UCBs Reluctant to Become SFBs: RBI’s Satish Marathe
Background and Context: Urban Co-operative Banks (UCBs) in India are showing reluctance to transition into Small Finance Banks (SFBs), despite the Reserve Bank of India’s (RBI) guidelines and encouragement. Satish Marathe, a member of the RBI’s central board, shared insights on the situation, emphasizing several factors contributing to this hesitation.
Eligibility and Guidelines for Transition:
- Minimum Capital Requirement: UCBs must have a minimum capital of Rs 50 crore to be eligible for transitioning into an SFB.
- Capital-to-Risk (Weighted) Asset Ratio (CRAR): UCBs need to maintain a CRAR of 9% or above.
- Initial Net Worth for SFBs: New guidelines state that UCBs planning to convert must have an initial net worth of Rs 100 crore, which must increase to Rs 200 crore within five years.
- On-Tap Licensing: UCBs must comply with the on-tap licensing guidelines for private sector SFBs, which include maintaining a minimum net worth of Rs 100 crore from the commencement of business.
Timeline for Compliance:
- UCBs have 18 months to meet the aforementioned requirements for transitioning into SFBs.
Challenges and Concerns:
- Loss of Control: Marathe pointed out that no UCB has applied to the RBI for conversion into an SFB. One primary concern is that, post-conversion, SFBs will have to get listed, which could lead to investors with substantial financial power taking over, causing the existing board to lose control.
- Mission Drift: There is a fear that once a co-operative bank converts into an SFB, it might not continue to work towards the original objectives for which the co-operative was founded. This could undermine the community-centric mission of UCBs.
Current Scenario:
- Voluntary Transition Scheme: Despite the scheme announced in late September 2018, only the Uttar Pradesh-based Shivalik Mercantile Co-operative Bank has transitioned into an SFB, starting operations on April 26, 2021.
- Regulatory Supervision: The RBI permitted the conversion of UCBs into SFBs due to some banks having a multi-state presence and the lack of direct supervision by the RBI. However, in June 2020, the central government approved an ordinance bringing all urban and multi-state co-operative banks directly under the RBI’s purview.
Perspective from RBI’s Satish Marathe:
- Marathe noted that transitioning to SFBs might not enhance the work or culture of UCBs. He stressed that maintaining the status quo could be preferable for many UCBs, as conversion might lead to losing their core objectives and community-focused goals.
Conclusion: Urban Co-operative Banks are hesitant to become Small Finance Banks due to stringent regulatory requirements, potential loss of control, and concerns about mission drift. The RBI continues to encourage UCBs to consider transitioning to SFBs for better regulatory oversight and operational efficiency, but the response has been lukewarm, with only one successful conversion to date.
