Rbi Policy Merger of u Cbs

7/30/2019 Rbi Policy Merger of u Cbs

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College of Agricultural Banking, RBI, PUNE

RBI Policy

Merger of UCBs

RBI PolicyRBI Policy

Merger ofMerger ofUCBsUCBsJ. K. Pandey

DGM & MoF,

CAB, RBI, Pune


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Progress of Urban CoProgress of Urban Co--operative Bankoperative Bank

PHASE I In formative stage, urban credit

societies organised by communities PHASE II - Post 1966

PHASE III - Post Marathe Committee

PHASE IV - Post Madhav Rao / MadhavpuraMercantile Cooperative Bank Crisis


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Distribution ofDistribution ofUCBsUCBsRegional Office

UCBs in GradeII, III & IV UCBs in Grade II

UCBs in GradeIII UCBs in Grade IV

1 Guwahati 11 1 (4) 4 (4) 6 (4)

2 Thiruvanathapuram 48 9 (11) 31 (28) 8 (11)

3 Bhopal 56 17 (28) 26 (17) 13 (14)

4 Kolkata 6 (11) (3) 6 (7)

5 Nagpur 65 31 (45) 20 (43) 14 (33)

6 Hyderabad 104 44 (43) 34 (18) 26 (15)

7Bangalore 188 79 (76) 97 (85) 12 (46)

8 Bhubaneshwar 11 5 (6) 6 (3) 0 (4)

9 Chandigarh 13 4 (1) 5 (1) 4 (4)

10 Ahmedabad 187 50 (50) 85 (67) 52 (43)

11 Lucknow 30 8 (13) 14 (9) 8 (8)

12 Jaipur 9 2 (10) 5 (3) 2 (1)

13 Mumbai 101 32 (128) 49 (84) 20 (71)

14 Chennai 110 19 (32) 76 (39) 15 (7)

15 New Delhi 4 1 (1) 2 (1) 1 (2)

16 Jammu 1 1 () 0 (2) 0 ()Total 944 303 454 187

Figures in bracket are for 2006


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Role of RBIRole of RBI

Regulatory, Supervisory, Operational and

Developmental Functions(Carried out through the Urban BanksDepartment)

RBI derives authority to control and supervise theurban banks through the Banking Regulation Act,1949 (As Applicable to Cooperative societies)


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Issues of Regulatory & SupervisoryIssues of Regulatory & Supervisory

Concern :Concern :

Sharp increase in no. of banks and branches

Large number of financially unsound banks Steep increase in deposits consequent on deregulation

High rate of interest on deposits, consequently on advances

Adverse selection of borrowers

Low capital base

Dual/triple control

Belated introduction of CRAR, ALM etc.

High exposure to real estate and other sensitive sector



Issues of Regulatory & Supervisory Concern:Issues of Regulatory & Supervisory Concern:Problems Faced By The SectorProblems Faced By The Sector

Lack of professionalism

Political interference Unlicensed UCBs

Low level of computerisation

No Central recruitment Faulty recruitmentsystem / excess staff / poor skill upgradation

Low level of operational efficiency

High operating cost




Concern:Concern: (Contd.)(Contd.)

UCBs membership of Payment System Should

it be unconditional? Experience of MMCB

Access to call money

SLR investments





Governance in UCBs

Is it enough? How much is enough?

Growing ambit of operations of UCBs Should UCBs have unlimited access to inter-bank markets?

Whether the reach should be nationwide?

Access to capital markets?





Disclosure Standards

Is it enough? How much is enough?

Interest Rates on Advances High interest rates as compared to the commercial banks

Adverse selection of borrowers



Regulatory Issues concerning RBIRegulatory Issues concerning RBI

Capital Adequacy

UCBs unable to maintain capital HPC viewed CRAR to be made applicable to UCBs

Issue pertaining to Deposit Insurance Some states do not have eligibility clause to be covered

under DICGC Act, 1961

Insured banks often default payment of premium



Regulatory Issues concerning RBIRegulatory Issues concerning RBI(contd.)(contd.)

Supervision of UCBs

Large number of banks On-site inspection in two years time frame

System is under severe strain to maintain the schedule

Need for off-site surveillance

Other issues Financially unsound banks

Unlicensed banks in Kerala Recent transactions by UCBs in Government Securities



Road Map To FutureRoad Map To Future

Focus on:

Consolidation : slow down in issue of new LicenceWeeding out weak units

Strengthening of regulatory and supervisory standards



Merger / Amalgamation ofMerger / Amalgamation of

UCBsUCBs

Guidelines issued by RBI February 02, 2005

Focus on facilitating consolidation and emergence of strong

entities

providing an avenue for non disruptive exit of weak /unviable entities in the co-operative banking sector



Statutory ProvisionsStatutory Provisions

RBI does not have any powers to: -

-Appoint or remove the members of the board ofmanagement of urban banks-Initiate amalgamation of two urban banks-Appoint auditors of urban banks

Matters related to banking operations aregoverned by directives and guidelines issued bythe RBI


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Statutory ProvisionsStatutory Provisions (contd.)(contd.)

Banking Regulation Act, 1949 (AACS) does not

empower Reserve Bank to formulate a schemewith regard to merger and amalgamation of co-operative banks

The State Governments have incorporated intheir respective Co-operative Societies Acts aprovision for obtaining prior sanction in writing,of RBI for an order, inter alia, for sanctioning ascheme of amalgamation or reconstruction


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Statutory ProvisionsStatutory Provisions (contd.)(contd.)

Request for merger can emanate from banks

registered under the same State Act State Acts specifically provide for merger of co-operative societies

registered under them

from banks registered under the Multi State Co-operativeSocieties Act (Central Act) for takeover of a bank/s registered

under State Act the position with regard to take over of a co-operative bankregistered under the State Act by a co-operative bank registeredunder the Central Act is not clear

View is that, if all concerned including administrators of the

concerned Acts are agreeable to order merger/amalgamation, RBImay consider proposals on merits leaving the question ofcompliance with relevant statutes to the administrators of the Acts

RBI will limit its examination only to financial aspects and to theinterests of depositors as well as the stability of the financialsystem while considering such proposals


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Procedure for MergerProcedure for Merger

Voluntary or otherwise

Procedures mentioned in the respective State Actor the Multi State Cooperative Societies Act

Registrars are vested with the responsibility of

administering the Acts Responsible for ensuring that the due process prescribed

in the Statutes has been complied with before they seekthe approval of the RBI

Responsible for ensuring compliance with the statutoryprocedures for notifying the amalgamation afterobtaining the sanction of the RBI


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Procedure for MergerProcedure for Merger (contd.)(contd.)

Acquirer Bank

Acquired Bank

RCS / CRCS

RBI

Make Application

MakeAppl

ication

ForwardcopyofschemetoRBIalongwithsomedetails

Seek RBIApproval

DecisionConveyed


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Procedure for MergerProcedure for Merger (contd.)(contd.)

State Acts also provide for compulsory

amalgamation of the cooperative societies by theRCS

In such cases too, prior approval of RBI is

necessary Schemes received from RCS will be examined

with reference to the financial aspects and the

interests of depositors as well as the stability ofthe financial system, based on certaincriteria/factors and decision conveyed to the RCS


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Information to be submitted to RBI byInformation to be submitted to RBI by

Acquirer UCBAcquirer UCB

Draft scheme of amalgamation as approved by the Board ofDirectors of the acquirer bank

Copies of the reports of the valuers appointed for thedetermination of realizable value of assets of the acquiredbank

net of amount payable to creditors having precedence over

depositors Other important relevant information

Annual reports of each of the UCBs for each of the threecompleted financial years immediately preceding the proposed

date for merger Financial results, if any, published by each of the UCBs for any

period subsequent to the financial statements prepared for thefinancial year immediately preceding the proposed date ofmerger


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Acquirer UCBAcquirer UCB (contd.)(contd.)

Other important relevant information (contd.)

Pro-forma combined balance sheet of the acquiring bank as it

will appear consequent on the merger Computation based on such pro-forma balance sheet of the

following:- Tier I Capital

Tier II Capital Risk-weighted Assets

Gross and Net NPAs

Ratio of Tier I Capital to Risk-weighted Assets

Ratio of Tier II Capital to Risk-weighted Assets

Ratio of Total Capital to Risk-weighted Assets

Tier I Capital to Total Assets

Gross and Net NPAs to Advances

Cash Reserve Ratio

Statutory Liquidity Ratio


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Acquirer UCBAcquirer UCB (contd.)(contd.)

Other important relevant information (contd.)

Information certified by the valuers to understand the net

realizable value of assets of the acquired bank Details to include

Method of valuation used by the valuers

Information and documents on which the valuers have relied and

the extent of the verification, if any, made by the valuers to testthe accuracy of such information

If the valuers have relied upon projected information, the namesand designations of the persons who have provided suchinformation and the extent of verification, if any, made by thevaluers in relation to such information

Details of the projected information on which the valuers haverelied

Detailed computation of the realizable value of assets of theacquired bank

Any other information which RBI may so require


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Guidelines on Merger and AmalgamationGuidelines on Merger and Amalgamation

Reserve Bank of India may consider proposals for merger andamalgamation in the following circumstances:

When the networth of the acquired bank is positive and the acquirerbank assures to protect entire deposits of all the depositors of theacquired bank

When the networth of acquired bank is negative and the acquirer bankon its own assures to protect deposits of all the depositors of the

acquired bank When the networth of the acquired bank is negative and the acquirer

bank assures to protect the deposits of all the depositors of theacquired bank with financial support from the State Governmentextended upfront as part of the process of merger

In all cases of merger/ amalgamation the financial parameters ofthe acquirer bank post merger should conform to the prescribedminimum prudential and regulatory requirement for UCBs

The realizable value of assets has to be assessed through aprocess of due diligence


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AmortisationAmortisation of Lossesof Losses

Mid-Term Review of Annual Policy Statement for

the year 2005-06 in order to smoothen the process of merger in the UCB

Sector, the acquirer UCB was permitted to amortise theloss taken over from the acquired UCB over a period of

not more than five years, including the year of merger Issued vide UBD circular dated November 22, 2005


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AmortisationAmortisation of Goodwillof Goodwill

Where the consideration, if any, paid for theacquisition/amalgamation exceeds the book value of the

net assets taken over, the excess amount should be treatedas goodwill and amortized over a period of five years inequal installments

Where no consideration is paid but the book value of theassets is less than the book value of liabilities taken over,

the excess of the book value of liabilities over the bookvalue of the assets taken over will be considered asgoodwill and amortized over a period of five years in equalinstallments

Where no consideration is paid, but the book value of theassets taken over is greater than the book value of theliabilities taken over, the excess of the book value of assetsover the book value of the liabilities will be considered asCapital Reserve

Rbi Policy Merger of u Cbs

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