Indian co-operative banks under threat of being demutualised

11 Sep 2015

The Reserve Bank of India is recommending converting large urban co-operative banks into commercial banks. While the conversion would not be compulsory, co-operative banks would not be permitted to offer all products and services currently provided by commercial banks unless they obtain commercial banking licences.

RBI deputy governor R Gandhi leads the panel that recommended the demutualisation of co-operative banks. Mr Gandhi says this would enable urban co-operative banks to minimise systemic risks and continue to grow and promote financial inclusion.

The report by the RBI panel also highlights that the co-operative banking sector is growing and consolidating. However, according to the report, a stress test on liquidity risks carried out by RBI showed that more than half of the 50 urban co-operative banks being assessed would face liquidity problems. The conversion would apply to co-operative banks with a revenue of over Rs 200m.

Responding to the report, the National Association of Urban Co-operative Banks (NACUB) accused the RBI of trying to shrink the co-operative banking sector.

“The accumulated surplus of a co-operative is the culmination of efforts of members of the co-operative over the years and generations. Present members are bound by co-operative values and principles to pass it on to the next generation with some improvement. It is commonly known as intergenerational capital.

“Unlike in joint stock companies, the shares held by members of a co-operative do not have a concept of book value or market value as the reserves are not all distributable among members nor are the shares of co-operatives traded like shares of companies. Therefore, the envisaged introduction of provision to convert a multistate co-operative society into a joint stock company or any other form of business entity is unethical and anti-co-operative. It is antithesis of 97 Constitution Amendment that enjoins upon state through a directive principle to endeavour to promote co-operatives,” reads a statement issued by the body.

The organisation also strongly rejects the concept of a co-operative bank starting with a capital base comparable to that of a commercial bank. NACUB argue that such a move will ensure that hardly any new urban co-operative banks are licensed in future.

RBI suggests having two power centres – a board of directors and a management board, with one being answerable to the general body and the other to the Regulator directly. NACUB opposes this proposal, which it described as "impractical".