Rbi Policy Merger of u Cbs
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Transcript of 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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
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
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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
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Issues of Regulatory & SupervisoryIssues of Regulatory & Supervisory
Concern:Concern: (Contd.)(Contd.)
UCBs membership of Payment System Should
it be unconditional? Experience of MMCB
Access to call money
SLR investments
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Issues of Regulatory & SupervisoryIssues of Regulatory & Supervisory
Concern:Concern: (Contd.)(Contd.)
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?
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Issues of Regulatory & SupervisoryIssues of Regulatory & Supervisory
Concern:Concern: (Contd.)(Contd.)
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
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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
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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
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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
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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
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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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
Information to be submitted to RBI byInformation to be submitted to RBI by
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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College of Agricultural Banking, RBI, PUNE
Information to be submitted to RBI byInformation to be submitted to RBI by
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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College of Agricultural Banking, RBI, PUNE
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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College of Agricultural Banking, RBI, PUNE
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