Tag: urban cooperative banks

MP HC stays RBI notification on urban cooperative banks, BFSI News, ET BFSI

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Jabalpur, Sep 6 (PTI) The Madhya Pradesh High Court has stayed an RBI notification related to appointment and removal of managing directors and whole-time directors in Urban Cooperative Banks (UCBs) operating in states.

A division bench comprising Chief Justice Mohammad Rafiq and Justice VK Shukla, while hearing a petition, on Friday (September 3) stayed the Reserve Bank of India (RBI) circular issued on June 25.

The HC has also issued notices to the RBI, the Centre and state governments on the petition filed by Bhopal-based Mahanagar Nagrik Sahkari Bank Maryadit, the petitioner bank’s counsel, Ajay Gupta, said. The court order said, “Issue notice to the respondents on payment of PF (processing fee) within seven days returnable within eight weeks.” “In the meanwhile, operation and effect of the impugned order dated 25.06.2021 qua ((with regard to) the petitioner shall remain stayed”, the HC said.

The Bhopal-based urban cooperative bank has challenged the constitutional validity of the RBI notification. Gupta said the RBI’s order has regulated appointment, re-appointment and removal of managing directors (MDs) and whole-time directors (WTD) of UCBs. Service conditions of MDs and/or Chief Executive Officers of UCBs is governed under the bye-laws of the MP State Cooperative Societies Act, the petitioner’s counsel said.

The cooperative as a subject falls under Entry 32 in List-II – State list – in the Seventh Schedule of the Constitution, whereas the banking falls under Entry 45 in List-I – Union list – of the Seventh Schedule, he said.

Therefore, the power to legislate and regulate UCBs falls exclusively with the state domain and does not lie in the purview of the Union, much less the RBI, Gupta said. “Thus, the RBI order is absolutely incompetent and lacks in authority,” he claimed. The court has granted eight weeks to the respondents to file their replies to the notices issued to them, Gupta added. PTI COR ADU RSY RSY



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Madhya Pradesh High Court stays RBI notification on UCBs

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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.

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RBI wants NAFCUB to expedite setting up of umbrella organisation to support urban co-operative banks

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The National Federation of Urban Co-operative Banks and Credit Societies Ltd (NAFCUB) should expedite the process of setting up the Umbrella Organisation (UO) so that it can provide support with regard to IT infrastructure, capital, liquidity, and training, to its member urban co-operative banks (UCBs), according to a Reserve Bank of India panel.

The small UCBs with the support of the UO can emerge the neighbourhood bank of choice, the RBI’s Expert Committee on UCBs, headed by former Deputy Governor of RBI NS Vishwanathan, said in a report.

“Therefore, the Committee suggests that the grant of new licences for setting up UCBs could be considered after the UO satisfactorily emerges as a stabilising arrangement,” it added.

The committee felt that in the long run, the UO may take up the role of a Self-Regulatory Organization (SRO) for smaller UCBs, where the UO could run an independent audit/ inspection and supervisory division that may conduct both offsite and onsite supervision.

The branding partner

The panel observed that the UO should be the branding partner for the member UCBs and both because of this and the business model itself, it has a significant systemic role.

The committee noted that membership of UO, once it becomes operational, would mitigate market and operational risks for UCBs in lower tiers to a certain extent and, therefore, the capital to risk-weighted assets ratio (CRAR) requirement can be brought down. However, a glide path should be provided to UCBs to achieve the higher CRAR.

UO membership

The report said that if a Tier-1 UCB (with less than Rs 100 crore deposits) meets the minimum net worth criteria of ₹2 crore for those having area of operation within a district/ ₹5 crore for other Tier-1 banks and is a member of UO, the minimum CRAR could be pegged at 9 per cent.

For Tier-1 UCBs, which meets minimum net worth criteria but is not a member of UO, and vice-versa, the minimum CRAR could be 11.5 per cent.

If a Tier-1 UCB does not meet the net worth criteria and is not a member of UO, the CRAR could go up to 14 per cent.

For Tier-2 UCBs (deposits between ₹100 crore and up to ₹1,000 crore), the minimum CRAR could be 15 per cent on credit risk. The minimum CRAR requirement may be reduced by one per cent point upon the bank becoming a member of the UO.

For Tier-3 UCBs (deposits between ₹1,000 crore and up to ₹0,000 crore), the minimum CRAR could be 15 per cent as applicable to small finance banks.

For Tier 4 UCBs (deposits above ₹10,000 crore), the minimum CRAR could as per Basel III prescriptions as applicable to universal banks.

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Banks feel the regulatory heat as RBI imposes penalties amid pandemic shadow, BFSI News, ET BFSI

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As it moves to risk-based supervision, the Reserve Bank of India has stepped up the heat on banks.

In the first half of this year, the central bank has imposed fines of over Rs 43 crore on 23 banks for various regulatory non-compliances and lapses. The RBI had imposed a fine of Rs 20 crore on eight banks in 2020.

After the Nirav Modi scam, RBI had stepped up its surveillance and imposed a hefty Rs 143 crore fine on 49 banks in 2019. While the amount of fine was small individually in 2019, the RBI has increased it multifold as it has fined HDFC BankRs 10 crore, Bank of India Rs 4 core, Punjab National Bank Rs 2 crore and SBI Rs 50 lakh.

In January this year, the central bank had imposed Rs 2 crore penalties on Deutsche Bank and Standard Chartered Bank. It has imposed penalties on various cooperative banks during the year.

Risk based supervison

In May this year the Reserve Bank has decided to review and strengthen the Risk Based Supervision (RBS) of the banking sector with a view to enable financial sector players to address the emerging challenges.

The RBI uses the RBS model, including both qualitative and quantitative elements, to supervise banks, urban cooperatives banks, non-banking financial companies and all India financial institutions.

“It is now intended to review the supervisory processes and mechanism in order to make the extant RBS model more robust and capable of addressing emerging challenges, while removing inconsistencies, if any,” the RBI said while inviting bids from technical experts/consultants to carry forward the process for banks.

In case of UCBs and NBFCs, the Expression of Interest (EOI) for ‘Consultant for Review of Supervisory Models’ said the supervisory functions pertaining to commercial banks, UCBs and NBFCs are now integrated, with the objective of harmonising the supervisory approach based on the activities/size of the supervised entities (SEs).

“It is intended to review the existing supervisory rating models under CAMELS approach for improved risk capture in forward looking manner and for harmonising the supervisory approach across all SEs,” it said.

Annual financial inspection of UCBs and NBFCs is largely based on CAMELS model (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Systems & Control).

The RBI undertakes supervision of SEs with the objective of assessing their financial soundness, solvency, asset quality, governance framework, liquidity, and operational viability, so as to protect depositors’ interests and financial stability.

The Reserve Bank conducts supervision of the banks through offsite monitoring of the banks and an annual inspection of the banks, where applicable.

In the case of Urban Cooperative Banks (UCBs) and NBFCs, it conducts the supervision through a mix offsite monitoring and on-site inspection, where applicable.

A technical advisory group consisting of senior officers of the RBI would examine the documents submitted by the applicants in connection with EOI.



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UCBs fear disruption as RBI’s deadline on the appointment of MDs looms large

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Hundreds of urban co-operative banks (UCBs) may have to change their Managing Directors by August 25, 2021, if the Reserve Bank of India (RBI) does not give them leeway on its directions on the appointment of Managing Director (MD) and Whole-Time Director (WTD), according to an apex body of co-operatives.

The National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB) has requested the RBI to allow incumbent MDs of UCBs to complete their tenure and make its directions on appointment of MD/WTD applicable only to fresh appointments.

The Federation emphasised that the aforementioned arrangement will be least disruptive and also give banks time to comply with the RBI directions.

Jyotindra Mehta, President, NAFCUB, feared that if RBI insists on adherence to the timeline prescribed in the directions, it could lead to a situation where hundreds of banks will need to change their MDs within two months. He emphasised that it will be not easy for the banks to find suitable candidates.

Cooperative vs corporate structure

He observed that while making most of the provisions of the Banking Regulation Act, 1949, applicable to UCBs, RBI has to keep in mind that the directions/ guidelines it issues under these provisions are compatible with the democratic structure of the cooperative banks and their essential cooperative character.

In a letter to RBI Governor Shaktikanta Das, Mehta underscored that this was an assurance given by the Minister in the Parliament during the discussion on the Bill to amend the Banking Regulation Act, 1949, when some members raised apprehensions that the provisions of Bill would allow authorities to undermine cooperative character of cooperative banks.

He opined that this challenge is most evident when it comes to the provisions regarding constitution and powers of board, appointment of chairman and managing director.

“However, it appears that RBI has largely brought about changes through the directions (on Appointment of MD/ WTD) without visualising the disruption it would cause in the sector.

“It has practically incorporated same provisions that are prescribed for banks that have corporate structure,” Mehta said.

Directions

As per the directions, while MDs of UCBs appointed with prior RBI approval in terms of its guidelines on constitution of Board of Management can continue till completion of his/ her tenure or for a period of three years from the date of initial appointment, whichever is earlier, other UCBs have to review the ‘Fit and Proper’ status of the existing MD in terms of the directions.

Such UCBs have to confirm the same, with the approval of Board of Directors, to RBI’s regional offices within a period of two months from the date of the directions, which were issued on June 25, 2021.

The directions prescribe eligibility and propriety criteria, tenure of MD/WTD, procedure for obtaining RBI approval for appointment/ re-appointment/ termination of MD/WTD, among others.

While NAFCUB appreciated the need for steps to be taken to upgrade professionalism and bring in more transparency in the managements of many of the UCBs, it also stated that about 90 per of these Banks are very small sized entities in comparison to commercial banks and pose no major risk to the banking system.

As at March-end 2020, there were 1,539 UCBs in the country. About 88 per cent of these Banks had deposits of less than ₹500 crore and about 93 per cent had advances of less than ₹500 crore.

Appointment vs election of directors

Referring to UCBs management structure being decades old and, in some cases, even over a century old, Mehta said they will need time to change and to adopt concepts such as “appointment” of directors, (as against elected) “CMD”, “WTD” and so on, which are totally alien to them, as they do not exist in cooperative lexicon

The NAFCUB chief feared that suddenly forcing the banks to implement all these concepts all at once would be highly disruptive, inviting chaos.

He said stretching the appointment exercise over a period of time of, say, 4-5 years or more in stages will help the sector.

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Cooperation Ministry: Cooperatives’ financial heft seen behind Centre’s bid for greater control

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There are about 8.5 lakh co-operatives in the country with roughly 38 crore members. Of these, 1,539 are urban cooperative banks (UCBs) and 97,006 rural ones with a combined asset size of as much as Rs 17-18 lakh crore, an official source told FE.

From a tiny wing of the agriculture ministry with less than a dozen employees in a nondescript corner of Krishi Bhawan, the department of cooperation’s morphing into a full-fledged ministry last week, with Amit Shah at its helm, is seen as having not just political but economic ramifications.

There are about 8.5 lakh co-operatives in the country with roughly 38 crore members. Of these, 1,539 are urban cooperative banks (UCBs) and 97,006 rural ones with a combined asset size of as much as Rs 17-18 lakh crore, an official source told FE.

These cooperative banks, both urban and rural, account for an overwhelmingly large share of the cooperative sectors’ finances. While many of them are starved of capital and riddled with management woes, the co-operative banking sector, as a whole, still retains much financial as well as political clout over voters at the critical grassroots level. Against this backdrop, the Centre’s bid to regulate policies governing co-operatives through the new ministry assumes significance.

Some of the large UCBs are cash-rich, and this makes them a potent financial force. The deposit base of UCBs stood at Rs 5 lakh crore as of March 2020 (deposits constitute about 90% of the cooperatives’ resource base). Their loan portfolio was as high as Rs 3 lakh crore at the end of FY20, constituting a sizeable share of credit flow in the overall cooperative sector, mainly to agriculture.

Similarly, the UCBs’ cash reserves grew 7.9% on year to Rs 5,812 crore in FY20 and balances with banks rose 8.6% to Rs 66,212 crore. Their investments stood at Rs 1.62 lakh crore in FY20, 60% of which were in central government securities and another 27% in state government papers. Their asset size stood at Rs 6.2 lakh crore as of March 2020.

Once the financials of rural co-operative banks are included, the asset size sees a substantial jump. These rural co-operatives make up 65% of the total asset size of all co-operative banks put together, according to an RBI assessment.

Given the financial prowess of many of the co-operatives and the sheer large number of their members, the political parties that exercise considerable control over them potentially have a significant advantage over others in times of elections. For instance, the Congress and the NCP have tremendous clout over them in Maharashtra, the BJP in Gujarat and the Left parties in Kerala.

No wonder, opposition parties have called the move to carve out the ministry of cooperation from the agriculture ministry a “political mischief” and an onslaught on the country’s federal structure. Co-operatives, being a state subject (the Union government’s role is mostly restricted to multi-state co-operative societies), should be overseen by the states and the new ministry must not be used to usurp their power or curb their innovation, they say.

For instance, to fund development activities and ease credit flow to farmers, Kerala formed the Kerala Cooperative Bank (KCB) (branded Kerala Bank) by merging district cooperative banks. The KCB is now the country’s largest cooperative bank with as many as 820 branches. The state’s ministry of cooperation lists as many as 11,892 cooperative societies that function across sectors, including agriculture, dairy, industry and services such as banking and hospitality.

More importantly, many of the cooperatives, thanks to their opaque structure and severe governance issues, are allegedly used to funnel black money. The crisis at the Punjab Maharashtra Co-operative (PMC) Bank and some others in recent years are a testament to it.

Of course, the government last year amended the Banking Regulation Act to bring urban and multi-state co-operative banks under the RBI regulation. While the move aims to protect the interests of depositors and better scrutinise the affairs of these cooperative banks, given the enormity of the task, strict supervision and regulation will take some time to evolve to the desired standards. Moreover, the sphere of the RBI regulation is limited to only those offering banking services and doesn’t cover the entire universe of co-operatives.

According to the notification issued by the government, the new ministry will deal with general policy in the field of cooperation while other relevant ministries will be responsible for cooperatives in their respective fields. For example, IFFCO will continue to be driven by the policies of the fertiliser ministry and Gujarat Cooperative Milk Marketing Federation (Amul) by the dairy ministry. Agri cooperative Nafed, which undertakes the procurement of oilseeds and pulses, will remain with the agriculture ministry.

So, the new ministry will get to oversee the central registrar of cooperative societies that regulate and govern all multi-state cooperative societies, a function that was earlier undertaken by the agriculture ministry.

The step assumes significance as some of the financial companies were allegedly converted to multi-state cooperatives to evade regulating authorities like RBI and Sebi.

As of December 2020, there were 1,469 registered multi-state co-operative societies. Maharashtra led the pack of states with 622 of them, followed by Delhi (153), Uttar Pradesh (149), Tamil Nadu (124) and Rajasthan (74).

Rejecting criticism of the move, government officials say the much-neglected co-operative sector will get its due share of attention now following the formation of a dedicated ministry and catalyse a bottom-up growth approach. It will bolster the country’s cooperative movement and deepen its reach at the grassroot level, they add.

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RBI prescribes qualifications for MDs, WTDs of urban cooperative banks, BFSI News, ET BFSI

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The Reserve Bank on Friday prescribed educational qualifications and ‘fit and proper’ criteria for managing directors (MDs) and whole-time directors (WTDs) of primary urban cooperative banks and barred MPs and MLAs from these posts.

Issuing the guidelines for appointment of MDs and WTDs, the RBI said MPs, MLAs and representatives of municipal corporations will not be eligible to hold such positions in the primary urban cooperative banks (UCBs).

It further said the MD/WTD should be a post graduate or have qualifications in finance discipline. He or she could be either chartered/cost accountant, MBA (finance) or have a diploma in banking or cooperative business management.

The person should not be below 35 years of age or more than 70 years, it added.

“The person shall 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 notification said.

Besides MPs, MLAs and representatives of municipal corporations and local bodies, persons engaged in business, trade or having substantial interest in any company too will not be eligible for appointment to such positions.

Regarding the tenure of appointment, it said the person can be appointed for a maximum of five years and will be eligible for re-appointment.

However, it said the MD or WTD will not hold the post for more than 15 years. After that, the person, if necessary, may be re-appointed after a three-year cooling period.

It further said the “UCBs whose existing MD/CEO has completed a tenure of five years may approach RBI either to seek re-appointment of the incumbent, if he/she is eligible, or for appointment of a new MD/CEO, within a period of two months…”.

In case a UCB decides to terminate the services of MD/ WTD before the expiry of tenure, it will have to seek prior approval of the Reserve Bank.

The directions are applicable to all Primary (Urban) Co-operative Banks, the RBI said.

In a separate circular, the RBI mandated the appointment of Chief Risk Officer (CRO) by UCBs with asset size of Rs 5,000 crore and above.

It is necessary that every UCB focuses its attention on putting in place appropriate risk management mechanism commensurate with its business profile and strategic objectives, it said.

“In this connection, it has been decided that all UCBs having asset size of Rs 5,000 crore or above, shall appoint a Chief Risk Officer (CRO). The Board must clearly define the CRO’s role and responsibilities and ensure that he/she functions independently,” the circular said.

The CRO should have direct reporting lines to MD/CEO or Board or the Risk Management Committee of the Board (RMC), it added.



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

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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.



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