The government is considering a proposal to merge financially sound urban co-operative banks with private sector banks.Since private sector banks are finding it difficult to grow organically through the expansion of branches, it is felt that this is one way to ensure a good growth.
According to the RBI licensing policy, new-generation private banks should be well spread out with a presence in urban, semi urban and rural areas. But except for a few, most smaller new-generation private sector banks are finding it difficult to grow and have restricted themselves to urban areas.
Urban co-operative banks, on the other hand, have limited presence and are too localised. They are also finding it difficult to raise funds given the enhanced capital requirements for UCBs with deposit above Rs 100 crore (Rs 1 billion) post-Basel-II norms, becoming effective from March 2009.
Depositors of these banks also will get a bargain by shifting to bigger banks with a professional management structure. This could therefore lead to a win-win situation for both. The suggestion has been sent to the Reserve Bank of India for its views. The apex bank, however, feels it will be difficult to assess the implications till a proposal comes up for examination.
However, banking sources added that amalgamation was allowed for urban co-operative banks under the Banking Regulation Act applicable to the Co-operative Societies Act.
From the legal point of view, another option could be to take over the assets and the liabilities of the UCBs by private sector banks after liquidation of the respective UCBs.
In order to revive the urban co-operative banks, the RBI has come up with a vision document and has entered into memorandums of understanding with various state governments for better management of the UCBs. It has restarted licensing of new UCBs for those states with whom it has signed MoUs.
The asset quality of these banks has significantly improved over the last one year. This was reflected in the sharp decline in their non-performing assets, higher rate of deposits and the loans portfolio over the last one year.
The geographical presence of UCBs is highly skewed as they are concentrated mainly in five states - Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu. At the end of March 2006, two-thirds of the total UCBs operated in Maharashtra, Goa, Karnataka and Gujarat.
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