A uni-State Urban Co-operative Bank (UCB) can metamorphose into a multi-State UCB through amalgamation with a uni-State bank registered in another State, going by the Reserve Bank of India’s guidelines on amalgamation of two or more UCBs.
Freedom from interference
What this means is that a UCB can get freedom from interference in their functioning by the State Registrar of Co-operative Societies (RCS) and come under the benign influence of the Central RCS via the aforementioned amalgamation route.
While a uni-State UCB is a bank registered as a Society in a single State, a multi-State UCB is registered with the Central RCS (CRCS) under the Multi-State Co-operative Societies Act.
Referring to the RBI’s Master Direction on ‘Amalgamation of Urban Cooperative Banks’, Co-operative Banking expert Krishna Damarla said: “Two well-managed uni-State UCBs from two States can get amalgamated into one multi-State UCB and get out of the clutches of State Registrars to come under more benign regulations (as applicable to multi-state co-operative societies) of CRCS.”
Damarla observed that uni-State UCBs in contiguous States such as Maharashtra and Gujarat, Maharashtra and Karnataka could explore amalgamation possibilities.
A State’s RCS exercises control and regulation of UCBs as co-operative societies. The RBI exercises control and regulation of UCBs on their function as a bank.
Through its auditors, RCS examines UCBs overdue debts; does valuation of assets and liabilities; ensures observance of the provisions of the State Co-operative Act, Rules and Byelaws; and award audit classification to the society, among others.
As per the ‘Amalgamation of Urban Cooperative Banks, Directions, 2020’, the RBI may consider proposals for merger and amalgamation among UCBs under three circumstances, including when the net worth of the amalgamated bank (the UCB which proposes to transfer its business to another UCB) is positive and the amalgamating bank (the UCB which is to acquire the business of the amalgamated bank) assures to protect entire deposits of all depositors of the amalgamated bank.
The second circumstance for considering proposals are when the net worth of amalgamated bank is negative, and the amalgamating bank on its own assures to protect deposits of all the depositors of the amalgamated bank.
The third circumstance is when the net worth of the amalgamated bank is negative, and the amalgamating bank assures to protect the deposits of the depositors of the amalgamated bank with the financial support from the State government extended upfront as part of the process of merger.
Among the incentives that the RBI is offering for consolidation among UCBs include not insisting on minimum entry point capital prescribed for multi-State UCBs in case the amalgamating UCB becomes a multi-State UCB, only on account of the amalgamated UCB being registered in a different State; and permission to the amalgamating UCB to close down the loss-making branches of the amalgamated UCB or merging branches of the amalgamated UCB with its own.