Weak urban co-operative banks (UCBS) could get a regulatory nudge to explore voluntary mergers or convert into a non-banking society at an early stage, going by the recommendations of the Reserve Bank of India's Expert Committee on UCBs. Else, the powers for mandatory resolution would be employed.
The committee, headed by NS Vishwanathan, a former Deputy Governor of the RBI, emphasised that all-inclusive directions (AID) should be treated on a par with moratorium under Section 45 of the Banking Regulation Act.
If AID is imposed, a bank should not continue thereunder beyond the time permitted to keep a bank under moratorium - three months extendable by a maximum of another three months.
This recommendation is significant as some UCBS have been under AID for many years, causing a lot of hardship to depositors as deposit withdrawals are capped. Currently, about 50 UCBs are under AID.
In view of the powers derived from the recent amendment to the Banking Regulation Act, the committee observed that the RBI may strive to begin the mandatory resolution process including reconstruction or compulsory merger as soon as a UCB reaches Stage III under the Supervisory Action Framework (SAF).
The RBI may also consider. superseding the board if the bank fails to submit a merger/ conversion proposal within the prescribed timeframe and take steps to avoid undue flight of deposits once the news becomes public. A Stage III UCB is one where its capital to risk-weighted assets ratio/ CRAR is less than 4.5 per cent and/or net non-performing assets/NNPAS is greater than 12 per cent.
The committee felt that the RBI can prepare a scheme of compulsory amalgamation or reconstruction of UCBS, like banking companies.
The action may include compulsory amalgamation with another banking institution or a transfer of assets and liabilities to another financial institution. In such cases, the existing members of the transferor UCB may be disenfranchised for five years.
The amalgamation or reconstruction scheme may include reduction in the rights of creditors, including depositors and members of the bank; or payment in cash or in any other manner to depositors/ creditors in respect of their en tire claims or reduced claims, as the case may be.
The relevant section of the Banking Regulation Act also offers flexibility to allot shares/ long-term debt instruments of the transferee bank (acquiring bank) to the depositors/ creditors/members without reducing their claims.