To prevent closure of urban co-op banks, NAFCUB to set up umbrella organisation
The National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB) plans to set in motion the process of establishing an umbrella organisation for the 1,551 urban cooperative banks (UCBs) in the country. This is to cater to their technology, liquidity, and capital needs, and also to ensure that banks in the sector do not close down.
The umbrella organisation (UO) will be set up as a nonbanking finance company (NBFC) to begin with and could be converted into a bank down the line, said Jyotindra Mehta, President, NAFCUB.
In its Statement on Developmental and Regulatory Policies issued in February 2019, the RBI said it has received a proposal for setting up a UO from NAFCUB.
“We are expecting a (approval) letter from the RBI soon.
It will also cater to the technological and liquidity needs of banks
“The UO will be a shelter for all UCBs – unit banks (with a single branch), Tier-I banks (with less than ₹100 crore deposits), and Tier-II banks (with more than ₹100 crore deposits, including multi-state banks).
“Initially, we advocated that the UO should be in the cooperative sector. But the regulator was not comfortable with this as the sector does not have a resolution mechanism. So, the UO will be an NBFC,” explained Mehta.
While NAFCUB, State UCB Federations, and UCBs will be the main shareholders of the UO, the federation is also trying to rope in the National Cooperative Development Corporation (established by an Act of Parliament in 1963 as a Statutory Corporation under the Ministry of Agriculture and Farmers Welfare) and global cooperative funds to invest in the proposed venture, said D Krishna, former CEO, NAFCUB.
Mehta emphasised that NAFCUB’s primary vision for UCBs is that they should survive and thrive in the competitive financial services space and increase their market share.
According to the RBI, the UCB sector saw 129 mergers/amalgamations of weak but viable banks between 2004 and 2018, with the maximum being in Maharashtra (72), followed by Gujarat (31), and Andhra Pradesh (12).
Some of the functions that the UO could perform include liquidity management for UCBs (those with surplus liquidity can park it with the UO, and those facing deficit could draw funds from it), establishing a common IT infrastructure, including payment gateways and data centres that could be shared by all banks, and facilitating mergers in the sector.
RBI Governor Shaktikanta Das, in a speech delivered at NIBM, Pune, on June 8, observed that a need is being felt for establishing a UO for UCBs, which may extend loans and refinance facilities, set up IT infrastructure, and provide support for capital and liquidity.
The structure, functions, and regulatory guidelines of this organisation are being examined by the RBI.
“Mergers and consolidation in the sector will also help in reducing operating costs, encouraging greater risk diversification and economising capital.
“We propose to put in place a mechanism for encouraging voluntary mergers in the sector through appropriate incentives. We also propose to create a Centralised Fraud Registry for UCBs,” the Governor added.