Mid-Term Review of Annual Policy Statement 2007-08 (part-II)

Suggestions from NAFCUB for the Urban Cooperative Banking Sector

Annual Policy Statement for 2007-08 contained the following announcements for urban cooperative banks under head institutional developments.

1. Resumption of issuing licenses to urban cooperative banks to open branches.
2. Consideration or recommendations of Committee on alternative avenues of raising capital by urban cooperative banks.
3. Extension of time by one year the existing relaxed prudential norms applicable to Tier-I and Tier-II banks.
4. Permission to all Grade-I and Grade-II banks with a net worth of Rs.10 crores and registered in a state that has signed MoU with RBI or under Multi State Cooperative Societies Act 2002, to undertake insurance business as corporate agents, without risk participation.
5. a) DICGC to take active steps to reduce the delays in release of payments to insured depositors of banks that are taken to liquidation.
b) DICGC to treat two or more joint accounts with same names but in different order in the bank or in different branches of the bank as different accounts for DICGC claims.

Other announcements that have had beneficial bearing on urban banks were :

1. Reduction of risk weight on loans up to Rs.1.0 lac against gold and silver ornaments to 50 per cent from the existing level of 125 per cent to all categories of banks.

2. Reduction in risk weight on residential housing loans to individuals from existing 75 per cent to 50 percent for loans up to Rs.20 lacs, up to one year for the present.

NAFCUB would like to make submissions in respect of these announcements.

1. Branch Licensing Policy
The operational circular of RBI in respect of the announcement is highly discriminatory to almost 90% of the urban banks. As the Federation and the sector are not in concurrence with the reasoning behind the contents of the circular, we have taken up the issue with the RBI. Quite simply, any policy that prevents more than 1600 out of 1830 banks from even seeking to open a single branch, according to the Federation, is not in the interest of the sector. This needs to be reviewed with some urgency.

2. Avenues of raising Capital
No guidelines have yet been issued in this regard. It is suggested that in respect of those instruments where RBI has identified legal or other difficulties, meetings of the Federation, select State Governments and RBI may be convinced to find solutions while other instruments may be cleared without delay for operationalisation.
 

3. Extension of relaxed prudential norms for Tier-I & Tier-II banks for one year
It is being submitted repeatedly by the Federation that a permanent relaxation for Tier-I banks, in respect of all their loans and for Tier-II banks, for their loans of up to Rs.1 lac, is being sought primarily not because of the time required for the banks to migrate to more stringent norms gradually, but in recognition of the following.

i) The profile of a substantially large part of urban banks' loan clientele is that of 'higher risk category' on account of the high dependence on agricultural production in the area. Small borrowers, retailers, customers in small towns are all dependent on the success of agricultural production.
ii) Since the urban banks are local organizations having branches in 1-2 districts generally, they have no opportunity to spread their risk across geographical areas, which is in addition to the higher risk of their limited types of clients.

Therefore the relaxed norms should be made applicable at least for a block of 5 years instead of one year as things are not going to change much in one year. Migration of all these clientele taken together from high risk to lower or normal risk category would require many changes in the economy including creation of better infrastructure facilities in those areas.

4. Insurance Business Corporate Agents
The permission granted to urban cooperative banks to undertake insurance business as corporate agents without risk is limited to only those banks that have net worth of Rs.10 crores. The Federation has contended that by putting this ceiling, the RBI has again denied the small urban banks to source some non-fund based business that would improve their earnings and profitability. Apparently, the business of agency does not involve any risk and even small urban banks with Rs.1crore net worth, being legal entities, are in a better position than individuals who are also permitted to take up insurance agency. There is apparently no rationale in linking the permission to banks with Rs.10 crores net worth and above. Requirements of banks being Grade-I or Grade-II is sufficient safeguard to take care of any contingency arising out of their undertaking the insurance agency work. It is submitted that the net worth requirement be kindly dropped.

In its submission at the pre Annual Policy 2007-08 meeting with the Governor, the Federation had requested consideration of the following points, which have not yet been taken up by RBI.