Why co-operative banks don’t want to convert into small finance banks

Conversion as SFBs would require UCBs to give up their universal bank status to become ‘narrow banks’

Urban co-operative banks (UCBs) have not warmed to the Reserve Bank of India’s scheme to allow them to voluntarily convert into small finance banks (SFBs), as it would mean that they would have to give up their ‘universal bank’ status to become ‘narrow banks’.

Put simply, UCBs do not want to be shackled by the lending restrictions that SFBs face currently. As universal banks, UCBs can undertake all banking activities permitted to commercial banks.

SFBs are required to extend 75 per cent of their loans to sectors eligible for classification as priority sector lending (PSL), comprising loans to agriculture, micro, small and medium enterprises, education, housing, and others.

Further, at least 50 per cent of SFBs’ loan portfolio should constitute loans and advances of up to Rs 25 lakh.

For UCBs, the target for lending to the priority sector is 40 per cent of the total. According to RBI data, in FY2018, UCBs’ PSL portfolio was at 46.6 per cent of total advances, against SFBs’ 76.7 per cent.

Only about 26 per cent of the loans of scheduled UCBs, which are eligible for conversion into SFBs, is in the below Rs 25-lakh category. In sharp contrast, 50 per cent of SFBs’ loan portfolio has to comprise loans and advances below Rs 25 lakh.

Universal banks vs narrow banks

The RBI had announced a scheme for the voluntary conversion of eligible UCBs into SFBs in September 2018, in line with the recommendations of the high-powered committee headed by the then Deputy Governor R. Gandhi. Though it is more than a year since the central bank came up with the scheme, the co-operative banks are not enthused by it.

The central bank reasoned then that in keeping with the fast-paced changes in the banking space and in order to facilitate growth, the scheme for voluntary transition of UCBs into an SFB would be a step forward, to provide a full suite of products/ services, sustain competition, raise capital, etc.

D. Krishna, former Chief Executive, National Federation of UCBs and Credit Societies (NAFCUB), opined that conversion is not a great solution.

“UCBs are universal banks. Why should they trade it to become narrow banks? UCBs should not fall for it. The (priority sector) lending criteria for SFBs is quiet rigorous. Conversion into an SFB is just an invitation for people having a lot of money to take a short cut towards banking licences,” he said.

According to RBI, UCBs with a minimum networth of Rs 50 crore and maintaining a capital-to-risk-weighted assets ratio of 9 per cent and above, are eligible to apply for voluntary transition to an SFB.

Jyotindra Mehta, President, NAFCUB, emphasised that UCBs have been set up in the spirit of co-operation. “All the stakeholders are trustees, with one member having only one vote, irrespective of his/ her shareholding. But if UCBs get converted into SFBs, the stakeholders will become owners, with their voting power dictated by their shareholding.

“We are against privatisation of co-operatives. Conversion of UCBs into SFBs is totally against the principle of co-operation,” he said.