Urban co-operative banks:
Urban co-operative banks (UCBs) are reluctant to convert into small finance banks (SFBs) due to the operational changes it entails, stated Satish Marathe, a founder member of Sahakar Bharati and member of the Reserve Bank of India’s (RBI) central board. Consequently, only one UCB has applied for conversion.
In 2018, the RBI issued guidelines for the voluntary transition to SFBs. These guidelines stipulate that UCBs must have a minimum capital of Rs 50 crore and a capital-to-risk (weighted) asset ratio of 9 percent or above to be eligible. UCBs are given 18 months to comply with these requirements. Additionally, UCBs must adhere to the latest guidelines for on-tap licensing of SFBs in the private sector, which require maintaining a minimum net worth of Rs 100 crore from the commencement of business.
Marathe told Business Standard, “No Urban co-operative banks has applied to the RBI to convert into an SFB. Once a co-operative bank converts into an SFB, it will eventually have to get listed. Investors with deep pockets are likely to take over the SFB, causing the current board to lose control.” Despite the voluntary transition scheme announced in late September 2018, only the Uttar Pradesh-based Shivalik Mercantile Co-operative Bank has converted into an SFB, beginning operations on April 26, 2021.
The RBI allowed Urban co-operative banks to convert into SFBs due to some banks’ multi-state presence and concerns about the lack of direct supervision. However, in June 2020, the central government approved an ordinance bringing all urban and multi-state co-operative banks directly under the RBI. UCBs prefer to maintain their current status, as conversion will not enhance their work or culture. “Once it changes hands, the SFB will neither work towards nor nurture the objectives for which the co-operative was founded,” added Marathe.
Moreover, the RBI recently stated that UCBs planning to convert into SFBs must have an initial net worth of Rs 100 crore, increasing to Rs 200 crore within five years.
