Takeover of Weaker Banks

The Reserve Bank of India appears inclined to encourage takeover of weak/sick urban co-operative banks (UCBs) by domestic scheduled commercial banks (SCBs).

According to the central bank, where proposals for amalgamation within the UCB sector (i.e. amalgamation of weak/ sick UCBs with strong UCBs) are not forthcoming, it is proposed to provide Deposit Insurance and Credit Guarantee Corporation support to the amalgamation scheme involving transfer of assets and liabilities (including branches) of legacy cases of UCBs to domestic SCBs.

Takeover legacy

The takeover of legacy cases of UCBs – UCBs having negative networth as on March-end 2007 – by domestic SCBs will be allowed provided the amalgamation scheme ensures 100 per cent protection to depositors, the RBI said in the second quarter review of its monetary policy for 2009-10.

The prospect of acquiring a readymade infrastructure and business could prompt SCBs, especially from the private sector, to pursue acquisition of weak UCBs, said Dr Vinayak Tarale, Secretary, Mahahrashtra State Co-operative Banks’ Association.

In case the amalgamation scheme provides for each depositor (of a weak UCB) being paid or credited with, on the date on which the scheme comes into force, an amount which is less than the original amount and also the specified amount, the Corporation, according to the provisions of the DICGC Act, will pay to depositors the difference between original amount and the amount so paid or credited/ the specified amount, whichever is less.

Guidelines

The central bank said it will be issuing detailed guidelines on DICGC supported transfer of assets and liabilities of UCBs to SCBs in legacy cases.

According to the RBI’s latest report on Trends and Progress of Banking in India, out of 1,721 UCBs in India, 23 per cent or 392 UCBs fell in the weak and sick banks category as of March-end 2009