Master Direction – Amalgamation of Urban Cooperative Banks, Directions, 2020

Ashish M. Shaji

01 Apr, 2021

The Reserve Bank recently came out with a master direction on amalgamation of urban co-operative banks, paving way for it to consider proposals for the merger and amalgamation of 2 or more urban co-operative banks. This master direction was issued even as RBI is evaluating proposals by investors to acquire the scam-hit Punjab and Maharashtra co-operative bank. In this article, we shall look at the master direction issued by RBI on the amalgamation of urban cooperative banks.

Purpose behind directions for amalgamation of urban cooperative banks

With a view to allow consolidation in the urban cooperative banking space, the RBI approved fresh directions for the amalgamation of two or more urban co-operative banks. Further, the RBI has stated that it would offer certain incentives to the urban cooperative bank that will be an acquirer in the process.

The Reserve bank said that it is satisfied that the amalgamation guidelines are necessary and expedient in the public interest. It may be noted that after the issue of these guidelines, the earlier norms would stand repealed.

Conditions for amalgamation of two or three urban cooperative banks

The RBI stated that it can consider the application for such amalgamation under the following scenarios:

• When net worth of the acquired bank is positive and when the acquirer bank assures protection of all depositors of such bank;
• When net worth of the acquired bank is negative and when the acquiring bank assures protection of all depositors of such bank on its own;
• When net worth of the acquired bank is negative and when the acquiring bank assures protection of all depositors with the financial support of state government extended upfront as part of the merger.

Points to consider before the merger

The RBI stated that the merger decision should be approved by two-third majority of all board members of both acquiring and acquired urban co-operative banks.

Further, the boards of these banks (UCBs) are required to consider the following points before approving the merger:

• Assets, liabilities, and reserves of acquired bank are incorporated into the books of the acquiring bank at their existing carrying amounts and don’t result in revaluation upward or credit taken for unrealised gains.
• Due diligence is done before the merger.
• Nature and quantum of consideration paid to the shareholders of the acquired UCB.
• The swap ratio has been determined after the independent evaluation of the value of both banks and if the boards are convinced that the swap ratio is fair and proper.
• The amalgamation doesn’t cause any individual shareholders violating the RBI norms.
• The impact of the amalgamation on profitability, asset quality, capital adequacy ratio, compliance with exposure norms. In all instances of amalgamations the Reserve Bank provides that the merged entity should meet the regulatory minimum requirement on capital adequacy.

Amalgamation of Urban Cooperative Banks

The boards of directors are required to ensure that the shareholders of every cooperative bank are provided access to a draft scheme for amalgamation, and minimum two-thirds majority of those shareholders that are present vote in favour of draft scheme at the shareholder’s meeting.

When the board and the shareholders have approved this scheme, it can then be submitted to the Reserve Bank for final regulatory approvals.

Dissenting shareholders can seek the value of the shares held by them in the final scheme within 3 months of the approval from RBI. However, in case of the dissenting shareholders who borrowed money from the bank where they have shareholding, the settlement shall be done once full and final settlement of their pending dues are made.

Incentives for amalgamating urban cooperative banks

The amalgamating banks would be provided certain incentives by the Reserve Bank in lieu of the mergers:

• The banks can shut loss-making branches of the acquired bank or merge them with their own branches;
• The acquiring banks can also use the branch licenses of the closed branches to open new outlets in the expanded operational area. Here the expanded area means combined locations of acquiring and the acquired banks;
• Shifting of branches or its relocation within the expanded area of operations will be permitted only after acquiring banks make sure that the clientele of the merged bank are served;
• Acquiring banks would be permitted to retain facilities like AD category I licenses of the acquired banks, even if they fail to meet the higher capital adequacy ratio requirements of 12% for such facilities, but the acquiring banks should ensure that the regulatory minimum capital adequacy ratio (9%) is met at all times.
• The minimum entry point capital for multi-state cooperative banks won’t be insisted upon in case the acquiring bank becomes a multi-state cooperative bank due to merger.

Conclusion

The guidelines pointed out that the RBI has discretionary powers to approve the voluntary amalgamation of Urban Cooperative banks under the provisions of section 44A read with section 56 of the Banking Regulation Act, 1949^[1].

Read our article:System Based Asset Classification for Urban Co-operative Banks (UCBs)