Tag: Urban Co-operative Banks

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

Banking & Finance

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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.

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RBI committee suggests measures to strengthen the Urban co-operative banks, BFSI News, ET BFSI

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Larger urban co-operative banks may be allowed to issue stock exchange tradable instruments to shore up capital and allow them to function as an universal bank according to the recommendations of an Expert Committee on Primary (Urban) Co-operative Banks which also suggests more enabling regulations giving their role in enhancing financial inclusion.

The committee headed by former deputy governor N S Vishwanathan, suggesting a four tiered structure based on the size of deposits recommends setting up of an Umbrella Organisation with a minimum capital of Rs 300 crore to help smaller co-operative to acquire scale and help with capital and liquidity support whenever needed.

In the long run, the umbrella organisation -UO- may take up the role of a Self-Regulatory Organization (SRO) for smaller UCBs where the organisation could run an independent audit/inspection and supervisory division. Once the UO stabilizes, it may explore the possibilities of converting into universal bank and offer value-added services on behalf of its member banks. An UCB could get an incentive of lower capital requirement if it is a member of the UO

The committee also seeks to address capital raising constraints of larger UCBs banks by facilitating issue of tradable securities . It suggests that RBI declare certain securities issued by UCBs eligible to be covered under the Securities Contract Regulation Act to facilitate their listing and trading in a recognised stock exchange may be made. ” Till such time, the RBI may consider allowing banks in Tier 3 and 4, having the necessary technology and wherewithal, to issue shares at premium to persons residing in their areas of operation subject to certain conditions” the RBI report said. This is significant in the context of the recent collapse of PMC Bank where its capital was almost wiped out.

The Committee felt that a liberal regulatory approach may be adopted for UCBs that meet a certain minimum level of capital and reserves (net worth) and CRAR requirements.

A Tier-4 UCB with a deposit base of over Rs 10,000 crore which meets both the entry point capital and CRAR requirements applicable to universal bank may be allowed to function on the lines of a universal bank if RBI is satisfied that it meets the financial requirements and has a fit and proper Board and CEO.

Given that UCBs have the potential of driving financial inclusion and credit delivery to those with limited means, the committee felt that regulatory policies can now be more enabling.

At the same time, there were divergent views on allowing the UCBs to convert into joint stock companies. One view was that conversion of UCBs into banking companies is against the co-operative principles as the retained earnings in co-operative structure cannot be distributed.

A contrary view was that voluntary conversion after a well-informed decision taken by the General Body of the UCB in a democratic manner should not be barred by regulation, particularly where the underlying legislation is not restrictive on the use of retained earnings.



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RBI guidelines require banks, UCBs and NBFCs to appoint auditors for 3 years

Banking & Finance

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The Reserve Bank of India (RBI) on Tuesday issued guidelines for appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) in commercial banks, urban co-operative banks and non-banking finance companies from FY22 onwards, whereby they will have to appoint SCAs/SAs for a continuous period of three years.

RBI guidelines regarding appointment of SCAs/SAs will be implemented for the first time for urban co-operative banks (UCBs) and non-banking finance companies/NBFCs (including housing finance companies) from FY 2021-22.

However, UCBs and NBFCs will have the flexibility to adopt these guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption.

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Non-deposit taking NBFCs with asset size (total assets) below ₹1,000 crore have the option to continue with their extant procedure.

Commercial banks (excluding Regional Rural Banks/RRBs) and UCBs will be required to take prior approval of RBI (Department of Supervision) for appointment/reappointment of SCAs/SAs on an annual basis.

RBI tightens internal audit framework for NBFCs, UCBs

While NBFCs do not have to take prior approval of RBI for appointment of SCAs/SAs, all NBFCs need to inform RBI about the appointment for each year.

For entities (commercial banks. UCBs, and NBFCs) with asset size of ₹15,000 crore and above as at the end of previous year, the statutory audit has to be conducted under joint audit of a minimum of two audit firms [Partnership firms/Limited Liability Partnerships/LLPs].

All other entities have to appoint a minimum of one audit firm (Partnership firm/LLPs) for conducting statutory audit.

Entities need to ensure that joint auditors do not have any common partners and they are not under the same network of audit firms.

Asset size and numbers

The RBI said the entities should decide on the number of SCAs/SAs based on a board/local management committee (LMC) approved policy by taking into account factors such as the size and spread of assets, accounting and administrative units, complexity of transactions, level of computerisation, availability of other independent audit inputs, identified risks in financial reporting, etc.

The central bank prescribed that an entity with an asset size up to of ₹5 lakh crore can have a maximum of 4 SCAs/SAs; above ₹5 lakh crore and up to ₹10 lakh crore: maximum of 6 SCAs/SAs; above ₹10 lakh crore and up to ₹20 lakh crore: 8 SCAs/SAs and above ₹20 lakh crore: 12 SCAs/SAs.

In case of any concern with the management of the entities, such as non-availability of information/non-cooperation by the management, which may hamper the audit process, the SCAs/SAs are required to approach the Board/Audit Committee of the Board/Local Management Committee of the entity, under intimation to the concerned Senior Supervisory Manager (SSM)/Regional Office (RO) of RBI.

Concurrent auditors of the entity should not be considered for appointment as SCAs/SAs of the same entity.

The central bank emphasised that the audit of the entity and any entity with large exposure to the entity for the same reference year should also be explicitly factored in while assessing independence of the auditor.

Tenure and rotation

In order to protect the independence of the auditors/audit firms, the RBI said that entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year.

Further, commercial banks (excluding RRBs) and UCBs can remove the audit firms during the three-year period only with the prior approval of the concerned office of RBI (Department of Supervision), as applicable for prior approval for appointment.

NBFCs removing the SCAs/SAs before completion of three years’ tenure have to inform the concerned SSM/RO at RBI about it, along with reasons/justification for the same, within a month of such a decision being taken.

An audit firm would not be eligible for reappointment in the same entity for six years (two tenures) after completion of full or part of one term of the audit tenure. However, audit firms can continue to undertake statutory audit of other entities.

The RBI said one audit firm can concurrently take up statutory audit of a maximum of four commercial banks [including not more than one PSB or one All India Financial Institution (Nabard, SIDBI, NHB, Exim Bank) or RBI], eight UCBs and eight NBFCs during a particular year.

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Road ahead for co-operative banks

Banking & Finance

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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.

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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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