RBI Policy Merger of UCBs

J. K. Pandey DGM & MoF, CAB, RBI, Pune

College of Agricultural Banking, RBI, PUNE

Progress of Urban Co-operative Bank

PHASE I In formative stage, urban credit societies organised by communities PHASE II - Post 1966 PHASE III - Post Marathe Committee PHASE IV - Post Madhav Rao / Madhavpura Mercantile Cooperative Bank Crisis

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Distribution of UCBs
Regional Office 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Guwahati Thiruvanathapuram Bhopal Kolkata Nagpur Hyderabad Bangalore Bhubaneshwar Chandigarh Ahmedabad Lucknow Jaipur Mumbai Chennai New Delhi Jammu Total UCBs in Grade II, III & IV 11 48 56 6 65 104 188 11 13 187 30 9 101 110 4 1 944 UCBs in Grade II 1 (4) 9 (11) 17 (28) (11) 31 (45) 44 (43) 79 (76) 5 (6) 4 (1) 50 (50) 8 (13) 2 (10) 32 (128) 19 (32) 1 (1) 1 () 303 UCBs in Grade III 4 (4) 31 (28) 26 (17) (3) 20 (43) 34 (18) 97 (85) 6 (3) 5 (1) 85 (67) 14 (9) 5 (3) 49 (84) 76 (39) 2 (1) 0 (2) 454 UCBs in Grade IV 6 (4) 8 (11) 13 (14) 6 (7) 14 (33) 26 (15) 12 (46) 0 (4) 4 (4) 52 (43) 8 (8) 2 (1) 20 (71) 15 (7) 1 (2) 0 () 187 Figures in bracket are for 2006

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Role of RBI
Regulatory, Supervisory, Operational and Developmental Functions (Carried out through the Urban Banks Department) RBI derives authority to control and supervise the urban banks through the Banking Regulation Act, 1949 (As Applicable to Cooperative societies)

College of Agricultural Banking, RBI, PUNE

Issues of Regulatory & Supervisory Concern :

Sharp increase in no. of banks and branches Large number of financially unsound banks Steep increase in deposits consequent on deregulation High rate of interest on deposits, consequently on advances Adverse selection of borrowers Low capital base Dual/triple control Belated introduction of CRAR, ALM etc. High exposure to real estate and other sensitive sector

College of Agricultural Banking, RBI, PUNE

Issues of Regulatory & Supervisory Concern:

Problems Faced By The Sector

Lack of professionalism Political interference Unlicensed UCBs Low level of computerisation No Central recruitment Faulty recruitment system / excess staff / poor skill upgradation Low level of operational efficiency High operating cost

College of Agricultural Banking, RBI, PUNE

Issues of Regulatory & Supervisory Concern: (Contd.)

UCBs membership of Payment System Should it be unconditional?
Experience of MMCB Access to call money SLR investments

College of Agricultural Banking, RBI, PUNE

Issues of Regulatory & Supervisory Concern: (Contd.)

Governance in UCBs
Is it enough? How much is enough?

Growing ambit of operations of UCBs

Should UCBs have unlimited access to inter-bank markets? Whether the reach should be nationwide? Access to capital markets?

College of Agricultural Banking, RBI, PUNE

Issues of Regulatory & Supervisory Concern: (Contd.)

Disclosure Standards
Is it enough? How much is enough?

Interest Rates on Advances

High interest rates as compared to the commercial banks Adverse selection of borrowers

College of Agricultural Banking, RBI, PUNE

Regulatory Issues concerning RBI

Capital Adequacy
UCBs unable to maintain capital HPC viewed CRAR to be made applicable to UCBs

Issue pertaining to Deposit Insurance

Some states do not have eligibility clause to be covered under DICGC Act, 1961 Insured banks often default payment of premium

College of Agricultural Banking, RBI, PUNE

Regulatory Issues concerning RBI

(contd.)

Supervision of UCBs
Large number of banks On-site inspection in two years time frame System is under severe strain to maintain the schedule Need for off-site surveillance

Other issues
Financially unsound banks Unlicensed banks in Kerala Recent transactions by UCBs in Government Securities

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Road Map To Future

Focus on:
Consolidation : slow down in issue of new Licence Weeding out weak units Strengthening of regulatory and supervisory standards

College of Agricultural Banking, RBI, PUNE

Merger / Amalgamation of UCBs

Guidelines issued by RBI February 02, 2005 Focus on
facilitating consolidation and emergence of strong entities providing an avenue for non disruptive exit of weak / unviable entities in the co-operative banking sector

College of Agricultural Banking, RBI, PUNE

Statutory Provisions
RBI does not have any powers to: -Appoint or remove the members of the board of management of urban banks -Initiate amalgamation of two urban banks -Appoint auditors of urban banks Matters related to banking operations are governed by directives and guidelines issued by the RBI

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Statutory Provisions (contd.)

Banking Regulation Act, 1949 (AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and amalgamation of cooperative banks The State Governments have incorporated in their respective Co-operative Societies Acts a provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for sanctioning a scheme of amalgamation or reconstruction

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Statutory Provisions (contd.)

Request for merger can emanate from banks
registered under the same State Act
State Acts specifically provide for merger of co-operative societies registered under them

from banks registered under the Multi State Co-operative Societies Act (Central Act) for takeover of a bank/s registered under State Act
the position with regard to take over of a co-operative bank registered under the State Act by a co-operative bank registered under the Central Act is not clear View is that, if all concerned including administrators of the concerned Acts are agreeable to order merger/amalgamation, RBI may consider proposals on merits leaving the question of compliance with relevant statutes to the administrators of the Acts RBI will limit its examination only to financial aspects and to the interests of depositors as well as the stability of the financial system while considering such proposals

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Procedure for Merger

Voluntary or otherwise Procedures mentioned in the respective State Act or the Multi State Cooperative Societies Act Registrars are vested with the responsibility of administering the Acts
Responsible for ensuring that the due process prescribed in the Statutes has been complied with before they seek the approval of the RBI Responsible for ensuring compliance with the statutory procedures for notifying the amalgamation after obtaining the sanction of the RBI

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Procedure for Merger (contd.)

Make Application Acquirer Bank

t i on a c i ppl A ke Ma

RCS / CRCS

Seek RBI Approval

Decision Conveyed

Acquired Bank

Forwa rd cop along y of scheme with s ome d to RBI etails

RBI

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Procedure for Merger (contd.)

State Acts also provide for compulsory amalgamation of the cooperative societies by the RCS In such cases too, prior approval of RBI is necessary Schemes received from RCS will be examined with reference to the financial aspects and the interests of depositors as well as the stability of the financial system, based on certain criteria/factors and decision conveyed to the RCS

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Information to be submitted to RBI by Acquirer UCB

Draft scheme of amalgamation as approved by the Board of Directors of the acquirer bank Copies of the reports of the valuers appointed for the determination of realizable value of assets of the acquired bank
net of amount payable to creditors having precedence over depositors

Other important relevant information

Annual reports of each of the UCBs for each of the three completed financial years immediately preceding the proposed date for merger Financial results, if any, published by each of the UCBs for any period subsequent to the financial statements prepared for the financial year immediately preceding the proposed date of merger

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Information to be submitted to RBI by Acquirer UCB (contd.)

Other important relevant information
(contd.)

Pro-forma combined balance sheet of the acquiring bank as it will appear consequent on the merger Computation based on such pro-forma balance sheet of the following: Tier I Capital Tier II Capital Risk-weighted Assets Gross and Net NPAs Ratio of Tier I Capital to Risk-weighted Assets Ratio of Tier II Capital to Risk-weighted Assets Ratio of Total Capital to Risk-weighted Assets Tier I Capital to Total Assets Gross and Net NPAs to Advances Cash Reserve Ratio Statutory Liquidity Ratio

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Information to be submitted to RBI by Acquirer UCB (contd.)

Other important relevant information
(contd.)

Information certified by the valuers to understand the net realizable value of assets of the acquired bank Details to include
Method of valuation used by the valuers Information and documents on which the valuers have relied and the extent of the verification, if any, made by the valuers to test the accuracy of such information If the valuers have relied upon projected information, the names and designations of the persons who have provided such information and the extent of verification, if any, made by the valuers in relation to such information Details of the projected information on which the valuers have relied Detailed computation of the realizable value of assets of the acquired bank

Any other information which RBI may so require

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Guidelines on Merger and Amalgamation

Reserve Bank of India may consider proposals for merger and amalgamation in the following circumstances:
When the networth of the acquired bank is positive and the acquirer bank assures to protect entire deposits of all the depositors of the acquired bank When the networth of acquired bank is negative and the acquirer bank on its own assures to protect deposits of all the depositors of the acquired bank When the networth of the acquired bank is negative and the acquirer bank assures to protect the deposits of all the depositors of the acquired bank with financial support from the State Government extended upfront as part of the process of merger

In all cases of merger/ amalgamation the financial parameters of the acquirer bank post merger should conform to the prescribed minimum prudential and regulatory requirement for UCBs The realizable value of assets has to be assessed through a process of due diligence

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Amortisation of Losses
Mid-Term Review of Annual Policy Statement for the year 2005-06
in order to smoothen the process of merger in the UCB Sector, the acquirer UCB was permitted to amortise the loss taken over from the acquired UCB over a period of not more than five years, including the year of merger Issued vide UBD circular dated November 22, 2005

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Amortisation of Goodwill
Where the consideration, if any, paid for the acquisition/amalgamation exceeds the book value of the net assets taken over, the excess amount should be treated as goodwill and amortized over a period of five years in equal installments Where no consideration is paid but the book value of the assets is less than the book value of liabilities taken over, the excess of the book value of liabilities over the book value of the assets taken over will be considered as goodwill and amortized over a period of five years in equal installments Where no consideration is paid, but the book value of the assets taken over is greater than the book value of the liabilities taken over, the excess of the book value of assets over the book value of the liabilities will be considered as Capital Reserve

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