The Reserve Bank of India (RBI) has formulated new norms to facilitate restructuring of ailing urban cooperative banks

RBI, on Friday, said it is observed that even financially stronger banks are unwilling to acquire UCBs, where the deposit erosion is large. “In such situations, restructuring of the liabilities of the weak UCB may be a viable proposition, as the depositors above Rs 1 lakh may stand to gain compared to what they would be entitled to receive from DICGC in case of liquidation of the bank,” said RBI.

The central bank said it is prepared to consider financial restructuring proposals as an additional option for resolution of problem banks, provided they conform to some norms. To begin with, the interest of small depositors has to be protected in full. Accordingly, no conversion into equity will be permitted in the case of small depositors (those have deposit of up to Rs 1 lakh).

A portion of the deposit of individual depositors above Rs 1 lakh may be converted into equity. Likewise, a portion of the deposits of the institutional depositors may be converted into Innovative Perpetual Debt Instrument (IPDI), which is eligible for inclusion as Tier- capital.The conversion of deposits into equities and IPDI would be subject to consent of the depositors/their forum. Post-restructuring, no shares (equities) will be redeemed until the bank achieves a CRAR of 9%. The proportion of deposits converted into equity/IPDI should be such that the net worth of the bank after reconstruction turns positive. The bank will have to maintain CRR/SLR on the restructured liabilities.

Post-restructuring, the management of the bank should be in the hands of a board of administrators consisting of representatives of individual depositors as well as professional bankers to ensure proper implementation of the reconstruction scheme including recovery of NPAs.

RBI has asked UCBs having negative net worth may approach its regional office with specific proposals after the same is approved by its board of directors.

Innovative instruments shall not exceed 15% of total Tier-I capital. Innovative instruments in excess of the above limits shall be eligible for inclusion under Tier-II, subject to limits prescribed for Tier-II capital. However, investors’ rights and obligations would remain unchanged. Innovative instruments shall be perpetual. The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate.

Meanwhile, the RBI has communicated to the chief executive officer of The Gujarat Industrial Co-operative Bank (GICB) to explore a possibility to convert the funds locked in the fixed deposits of over Rs 1 lakh into the bank’s share capital with the consent of the concerned depositors.

This move is primarily aimed to improve the bank’s liquidity condition through financial restructuring.

Surat-based 40-year-old bank, GICB had been identified by the regulator as a bank having minimal liquidity status due to massive non-performing assets on its balance sheet. Thus, under Section 35-A, the regulator had directed the then management of GICB in September 2008 to disallow the bank’s depositors to withdraw over Rs 1,000 until further notice.

The bank had been placed under Gr IV category by the regulator based on its inspection with reference to its financial position as on March 31, 2008 on account of its negative 24% CRAR, 30.4% net non-performing assets and accumulated losses worth Rs 97.79 crore in its balance sheet by the end of the last financial year.

As on December 31, 2008, GICB reportedly had 6,500 depositors who are having fixed deposits of over Rs 1 lakh The money locked in these deposits, reportedly to be over Rs 180 crore, is likely to get converted into the share capital of GICB as recommended by the RBI.