral benefit for conversion of urban cooperative bank into banking company.

“It is proposed to expand the scope of business reorganisation to include conversion of a primary co-operative bank to a banking company and the deductions available under Section 44DB of the Act shall also be made applicable in relation to such conversion,”said the Memorandum to the Financial Bill.

The Budget has also proposed that transfer of a capital asset by the primary co-operative bank to the banking company as a result of conversion shall not be treated as transfer under Section 47 of the Act. Consequently, the allotment of shares of the converted banking company to the shareholders of the predecessor primary co-operative bank shall not be treated as transfer under the said Section of the Act, it further said.

These amendments will take effect from April 1, and will accordingly apply to the assessment year 2021-22 and subsequent assessment years, it said.

The Reserve Bank of India had, in September 2018, permitted voluntary transition of primary cooperative banks [urban co-operative banks (UCB)] into small finance banks through transfer of Assets and Liabilities.

However, players say that the scheme has till now enthused few cooperative banks.

Vidyadhar Anaskar, President, Maharashtra Urban Cooperative Bank Federation, said the proposal aims to help cooperative banks that have applied to convert to an SFB.

The RBI had in January granted an “in-principle” approval to Shivalik Mercantile Co-operative Bank, an Uttar Pradesh-based multi-state urban co-operative bank, to transition into a small finance bank.

According to a recent statement, Shivalik Small Finance Bank (SSFB) will start its banking operations from April.

With the developments at Punjab and Maharasthra Cooperative Bank, the government and RBI have been working to improve governance and oversight of the co-operative banking system.

[ad_2]

CLICK HERE TO APPLY

7 Comments , , , , , , ,

RBI issues guidelines on risk-based internal audit for NBFCs, UCBs

Banking & Finance

[ad_1]

Read More/Less


The Reserve Bank of India (RBI) on Tuesday issued guidelines on risk-based internal audit (RBIA) framework for Non-Banking Financial Companies (NBFCs) and Primary (Urban) Co-operative Banks (UCBs) which they need to implement by March 21, 2022.

The RBIA framework has been specifically mandated for supervised entities (SEs) — all deposit-taking NBFCs; all non-deposit taking NBFCs (including Core Investment Companies) with asset size of ₹5,000 crore and above; and all UCBs with asset size of ₹500 crore and above — to enhance the efficacy of their internal audit systems and processes.

Also read Regulating NBFCs

RBI asked the SEs to place the RBIA circular before their Board in its next meeting. The implementation of these guidelines as per timeline specified should be done under the oversight of the Board.

The central bank observed that the internal audit function should broadly assess and contribute to the overall improvement of the organization’s governance, risk management, and control processes using a systematic and disciplined approach. The function is an integral part of sound corporate governance and is considered as the third line of defence.

The supervised entities (SEs) will have to move towards a framework which will include, in addition to selective transaction testing, an evaluation of the risk management systems and control procedures in various areas of operations. This will also help in anticipating areas of potential risks and mitigating such risks.

Audit plan and review

Per the guidelines, RBIA should undertake an independent risk assessment for the purpose of formulating a risk-based audit plan which considers the inherent business risks emanating from an activity / location and the effectiveness of the control systems for monitoring such inherent risks.

The RBIA policy must be reviewed periodically. The risk assessment of business and other functions of the organization shall at the minimum be conducted on an annual basis. Every activity / location, including the risk management and compliance functions, shall be subjected to risk assessment by the RBIA, according to the guidelines.

Also read RBI’s norms will enhance stability of NBFC sector: Fitch Ratings

The SEs RBIA policy should also lay down the maximum time period beyond which even the low risk business activities / locations would not remain excluded for audit.

The Audit Committee of the Board (ACB)/ Board should formulate and maintain a quality assurance and improvement program that covers all aspects of the internal audit function.

The quality assurance program may include assessment of the internal audit function at least once in a year for adherence to the internal audit policy, objectives and expected outcomes.

RBI said a consolidated position of major risks faced by the organization needs to be presented at least annually to the ACB/Board, based on inputs from all forms of audit.

Authority and competence

The regulator wants senior management of SEs to ensure that the RBIA function is adequately staffed with skilled personnel of right aptitude and attitude who are periodically trained to update their knowledge, skill and competencies.

RBI emphasised that the internal audit function must have sufficient authority, stature, independence and resources thereby enabling internal auditors to carry out their assignments properly.

The Head of Internal Audit (HIA) shall be a senior executive with the ability to exercise independent judgment. Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the HIA shall be appointed for a reasonably long period, preferably for a minimum of three years.

RBI said requisite professional competence, knowledge and experience — including banking/financial entity’s operations, accounting, information technology, data analytics, forensic investigation, among others.– of each internal auditor is essential for the effectiveness of internal audit function. The collective skill levels should be adequate to audit all areas of the SE.

The SEs may prepare a Risk Audit Matrix based on the magnitude and frequency of risk.

RBI said the internal audit function should not be outsourced. However, where required, experts including former employees can be hired on a contractual basis subject to the ACB/Board being assured that such expertise does not exist within the audit function of the SE.

[ad_2]

CLICK HERE TO APPLY

19 Comments , , , , , , ,