RBI's Annual Policy Statement for the year 2006-07 (Urban Co-operative Banks)

(a) Vision Document for UCBs
As envisaged in the draft Vision Document for UCBs, the Reserve Bank has signed Memoranda of Understanding (MoUs) with four State Governments, viz., Andhra Pradesh, Gujarat, Karnataka and Madhya Pradesh with a view to facilitating the development of the UCB sector. The Reserve Bank has also constituted Task Forces for Urban Co-operative Banks (TAFCUBs) in these States in order to provide for a structured arrangement for co-ordination and consultation as well as professionalisation of management of UCBs. The TAFCUBs have so far considered the financial position of the UCBs and made various recommendations on the future course of action. Based on the recommendations, the Reserve Bank has granted licence to four unlicenced banks in Gujarat and Andhra Pradesh. Based on the positive experience of the TAFCUBs, it is proposed:

• to widen the scope of TAFCUBs to cover the scheduled UCBs registered in the State concerned and set up a similar forum for regulatory co-ordination in respect of scheduled UCBs registered under the Multi-State Cooperative Societies Act.

(b) Regulatory Framework
The Reserve Bank has given effect to the two-tiered regulatory structure by permitting the UCBs with deposit base of less than Rs.100 crore and having branches within a single district to adopt 180 days delinquency norm for NPA classification till March 2007. These banks are also eligible for partial exemption (not exceeding 15 per cent) from the prescribed SLR of 25 per cent to the extent of funds invested in interest-bearing deposits of public sector banks. Consequently, these banks can obviate market risks associated with investment in government securities. Based on the representations received, UCBs have been given modified guidelines for valuation of securities transferred from AFS category to HTM category.

(c) Augmenting Capital of UCBs
Share capital and retained earnings constitute the owned funds of co-operative banks. Share capital can be withdrawn by members after the minimum lock-in period and does not have the permanence of equity. Co-operative banks are also not allowed to issue shares at a premium.
In order to explore various options for raising regulatory capital, it is proposed:

• to constitute a Working Group comprising representatives of the Reserve Bank, State Governments and the UCB sector to examine the issues involved and identify alternate instruments/avenues for augmenting the capital funds of urban co-operative banks.

(d) Consolidation in the UCB Sector
The Reserve Bank had issued guidelines on merger/amalgamation in UCB sector in February 2005 with a view to facilitating emergence of strong entities and providing an avenue for non-disruptive exit of unviable entities. Further, relaxations in this regard were announced in the Mid-term Review of October 2005. The Reserve Bank has given 'no objection certificate' for 13 merger proposals since then, of which four have already taken effect. The remaining proposals are under various stages of consideration/ operationalisation by the Registrars of Co-operative Societies of the respective States. The Reserve Bank has received seven more proposals that are under examination.

(e) Delivery of Services to UCB Customers
The Reserve Bank has issued instructions permitting UCBs in States where MoUs have been signed and those registered under the Multi-State Co-operative Societies Act to offer mutual fund products, as agents, to their customers subject to certain conditions. It is further proposed:

• to allow well managed scheduled and non-scheduled UCBs to open select off-site/on-site ATMs, based on the recommendation of the TAFCUBs.

(f) Settlement of Depositors' Claims
In respect of UCBs whose licences are cancelled, the preparation, submission and settlement of claims and recoveries from assets for distribution are delayed due to the involvement of several agencies and stages in the process of liquidation. In order to ensure appropriate co-ordination between agencies and to expedite the process of settlement of claims and recovery of dues in those UCBs whose licences are cancelled, it is proposed:

• to set up a sub-committee of the TAFCUB to review the progress made by the liquidator in settlement of claims, recovery of dues and repayment to DICGC and other creditors including depositors.

Mid-Term Review of Annual Policy for the year 2006-07 (Urban Co-operative Banks)

(a) Vision Document for UCB
149. Pursuant to the draft vision document for Urban Co-operative Banks (UCBs), the Reserve Bank has been entering into Memoranda of Understanding (MoU) with State Governments with a view to putting in place a structured arrangement for co-ordination between the State Government and the Reserve Bank to address the problem of dual control. The Reserve Bank has signed MoU with four State Governments, namely, Uttaranchal, Rajasthan, Chhattisgarh and Goa in addition to the earlier MoU signed with four State Governments, viz., Andhra Pradesh, Gujarat, Karnataka and Madhya Pradesh. Task Forces for Urban Co-operative Banks (TAFCUBs) in these States have been constituted by the Reserve Bank and consultative processes are in operation.

(b) Conversion of Extension Counters into Full-Fledged Branches
150. In view of the regulatory co-ordination brought about through signing MoU with State Governments and based on the positive experience of the TAFCUBs, it is proposed:
o to allow financially sound UCBs registered in States that have signed MoU with the Reserve Bank and those registered under the Multi-State Co-operative Societies Act, 2002 to convert existing extension counters into full-fledged branches subject to certain conditions. Guidelines in this regard would be issued separately.

(c) Innovative Options for Augmenting Capital of UCBs
151. As indicated in the Annual Policy Statement of April, 2006 a Working Group (Chairman: Shri N.S. Vishwanathan) comprising representatives of the Reserve Bank, State Governments and the UCB sector was constituted to explore various options for raising regulatory capital funds of UCBs and identify alternate instruments/avenues for augmenting the capital funds. The Group has since submitted its report which would be placed in the public domain for feedback.

(d) Fair Practices Codes for Lenders
152. UCBs play an important role in meeting the credit needs of small and medium enterprises and retail traders. They also cater to housing loan requirements predominantly under the priority sector. The UCBs are also eligible institutions for applicability of SARFAESI Act. In this context, it is important for UCBs to draw up and implement a Fair Practices Code for Lenders with a view to putting in place a fair and transparent mechanism for sanction, disbursal and recovery of loans. Accordingly, it is proposed that:

• the Reserve Bank, taking into consideration the State specific environment and needs, would place a model draft Fair Practices Code for consideration of TAFCUBs set up in the States that have signed MoUs for deliberation and adoption

1. Opening of branches, extension counters and ATMs by UCBs
RBI's decision not to issue licenses to urban cooperative banks to open branches/extension counters/ATMs and also not to give approval for registering any new banks is in force now for over 4 years. The decisions of RBI was to be effective till acceptable regulatory framework was put in place. Subsequently a MoU route was proposed and adopted by RBI. Three of the 4 major states have already signed MoU and decks are clear for signing by the 4th state also. There is therefore no reason for RBI not permitting natural growth of sound urban banks. Even in the event of the banks being freely permitted to open branches/extension counters/ATMs, they will have a lot of catching up to do on account of opportunities lost in the last 3 years, which wee very momentous years for the Indian Banking Industry and for Indian economy as a whole. RBI, therefore, can make announcement in the Annual Policy to resume giving licenses for branches/extension counters/ATMs at least to all the banks that are categorized as Gr.I or Gr.II. This could be the most important policy announcement that the sector is waiting for during the last 3 years.

2. Permission for formation of new urban cooperative banks
As for the resumption of permission for registering new urban banks, it needs to be addressed from the point of removing huge geographical imbalance in the sector. Perhaps two criterion, one for the five states of Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu and the other for the rest of the states may have to be evolved. Strong and well-managed scheduled urban banks may be encouraged to open branches in the capitals/main cities of states, which have very little presence of urban cooperative banks in the first stage. After that they may be given all facilities and support to organize new banks in different parts of particular state's, by being one of the promoters. This may require some changes in the law. This route of expansion of urban banks, which is very much needed to fulfill the goals of financial inclusion of the population, will ensure that the newly formed banks will be organized on sound footing. A policy announcement on resumption of issuance of new banks licenses with a view to correct geographical imbalance and for wider coverage by urban banks is requested.

3. Avenues for raising capital
Budget proposal to amend Sec.80(P) of Income Tax Act that has now been passed by the Parliament has brought in sharp focus the absence of any appreciation for cooperative institutions being different from commercial ones. Taking away a significant part of the limited surplus of cooperative banks by way of tax will definitely affect the growth of profit making banks. The present system of capital formation and the system of withdrawable nature of the share capital by members of cooperatives are major constraint in their rapid growth. Raising share capital only from members is very inadequate. Unless this issue is addressed, cooperative banks may not take their rightful place in the banking scenario in the country. The last meeting of SAC discussed the issue and suggested formation of a committee to study the issue in all its entirety and to give recommendations. The subject will attract wider discussions if it finds mention in the Annual Policy Statement. It is requested that capital formation of urban cooperative banks is taken up for mention in the statement and for further action.

4. Investments in G-Secs.
RBI is kindly requested to permit UCBs to categories investments in G.Secs upto 40% of NDTL as held to maturity for at least 3 years to tide over the difficulty they are facing on account of excess holdings in gilts that are presently illiquid and have depreciated sharply over the last 18 months. The banks can exit only when the yields start going southwards again. Till then, they require sympathetic treatment from the Regulator by some supportive relaxations from time to time. As a large number of banks are affected, any decision will have far reaching impact on the sector.

5. Gold Loans tailored to the needs of weaker sections
Across the country and in all the states, there is a practice of people borrowing from private moneylenders against security of gold/ornaments. The gold loans or jewel loans being granted by urban banks require quarterly payment of interest/ installment, which is not very popular with people. In order to bring a sizeable portion of that population which is in the category of 'financially excluded' and which is nevertheless borrowing from private moneylenders, into the fold of banking, the RBI should permit urban cooperative banks to tailor their gold loan schemes to match that offered by the moneylenders. The urban cooperative banks should be permitted to sanction loans with bullet repayment of loan amount and interest at the end of, say, 12 months or 24 months. Further, the present provisioning norms of classifying loans against 'gold-ornaments' as against 'other assets' and requiring to provide 100% needs to be reviewed. These measures could be considered and announced in the policy statement.

6. Mergers and Amalgamations
The acceptance of mergers amongst urban cooperative banks by the sector has been a pleasant surprise as cooperatives being democratic organizations, mergers are not generally considered and very feasible route for consolidation. However, the mergers have been encouraged to some extent by denial of banks by RBI to take up natural expansion. This situation cannot go on for long and the UCBs need to grow on their own. Under these circumstances the strong banks, which offer to take over weak banks, could be given incentives by way of sanctioning offsite ATMs or specific branches required by the banks. etc.

7. Assistance for acquisition of IT hardware by UCBs
As per the MoU, one of the development aspects of RBI's initiatives in respect of UCBs would be to support them in becoming IT enabled so as to be in sync. with the rest of the banking industry. Many of the institutions are small and financially not very strong to invest in software and hardware. Technology up gradation must take place say, in the next 12 months or so. RBI must consider helping these banks and their Federations by financially supporting their hardware acquisition programmes. An announcement on this subject will be welcome.

Ref.No.: NF/R-1/2006-07/ Dated : April 20, 2006
Madam Thorat,

Sub : Annual Policy Statement : 2006-07
We would like to thank the Governor, RBI and yourself for the RBI's Annual Policy Statement 2006-07, continuing the forward momentum to the consultative approach to regulatory aspects of urban cooperative banks. NAFCUB is happy that the forum of TAFCUB is being encouraged by widening its scope, as also by bringing scheduled cooperative banks under TAFCUB.

Announcement of formation of working group to identify alternate instruments/ avenues for augmenting the capital funds of urban cooperative banks, as was discussed at the SAC, will hopefully set in motion the process of establishing connection of cooperative banks with markets.

The announcement of initiative to be taken by RBI in consolidation of illiquid securities will also help the urban cooperative banks in taking steps to find a solution to their illiquid holdings.

However, the Federation and the sector have been eagerly looking forward to announcement of resumption in issuance of branch licenses by RBI. The announcement made in this regard permits urban cooperative banks only to have on-site/off-site ATMs on the recommendation of TAFCUB. While the direction towards gradual relaxation is appreciated, the Federation is worried that not permitting branches to well-managed banks any longer will affect their future growth very adversely. They have already lost out in competition during the last 3 years. The anxiety of RBI to encourage banks to take consolidation route should not result in denial of branch licenses for such long periods, to those banks which are not in a position to take over other banks.

The Federation, therefore, earnestly request RBI to kindly appreciate Federation's view point and resume issuance of licences for opening of branches/extension counters to all well-managed banks.
With kind regards,
Yours sincerely,

(D. KRISHNA)
Smt. Usha Thorat
Deputy Governor
Reserve Bank of India
Central Office
Shaheed Bhagat Singh Marg
Mumbai