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

1. Revision in categorization of banks in the two tiers
All urban banks with deposits of Rs.100 crores or less but having a few branches in the contiguous districts need to be categorized as Tier-I banks.

The issue was discussed at the pre Annual Policy Meeting in April 2007 and the Governor was kind enough to say that the issue could be looked at in respect of those banks whose branches outside the single district do not account for significant part of banks' business, say, it could be less than 25%.

It is requested that the announcement in this regard may kindly be made in the Mid Term Review.

2. Resumption of consideration of applications for formation of new urban cooperative bank:
From 2002 onwards, RBI has stopped considering any applications for formation of new urban cooperative banks along with stoppage of issuance of licenses for opening new branches of existing banks.

Five years of the complete ban has apparently served its purpose and continuation of this policy even with a reason of being overcautious, given the experiences of recent past, will be counter productive, in the long run, for this extremely important grass roots segment of the country's banking industry. Urban cooperative banks are presently, the single most important group of financial intermediaries of their kind with direct involvement of common man in banking process and management, that have the potential to be soundly managed with collective responsibility in a transparent manner. They are responding encouragingly to the regulatory tonics being administered by the RBI from time to time. Not withstanding the known and perceived shortcomings, the sector is making significant contribution to the economy of the states where it has good presence. It is delivering credit essentially to those strata of society which require credit badly, and is in a position to do meaningful exercise of financial inclusion, beyond just "the number of no frills accounts opened" exercises.

In view of this, it is time that applications for new banks are taken up, particularly in states where the presence of the banks is thin. Due care may be exercised in evaluating the proposals and in studying the capabilities of the persons promoting the organization, before giving approvals. It is suggested that the scope of TAFCUBs be extended to study and approve the proposals of new banks, and branches of existing banks in addition to those of ATMs that they are approaching now.

The Federation and the sector feel that absence of issuance of branch licenses in a meaningful way and continued ban on registering of new banks will weaken the sector and it could be a handicap in its efforts to compete for space in the fast growing financial sector.

3. According Scheduled Status to eligible UCBs
Issue of according scheduled status to those of the strong urban banks that have applied for the same to RBI was raised at the last pre Annual Policy Meeting. While the banks are aware of additional regulatory requirements to be complied with, some of them, nevertheless are particular about the RBI taking a decision on their applications which are pending for years. With CRAR and profitability norms having been comfortably exceeded, some of the banks who have applied are working with gross NPA of even less then 1%. Considering the fact that cooperative banks have very scope of writing off principal in loan balances, this achievement speaks volumes of credit judgment of the banks. It would be unfair to deny them the scheduled status that they are asking for, under any reasoning. It is therefore requested that announcement of commencement of provision of according scheduled status to banks on selective basis be kindly made in the mid term review.

Other Issues
In addition to the above unaddressed issues flagged by the Federation in the last pre Policy Meeting, the Federation would request the Governor to kindly consider examining the following issues to make suitable announcements.

1. Interest on CRR balances
For various reasons that are well known to the RBI, the profitability of cooperative banks, both rural ad urban, are thinner than those of commercial banks. Therefore, the requirements of maintaining CRR that does not earn any interest affects the urban banks. The amount of loss is sizeable in case of scheduled urban cooperative banks. RBI is requested to consider making provision for CRR balances of UCBs to be paid interest.

2. Report of Working Group on access to payment system
The report recommends denial of access to payment system, as direct members of clearing house at MICR centres, to banks which do not comply with financial criteria of 9% CRAR, less than 10% net NPA, no default in CRAR & SLR in one year and net profit in at least one of the two preceding years. However, SCBs, DCCBs & RRBs have been given exemptions in this regard while UCBs will have to fulfill all the conditions in order to stay as direct members in the MICR clearing houses.