Report of Expert Committee on Licensing of New Urban Co-operative Banks

The Reserve Bank of India  placed  the Report of Expert Committee on Licensing of New Urban Co-operative Banks (Chairman:Shri Y.H. Malegam). Suggestions and comments on the Report may please be forwarded by October 31, 2011 to the Chief General Manager-in-Charge, Urban Banks Department, Reserve Bank of India, Central Office, Garment House, First Floor, Dr. Annie Besant Road, Worli, Mumbai 400 018 (Fax No. 022-24974030) or emailed.

The main recommendations of the Expert Committee are:

  • UCBs play a useful role and there is need for a greater presence of UCBs in unbanked districts and in centers having population less than 5 lakh. It is necessary to encourage new entrants to open banks and branches in States and Districts which are unbanked or inadequately banked. It is equally necessary to discourage new entrants from opening branches in Districts and population centers which are already adequately banked.
  • The existing well managed co-operative credit societies meeting certain financial criteria like profits, capital adequacy, NPAs™ proportion etc. should be given priority for granting licenses as urban co-operative banks particularly in unbanked or inadequately banked centers.

Entry Point Capital Prescription

The proposed entry point norms for the new UCBs are as under:

 

S.No.

Particulars

Minimum Capital

(a)

UCBs operating in only one state in

` 50 Lakh

(i) North Eastern Regions
(ii) In other States but confined to unbanked districts
(iii)

In other States but confined to ˜C™ and ˜D™ category population centers of banked districts

(b)

UCB operating in only one State with 50% or more branches in ˜C™ and ˜D™ category population centers

` 100 lakh

(c)

UCB operating in only one State but without requirement to have branches in ˜C™ and ˜D™ category population centers

` 300 lakh

(d)

UCBs which wishes to operate in more than one State after five years of successful operations

` 500 lakh


Note : (1) In respect of existing co-operative credit societies opting to be converted in to UCBs, the minimum capital required will be as per norms prescribed above or as per RBI™s per branch head room capital prescription, whichever is higher,

(2) Unbanked District means a District without any existing UCB.

Organization Structure of New UCBs

  • There should be segregation of the ownership of the UCB as a co-operative society from its functioning as a bank. The new organization structure shall consist of a Board of Management in addition to the Board of Directors.
  • The Board of Directors (BoD) would be elected in accordance with the provisions of the respective Co-operative Societies Acts and would be regulated and controlled by the RCS / CRCS.
  • The (BoD) will establish a Board of Management (BoM), consisting of persons with professional skills, which shall be entrusted with the responsibility for the control and direction of the affairs of the Bank assisted by a CEO who shall have the responsibility for the management of the Bank.
  • RBI would have unfettered powers to control and regulate the functioning of the UCB and of its BoM and of the CEO in exactly the same way as it controls and regulates the functioning of the Board of Directors and the Chief Executive in the case of a commercial bank.
  • It should be made a condition of the license that every new UCB should be required to have a Board of Management (BoM) to be appointed by the Board of Directors (BoD) and a Chief Executive Officer (CEO) to be appointed by the BoM. While the BoD will be responsible for laying down the broad contours of strategy, the BoM will be vested with the mandate to direct and control the day-to-day operations of the UCB within the limits set by the BoD. At least 51 per cent of the members of the BoM should have special knowledge or practical experience in the matters specified in Section 10 A(2) of the B. R. Act, 1949.
  • Members of the BoD can be members of the BOM provided they fulfill the conditions specified. Members of the BoM can be paid such sitting fees as the BOD may decide subject to a ceiling to be specified by RBI. The BoM to follow a Code of Corporate Governance to be specified by RBI.
  • The CEO shall be responsible for the management of the whole or substantially the whole of the affairs of the UCB but shall be subject to the control and direction of the BoM. The appointment of the CEO shall be subject to the prior approval of RBI.
  • Audit by a Chartered Accountant to be appointed by the BoM from out of a panel of approved auditors maintained by RBI and subject to rotation after four years.

Umbrella Organization

  • There should be two separate Umbrella Organizations viz. a national level organization which provides payments and settlement services and other services normally provided by central banks as also liquidity support to its members; and one or more organizations which provide the management, IT, training and other services which the UCB sector needs.
  • The national level UO should preferably be in the form of a multi-state UCB with membership being restricted to and mandatory for all UCBs other than scheduled UCBs.
  • Member UCBs should be required to maintain their CRR in the form of deposits with the UO.
  • The UO should invest its funds only in the form of balances with RBI, deposits with commercial banks or in SLR securities and in no other form.
  • The UO should offer Repos and Reverse Repos facilities to UCBs in the same manner as RBI offers to commercial banks and at the same rates of interest.  In turn, it should enjoy Repos and Reverse Repos facilities with RBI.
  • UCBs can avail of Repos facilities only to the extent of their excess SLR holdings.
  • Until the Payments and Settlements facilities are provided directly to UCBs, the UO will act as a gateway to provide these services for a fee to UCBs. In turn, the UO will be a member of the Payments and Settlement System.
  • Being a UCB, the UO would have a Board of Management and will be subject to the regulation, supervision and inspection of RBI.

It was announced in the Annual Policy Statement 2010-11 to set up a Committee comprising all stakeholders for studying the advisability of granting new urban co-operative banking licences under Section 22 of the Banking Regulation Act, 1949 [As Applicable to Co-operative Societies (AACS)]. Accordingly, the Reserve Bank of India constituted an Expert Committee under the Chairmanship of Shri Y.H. Malegam.

The Committee was assigned the following terms of reference:

  1. To review the role and performance of UCBs over the last decade and especially since the adoption of VISION document in 2004,
  2. To review the need for organization of new UCBs in the context of the existing legal framework for UCBs, the thrust on financial inclusion in the economic policy and proposed entry of new commercial banks into the banking space,
  3. To review the extant regulatory policy on setting up of new UCBs and lay down entry point norms for new UCBs,
  4. To examine whether licensing could be restricted only to financially sound and well managed cooperative credit societies through conversion route,
  5. To make recommendations relating to the legal and regulatory structure to facilitate the growth of sound Urban Co-operative Banks especially in the matter of raising capital consistent with co-operative principles;
  6. To examine the feasibility of an umbrella organization for the Urban Co-operative Banking Sector; and
  7. To examine other issues incidental to licensing of Urban Co-operative Banks and make appropriate recommendations.

    Note:  Report of Expert Committee on Licensing of New Urban Co-operative Banks attached

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Comments

  1. Arti Bisaria says:

    Reactions to Malegaon Committee Report
    Reserve Bank of India has placed the Malegaon Committee Report and its recommendations in the public domain and has called for the views of members of public before taking a decision on acceptance of the recommendations.
    Firstly, as the subject matter of RBI’s Executive order indicates, the expert committee was setup to examine the issues relating to ‘Licensing of Urban Co-operative Banks’. The recommendations of the committee relating to Licensing of new UCBs are broadly in alignment with our views and as such we have no serious divergence of views on this aspect. However, on the recommendations relating to ‘Umbrella Organization’ we have strong difference of opinion, the logic and rationale of which is explained in the following paragraphs.
    On Recommendation relating to Board of Management
    1. The committee, while discussing the problem of dual control in Chapter 4, lists the measures initiated by RBI such as Vision Document, Signing of MOU and TAFCUB etc. The committee also acknowledges the positive effects of these steps in strengthening of the sector through several measures made possible through the consultative process of TAFCUB between the two regulators and the sector representatives. The percentage reduction of banks in Grade 3 and 4 from 38.4% to 18.2% in the last seven years stated by the committee in Para 4.4 establishes that the UCB sector has strengthened because of initiating the consultative mechanism through TAFCUB. As such, the way forward should have been through further strengthening of the consultative mechanism. Instead the committee has recommended the mechanism of BOM as solution for the problem on which we have serious difference of opinion for the following reasons.
    A) More than a hundred years ago when there were no institutions available to extend credit to the poorer sections of the population, people have voluntarily joined together to form an institution to meet the credit needs through thrift because of the advantages of Cooperation. Over the years it had developed and Co-operative societies Act came into being. Co-operation in the banking sector primarily aims at providing banking facilities to the persons of small means in semi urban and urban areas. It is a fact that, even in the present day, the poor and semi literate populace of the country are afraid of going to a multi-national commercial bank or a foreign bank because of disconnect caused by the high-end infrastructure. The environment created by the UCBs, to say the least, is conducive for interaction and providing banking facilities to the vast majority of this section is assured so long as the agrarian sector and poorer sections of the population exists. As such any attempt at cutting the roots of Co-operation in the banking sector would be against the poorer sections of the population in the urban and semi-urban areas. The committee’s recommendation for introducing the system of BOM will result in negation of the principles of co-operation in the banking sector for the following reasons.
    i) In Para 4.6 (a) the committee report states “The solution, therefore, lies in a segregation of the ownership of the UCB as a co-operative society from its functioning as a bank. While the Registrar of Co-operative Societies would continue to exercise control and regulation of the UCB as a co-operative society, RBI would exercise control and regulation on its function as a bank.” From this, it is obvious that, the committee is attempting to find a solution to the issue of dual control by totally eliminating the role of RCS and State Govt. from the UCBs and achieving total control over regulation of UCBs through the medium of BOM. The principles of co-operation, on which the share holders elect the directors through a democratic process for management of the bank. If the elected directors do not have the power over functioning of a bank, then it will no more be a “Cooperative Urban Bank’ but will be like any other private sector bank.
    ii) The Directors, who are elected by the members (whether depositor members or borrower members), would have no role to play in the functioning of the bank once BOM is created and broad policies are laid down. The Board of Directors will be accountable to the members without any powers, while the BOM will be vested with powers to run the bank without any responsibility or accountability to the share holders.
    iii) Further, it will be an attempt at bypassing the provisions of constitution, which specifically lists co-operation as a State subject (not even in the concurrent list). It may be seen as a step towards taking the UCBs under the total control of RBI. The State Govt. and the Department of Co-operation being reduced to a non entity as far as the UCBs are concerned.
    iv) If the recommendation of the committee for a system of BOM, is implemented then the entire election process, general body and directors will become meaningless.
    v) The system of BOM is suggested by the committee on the premise that Directors of UCBs lack professional qualifications and are, knowledge wise not equipped to manage the affairs of a bank and in several cases they develop vested interests. Hence, it is necessary to insist on the appointment of BOM, who confirm to the fit and proper criteria laid down by RBI as also the professional qualifications or competence.
    B) It may be seen that in the entire report no mention has been made about the contribution made by the Board of Directors of UCBs in the development and strengthening of the sector. The credit for the positive developments in the sector is attributed to only the steps initiated by the RBI, while for the negative aspects still persisting in the sector the blame is attributed to either problems of dual control or the vested interests and lack of professionalism in the elected directors. To set the record straight and correct the negative impact created, it is necessary to put on record at least a few of the positive contributions.
    i) Whatever be the steps taken or directions issued by RBI or RCS, ultimately it is the Board of Directors, who ensure effective implementation of these directions for the turn around and strengthening of the financials.
    ii) In several UCBs, especially in the case of small banks, it is the directors who play a major role in both mobilization of deposits and mobilization of share capital to meet the CRAR and other norms. For all this they put at stack willingly their personal reputation.
    iii) These contributions by the elected directors establish their commitment and sincerity in working for the strengthening of the sector, which cannot be ignored.
    C) One of the reasons advanced for justifying the need for BOM is the weak financials of UCBs, particularly in banks having deposits of less than Rs.10 Crore. To quote the report, in Para 3.6 it says “The proportion of UCBs falling in Ratings C and D with deposit base up to Rs.10 crore is 61.9 percent of the total UCBs with this deposit base. The overall proportion of UCBs in Ratings C and D is 42.4 percent of the total UCBs.” Based on this input the committee has drawn the conclusion that :
    “(b) There is a pronounced weakness in the overall UCB structure with a large number of UCBs having financials below the required norms and several UCBs having a negative net worth.
    (c) Almost one-third of UCBs which have a deposit base of Rs.10 crore or less have shown less than satisfactory performance and must be considered as providing inadequate safety for depositors.” (Para 3.8)
    In our opinion, the committee, before reaching such conclusions should have pondered over the aspect the whether there is anything wrong with the yardstick determining the C and D rating. For example : In the system of rating, which has been implemented since the last 2-3 years, a UCB getting a lower rating of either a B or C in one of the camel parameters, say Earning analysis, will result in the downgrading of the overall rating of the bank by either one notch or two notches. This particular reason more often than not is the cause for the C or D rating of a bank especially one with deposits of less than Rs.10 crore. If RBI compiles data on this aspect it will become abundantly clear. Further, whether this system of rating and drawing conclusions which will have long term impact on the sector is justified needs to be pondered, especially when the committee in its report has stated as under :
    “Through functioning on commercial lines, profit maximization is not the sole objected of UCBs. Rather, their primary objective is the provision of affordable banking facilities to their members and catering to their credit needs.” (Para 3.9 b and 8.6a)
    “The low Return on Assets could be probably due to the restricted earning avenues available to the sector and consequently the less diversified activities undertaken by them. Though the cost of deposits of the UCB sector is generally high, the NIM and RoA of UCBs is not significantly lower than as compared with other groups in the banking industry.” (Para 2.10)
    “UCBs play a useful role as banks primarily intended for the small man. Though advances below Rs.5 lakh constitute less than 20 per cent in value of total advances of UCBs, they constitute more than 90 percent of the total loan accounts in number of all loans given by UCBs and aggregate credit provided by UCBs to the priority sector constitutes 45.9 percent of the aggregate credit provided by UCBs.” (Para 8.6 b)
    Point No. IO Recommendation Remarks
    5.10 Board of Management (BoM) to be appointed by the Board of Directors (BoD).

    5.12 a) ii) RBI can supercede the BOM for a period not exceeding five years and appoint an Administrator in its place. Appointment by BOD removal by RBI ?
    5.10 While the BoD will be responsible for laying down the broad contours of strategy, the BoM will be vested with the mandate to direct and control the day-to-day operations of the UCB within the limits set by the BoD. BoM is not a elected body while BOD one the elected member and they are answerable to their members. (Whether depositor member or borrower member)
    The role of BOD will be more of spectator. Moreover since appointment and removal of BOM and CEO also not under their control. What important work or control will left to the board.
    5.11 Chief Executive Officer (CEO) to be appointed by the BoM and shall be subject to the control and direction of the BoM. BoD will not have any say or control over CEO.
    Conclusion
    In the light of the foregoing RBI should not accept the recommendation of the committee for institution of BOM in the UCB sector. Instead the way ahead should be through the following :
    (1) At least 51% of the member in the BOD should be professionally qualified directors. They members will be called as professional qualified Directors.
    (2) RBI can lay norms for fit and proper criteria for such professional directors.
    (3) Such members can be paid sitting fees as BOD may decide subject to & ceiling to be specified by RBI.
    (4) These directors will be members of all important sub-committees.
    (5) RBI should work towards strengthening the co-ordination with the State machinery. Since the committee has acknowledged the positive effect after formation of TAFCUB. Measures should be taken to enhance the role of TAFCUB to strengthen the UCBs.
    (6) The State Govt. and Department of Co-operation should refrain from encroaching into areas of banking and also not to use the state act for political purposes.
    (7) Basically the approach is to be for allowing the UCBs to work with principles of co-operation and not try to convert them as mini commercial banks.
    On recommendation – Entry Point Norms
    (1) The Madhav Rao Committee recommended relaxation in entry point norms for a period of five years for UCBs operating in less developed area or exclusively for women or SC/STs.
    (2) The committee has not recommended any relaxation in entry point norms for Mahila Banks. To empower women especially in backdrop of financial inclusion – relaxation in entry point norms to mahila bank is need of the hour.
    On Recommendation relating to Umbrella Organization
    The committee’s recommendation relating to Umbrella Organization basically is addressing the needs of larger non-scheduled UCBs in the areas of liquidity support, settlement system (clearing). These needs are taken care of in the form of providing Repo and Reverse Repo and Payment and Settlement system. However, as has been noted by the committee at Para 2.16 vast majority of the UCBs i.e. 1040 accounting for 63% of the total UCBs in the country are having a deposit base of less than Rs.50 crore. The resources and needs of these banks are different from that of larger banks. The resource constraints and needs of these banks are as under :
    1. These banks (less than Rs.50 crore deposit base) generally do not have any additional Govt. securities other than the stipulated minimum of 25% of NDTL. As such they cannot access short term liquidity support envisaged in the form of Repo and Reverse Repo.
    2. These banks also do not have the leverage of excess funds of keep as deposit in Current Account (which will not yield any interest) with Commercial Banks to access clearing as sub members.
    3. All UCBs generally and these banks smaller banks, in particular, are eagerly looking for avenues to place their CRR deposit which will yield at least SB rate of interest. It is not clear from the recommendation, whether the Umbrella Organization suggested, would be paying interest on the CRR balances kept by UCBs.
    4. Another major need of UCBs, especially smaller UCBs, is providing technology support in the form of providing uniform software for all UCBs and ancillary services such as training and periodic updation.
    5. Providing Management support and training upgradation of skills.
    The recommendations of the committee on Umbrella Organization has not addressed these needs of the banks and suggested a way out. The committee’s recommendation also suffers from the following deficiencies :
    a) The recommendation does not envisage a role for RBI in addressing any of these needs especially that of the smaller banks. In our opinion, as central bank of the country the role of RBI does not end with only regulation and supervision of UCBs and the proposed Umbrella Organization.
    b) The smaller banks, which according to the committee’s recommendation, have to mandatorily continue towards the share capital of the umbrella organization, but they almost get nothing in return in the form of liquidity support or technology support or training for the staff and officers. For all these things they have to approach the NAFCUB or the State Federations, which may at a cost.
    In our opinion a better approach could have been by having a pivotal role for RBI in the Umbrella Organization with the following broad ingredients.
    i) Umbrella Organization at the state level may be formed in all states where there are 50 or more banks. In other states where there is lesser number of banks, Zone – wise UOs may be formed.
    ii) Theses UOs basically attend to providing liquidity support to the needy banks on the security of p-ledged gold or fixed assets and other properties of the UCB. The loan given by UCB also may be guaranteed by another UCB.
    iii) The capital of the UO may be contributed by the shares of UCBs with an equal contribution from RBI.
    iv) Initially all Tier II category UCBs are to be included in the Payment and Settlement system of RBI to facilitate clearing and other transactions of inter-bank nature. The other smaller UCBs is Tier I category are to be facilitated clearing mechanism through Tier II UCBs. This can be an interim arrangement till all the banks are brought within the purview of Payment and settlement system of RBI.
    v) Technology support in the form provision of requisite and uniform software for all UCBs to be done by IDRBT (which is best equipped to handle this at Reasonable cost) through the coordination of UO sufficient trained staff of IDRBT may be made available to UO for use of UCBs for updation, problem shooting and training purposes.
    vi) The organizational structure of UO to have the RBI official from Regional Office of say General Manager Rank as the head or Chairman with representatives of 10 large Banks in area as Members. All issues concerning liquidity support, technology support and payment and settlement system is to be decided by the committee.
    vii) The TAFCUB may have an advisory role in all aspects of UO’s Functioning.
    If the above suggested broad canters are adopted for formation of UO then the needs of smaller and bigger UCBs of the area can be met at the local level itself. We hope the Reserve Bank of India will seriously consider the above and accept the recommendations of the committee on the aspects of Board of Management and Umbrella Organization as suggested.

    Arti Bisaria
    • Founder Chairperson – Astha Mahila Nagrik Sahakari Bank Mydt., Bhopal
    • Director – National Federation of Urban Co-operative Banks & Credit Societies Ltd., New Delhi
    • Director – M.P. State Urban Co-operative Banks and Credit Societies Ltd., Bhopal

  2. Dr.pushpad says:

    sir,i want to new liecence nagrik bank please sir ,provide details 

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