The Reserve Bank of India on Wednesday said it has decided to reopen licensing for urban co-operative banks (UCBs), ending a two-decade pause on issuance of fresh licences. It has released draft guidelines for the same.
Due to deteriorating financial conditions in the urban co-operative banking sector, the RBI had stopped issuing fresh licenses in June 2004. Over the time, they have made a turnaround, aided by consolidation and closure of many weaker entities. Considering the improvement, the RBI floated a discussion paper on January 13. Based on the feedback, it proposed a framework on Wednesday.
Under the new framework, credit co-operative societies operational for at least 10 years are eligible to apply. It should have a deposit size of at least Rs 10,000 crore and a minimum net worth of at least Rs 300 crore. The entity should be registered under Multi-State Co-operative Societies Act, 2002 at the time of application.
Applicants must show improving financial and operational performance over the past five years, with a CRAR of at least 12% and net non-performing assets ratio not exceeding 3% as of March 31 of the previous financial year, the RBI said.
For considering a licence, the RBI will evaluate the board of directors’ ‘fit and proper’ status, requiring members to have strong credentials, integrity, and no record of defaulting on loans from banks or other financial institutions. It also mandates that no member should have a shareholding of more than 5%.
The regulator has proposed that UCBs provide a business plan and a roadmap for the same, covering financial projections for five years, branch expansion, product strategy, target clientele, and technology use.
The RBI said it will adopt a cautious approach in providing licences, as banking is a highly leveraged business. “Licences shall be issued on a very selective basis to those co-operative societies that conform to the stipulated requirements, as well as any other requirements the RBI may deem necessary to be fulfilled, have an impeccable track record, and are likely to conform to the best standards of governance, customer service, and efficiency.”
The RBI also decided to review prudential norms on concentration risk management of rural co-operative banks. It has been decided to undertake a review that balances the goal of developing a vibrant co-operative sector with the need to address prudential risks from concentrated lending, the RBI said.
