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The Reserve Bank of India (RBI) has exempted investments made by urban co-operative banks (UCBs) for subscribing to the capital of the Umbrella Organisation (UO) from the limits imposed on holding of non-Statutory Liquidity Ratio (non-SLR) securities. The move is expected to encourage UCBs to subscribe to the capital of UO and acquire its membership. The UO will be a non-banking finance company (NBFC).
According to the RBI’s 2009 circular on ‘Investments in Non-SLR securities by Primary (Urban) Co-operative Banks’, non-SLR investments will be limited to 10 per cent of a bank’s total deposits as on March 31 of the previous year. Further, investments in unlisted securities shall not exceed 10 per cent of the total non-SLR investments at any time.
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Some of the functions that the UO could perform include liquidity management for UCBs (those with surplus liquidity can park it with the UO, and those facing deficit could draw funds from it), establishing a common IT infrastructure, including payment gateways and data centres that could be shared by all banks, and facilitating mergers in the sector.
RBI had accorded regulatory approval to the National Federation of Urban Co-operative Banks and Credit Societies Ltd. (NAFCUB) in June 2019 for the formation of a UO for the UCB sector. The approval inter-alia permits UCBs to subscribe to the capital of the UO on a voluntary basis. As at March-end 2021, there were 1,534 UCBs in the country, according to the RBI.
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According to the report of the expert committee on UCBs, the UO should provide cross-liquidity and capital support to the UCBs when needed, as also cloud services for facilitating IT-enabled operations, by the member banks. “The provision of cloud services has several advantages. It will standardise the IT platform across all the member UCBs and avoid the need for each UCB, either to have skills or to hire services for maintaining the IT infrastructure,” the report said.
Further, due to the aggregation being done by the UO, it will provide all member banks the benefit of innovation on an ongoing basis, including advantages from emerging advancements on the IT front at a lower cost.
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Maintain a dynamic stop-loss as the rally looks steep“The UO is envisaged as the arrangement for smaller entities to acquire scale through network. However, it can also emerge as the brand builder for the cooperative banking sector in its entirety. While there may not be a regulatory imperative for the larger banks to federate with the UO, steps should be taken by the system to encourage the larger UCBs to embrace the UO,” the report said.
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