RBI guidelines for Amalgamation of District Central Co-operative Banks with State Co-operative Bank

Ashish M. Shaji

27 May, 2021

The Reserve Bank released a notification on May 24, 2021, stating that it would consider amalgamation of District Central Co-operative banks with the state co-operative banks. This would be done subject to certain conditions, including that a proposal be made by the concerned state government. Let’s take a close look at the notification released in this regard.

Amalgamation of District Central Co-operative banks: Background of the matter

On 23^rd December 2020, the Indian government had notified the Banking Regulation (Amendment) Act, 2020^[1] for the District Central Co-operative banks and for state co-operative banks with effect from 1^st April 2021. As per the notification, the amalgamation of the District Central Co-operative banks and state co-operative banks should be sanctioned by the Reserve Bank in terms of provisions of Section 44A read with section 56 of Banking Regulation Act, 1949.

The RBI notification also stated that in the past, few state governments approached RBI for the amalgamation of District Central Co-operative banks with the state co-operative banks as a two-tier short term Co-operative credit structure.

Conditions for Amalgamation

The RBI stated in the notification that it would consider proposals for amalgamations on fulfilment of the following conditions:

• The scheme of amalgamation should be approved by the requisite majority of shareholders as per the provisions of Section 44A, read with Section 56 of the Banking Regulation Act, 1949.
• The amalgamation proposal of the state government should be examined and recommended by NABARD (National Bank for Agriculture and Rural Development).
• When the state government of a state makes a proposal to amalgamate one or more District Central Co-operative banks in the state with state co-operative banks after performing a detailed study of the legal framework. Additionally, there should be an additional capital infusion strategy, assurance about financial support, projected business model with profitability and proposed model of governance for the amalgamated bank.

Amalgamation of District Central Co-operative banks: Two-stage approval process

The amalgamation proposal of District Central Co-operative banks with the state co-operative banks shall be examined by Reserve bank in consultation with NABARD, and the sanction/approval would be a two-stage process:

• In the first stage, an in-principle approval shall be accorded provided the conditions are fulfilled;
• Once the above process is completed, NABARD and RBI may be approached for final approval with compliance report.

General considerations governing the in-principle approval

• After amalgamation, the state co-operative banks should adhere with the CRAR norms prescribed by the Reserve bank from time to time. The shortfall in capital for meeting the CRAR requirement shall be met by the state government on an ongoing basis if required.
• If the state co-operative bank is not eligible to continue with certain line of business, then it will be phased out within a year of grant of final approval.
• Extant branches of the District Central Co-operative banks will be converted into branches of state co-operative bank. It will come under the purview of Section 23 of the Banking Regulation Act 1949.
• The state co-operative bank shall be required to apply for branch license from the Reserve Bank for all the existing branches of the District Central Co-operative banks within 3 months of the amalgamation.
• DICGC clearance for amalgamation will be obtained by the state cooperative bank before applying for the final approval.

Conclusion

In the past, few state governments approached RBI for the amalgamation of District Central Co-operative banks with the state co-operative banks as a two-tier short term Co-operative credit structure. The RBI stated in the notification that it would consider proposals for amalgamations on fulfilment of the conditions specified above.

Read our article: Supervision of Co-operative Banks by RBI