Since Umbrella Organization will play a vital role in the working of urban cooperative banks in the country, NAFCUB has come out with a booklet which answers questions likely to come up in one’s mind. Feeling the necessity for everyone to understand it properly, we are publishing the same verbatim- Editor
The need for an Umbrella Organization (UO) for India’s UCB sector, on the lines of those existing abroad, was first emphasized in 2006 by an RBI Working Group chaired by Shri N.S. Vishwanathan (presently, Deputy Governor). The recommendation was made in the context of exploring avenues for UCBs for raising capital, as also the need for professionalization of the sector and reviving the sagging public confidence in the sector, post the MMCB crisis.
Thereafter, RBI appointed another Working Group on Umbrella Organization for the UCB Sector under the chairmanship of Shri V.S. Das, Executive Director. In a comprehensive report issued in 2009, based on the study of UOs in other countries, this Working Group recommended a model of a national UO for the UCB sector.
These recommendations were subsequently broadly supported by certain other high level RBI Committees and also by UCBs themselves in several conferences organized by NAFCUB and other state federations/organizations, but progress was rather slow. NAFCUB vigorously and tenaciously pursued the matter with RBI for early implementation. A Steering Committee constituted by NAFCUB in 2016 submitted its recommendations in 2017 containing the design, role and functions of a national UO.
This report was furnished by NAFCUB to RBI in 2018 and their approval sought.
Recently, RBI conveyed to NAFCUB regulatory approval for formation of national Umbrella organisation (UO) for the UCB Sector in India vide their letter dated June 06, 2019. This is a landmark development and a great opportunity for India’s 1,551 UCBs, big and small, to come together in a spirit of mutual cooperation and solidarity to form a robust and professional UO on the lines of those operating in other countries that have a large presence of co-operative banks (called credit unions).
With a view to facilitating a basic understanding of UO, its role, functions and usefulness to the UCBs, certain basic aspects are explained below in the form of Questions and Answers
Q 1. What is meant by UO?
In countries having a large presence of co-operative banks (called credit unions), such as USA , Canada, Australia, France, Austria, Italy, Finland, Poland, Netherlands and quite a few others, co-operative banks are networked closely and thrive under an apex institution known as Umbrella Organization that provides Cooperative Banks a wide range of banking and other related financial services. In most countries UO itself is a bank. India’s UCBs do not have such a UO although there are 1,551 UCBs in the country.
Q 2. Why do we need a UO?
The UO, as in other countries, will signify the spirit of mutual co- operation and solidarity – one for all and all for one- which is the basic philosophy of co-operatives. A unified & united sector served by a strong UO will through its wide range of services bring about greater professionalism and efficiency in the operations of UCBs, particularly the smaller ones. It provides protection to members in times of financial distress and crisis and also fosters co-operative spirits. A stable sector will boost public confidence in UCBs and contribute to financial stability in the country.
The UO will help UCBs raise their capital, be a provider of liquidity to address mismatches in emergencies and in times of crisis. It will also provide a robust and reliable IT infrastructure /platform that can significantly reduce costs for member banks while enabling them to provide modern banking products based on latest technology. A wide range of non-fund based services in operational spheres, training, consultancy, etc. extended by the UO will be of great benefit to banks and help them cope with competition effectively.
Q 3. What is the relevance of UO in India ?
The formation of UO will set the ball rolling for the UCB sector to move away from the existing ‘stand -alone’ structure of a large number of small banks into a well-knit system of grass roots level banks with strong network that can provide support in times of need and also improve the general quality of governance. The UCBs in India continue to be afflicted with various inherent weaknesses, the formation of UO will address different requirements of UCBs in different sizes in different locations. This, in turn, will change the mindset of the regulator towards the sector and it will consider allowing the UCBs to prosper within the co-operative fold rather than asking them to covert themselves into commercial banking companies.
A national UO for UCBs is of great relevance to India and could effectively address many limitations afflicting the sector such as, limited avenues for raising capital, meeting short term liquidity requirements, handling inefficiencies in operations, lack of professionalism and weak corporate governance. The relevance of UO for the UCB sector is also re-elected in various functions undertaken by it, such as providing investment / fund management services, technology support , product design and distribution, process re engineering which will ultimately lead to growth of the sector. The UO will also help UCBs in better credit management, improve CD ratio and will provide a platform for consortium / syndicated loans to large sized UCBs.
Q 4. What are the services to be provided by the UO?
Accepting deposits from member banks.
Raising loans from UCBs, banks and financial institutions.
Raising funds through market borrowings (bonds and non- convertible debentures).
Raising refinance from other financial institutions.
Granting loans and advances to member banks.
Granting refinance facilities to member banks.
Providing liquidity support to member banks against SLR securities through repo.
Providing capital support to member banks.
Providing facility for parking of excess funds.Non-fund based services
Non Fund-based services:
IT Infrastructure for use of member banks so as to facilitate sharing of resources leading to cost efficiency, Consultancy, Data Centers, dedicated IT network
Fund Management Services, Treasury Management Services
Consultancy services in various operational areas
Capacity building services : training, seminars and conferences
HR services: manpower planning and recruitment
Research & Development
The UO shall also play the role of a Self- Regulatory Organisation for its members.
Q 5.What is meant by Self-Regulatory
A Self-Regulatory Organization (SRO) is a non-governmental organization which has the power to create and enforce stand-alone industry and professional regulations and standards. It is meant to protect the investor by establishing rules , regulations , and set Standard Operating Procedures which promote ethics, equality, professionalism, transparency and code of governance . The UO will be subject to RBI-imposed regulation. However, the RBI may delegate some aspects of the industry oversight and surveillance to the UO. Any applicable laws or Governmental / RBI regulations will apply and be foremost while those set by the SRO become complementary / supplementary in nature to ensure efficient and sound UCBs. Since the SRO has some regulatory influence over an industry or profession, it can serve as a watchdog to guard against fraud or unprofessional practices.
The RBI shall prescribe the SRO role and functions of the UO. As a SRO, the UO will provide comfort to the Government, RBI and public who place their savings in UCBs.
Q 6. Should there be only one UO at the national level or regional UOs at the state level ?
The RBI approval is for national Level UO that shall provide all the fund-based as well as non-fund based services to its members, particularly in those regions where State Federations may not be equipped for the task and the number of UCBs is small. In states with a large presence of UCBs respective federations may extend only non-fund based services to their member banks and which may be supported by National UO. For this, there could be state level UO as has been done in Gujarat by formation of a separate wing under the aegis of the Federation, called the Centre for Banking Research Development and Excellence (CBRDE).
Q 7. How will a centralised institution like UO be able to help small banks spread over different states.
UO is envisaged to provide fund based and non- fund based support to urban banks, including the large number of small banks. In the age of electronic funds transfers, the fund based support will not be hindered by geographical location. In respect of non-fund based support activities, while certain specialized functions like investment guidance, all technology related guidance, support on regulatory aspects, etc. will be done by UO directly through its specialized arms. Certain other aspects like capacity building activities and localised seminars etc. will, if need be, be carried out in collaboration with the state level federations who can set up dedicated divisions/entities for this purpose.
Q 8. How the UO will be helpful to weak UCBs ?
Ans. There are various avenues and options for addressing the problem of weak UCBs under rehabilitation/ restructuring, such as TAFCUB, mergers, acquisitions, conversion, etc. Reserve Bank of India has put in place the above institutional mechanism for restructuring/ rehabilitation of UCBs having weak financial position. The framework encompasses augmentation of capital, improving CRAR and net worth and improvement in profitability of the UCBs. that are viable and merger of those that cannot be turnaround. However, the UO will be able to uplift banks confronted with incipient or chronic problems through timely fund based, consultancy and other advisory and technical services well before the banks get into solvency problems.
Q 9. How will the UO be useful for banks which are self – sufficient in technology, have trained manpower and are professionally run?
Ans. It is evident that a small number of large banks which account for bulk of assets in terms of value and also the large number of small banks whose aggregate assets form small part of sector’s total assets, both will make use of the UO in their own different ways. We live in a highly globalized and networked world. The volatilities in global banking system is there for all to see. While within the urban banking sector, any failure of any of the large number of small banks could adversely affect even big banks, it is a fact that there is no guarantee for even a professionally managed large urban bank not to encounter unforeseen problems due to external factors, and it would need a body like UO to come to its support. At present, there is no such support system available . B y maintaining links with markets and large international/national cooperatives, UO will be able to chart out new acceptable and safe growth paths for large banks. By participating in support system for small UCBs through UO, the large banks will indirectly be supporting themselves as overall strength of the sector will only enhance their standing in the financial intermediation world. It is very important to note that by promoting an umbrella organization the urban banks will be taking the first step towards much needed common bonding and networking. Also, the most visible facility of short term liquidity support will be immediately available even to the large banks, whenever they are in need of it. Lastly, membership of the UO could make them eligible for regulatory relaxations /concessions.
Q 10. What is important for the UO to be effective and to succeed?
Ans. Spirit of mutual co-operation, support and solidarity will be the foundation on which the UO should stand. The UO will have to be thoroughly professional, driven by Board of Directors appointed as per fit and proper criteria prescribed by RBI and its day to day operations will also be managed by professionals. It will be an organization that will also be intensely technology driven on a state of the art IT platform.
Q 11. What will be the organizational form of the national UO?
Ans. The UO initially will be in the form of a public limited non-deposit accepting NBFC (deposits from members being exempt). The company will largely be owned and controlled by UCBs as its shareholders. The NBFC form will enable the UO to raise capital and other borrowings from the market and use it for capitalizing member UCBs and for its own operations. As and when the UO is fully mature and based on its track record, it may convert itself into a full-?edged bank on the lines of UOs in other countries.
Q 12. Will the membership of the UO be voluntary or compulsory?
Ans. Membership of the UO will be voluntary. However, it is likely that UCBs joining the UO may enjoy special regulatory concessions and treatment. Being an SRO, UCBs having membership of Umbrella Organization will stand to gain in terms of branch expansion and extension of area of operation.
Q 13. What will be the capital structure of the UO and contribution of each UCB?
Ans. The UO will have an authorised capital of Rs. 500 crore. Initial issued and paidup capital will be Rs. 300.00 crore. The Steering Committee recommended that if each UCBs contributes Re. 0.10 per every Rs. 100 of assets, the above amount of Rs. 300.00 crore can be contributed to the capital of UO by all the UCBs. The load on each UCB can be made more reasonable and fair through equitable formula. Significant contribution and support is also expected from certain premier national co-operative and financial institutions for the UO. The participation of international organizations such as International Finance Corporation in subscribing to the capital of UO can be explored on the basis of experience gained in the successful running of the UO.
Q 14. How will the UO mobilize working capital ?
Ans. Apart from contribution to capital, UO will raise resources by way of borrowing from Banks and financial institutions, raise non-convertible debentures, refinance from financial institutions, UCBs having surplus funds due to low CD Ratio. Further, large cooperative organizations such as IFFCO, KRIBHCO which have sufficient resources/capacity to deploy funds may provide working capital funds for specified periods. As the UO matures and establishes its credentials, efforts will be made to seek financial assistance/contribution from RBI/ Government for the growth of the UCB sector.
Q 15. Will membership be restricted only to UCBs?
Ans. Membership can also be open to other co-operatives institutions and also to public when the UO becomes a listed company and the members can avail of the services of the UO within the framework of prevalent laws and regulations. While UO is being conceived mainly for the UCBs sector, it could also play a role in strengthening the rural cooperative credit institutions particularly in the areas of fund management, ALM, capacity building, IT adoption, Research & Development, Management Consultancy etc. They could derive benefits of its professional expertise and facilities.
Q 16. How will the UO earn its revenues?
Ans. All the services, funded as well as nonfunded, will be chargeable on commercial lines. Activities such loans, liquidity support, refinancing etc. will yield interest. Further, the UO will also invest its funds in assets which will generate income. The non-fund based facilities such as IT services, ATM network, Payment & Settlement services, Fund Management, Consultancy and other Capacity Building Services will earn fee based income for UO. It will pay fair dividend to the shareholders from its distributable profits in conformity with the prevalent laws and regulations.
Q 17. What is the roadmap for setting up of the national UO?
Ans. Pursuant to the receipt of the RBI letter of approval, NAFCUB has started the work of setting up of the national UO. A special task force has been constituted for the purpose. Steps are being taken to have a public limited company incorporated and thereafter apply to RBI for NBFC registration. The process is expected to be completed in 3-4 months. Thereafter, the process of capitalization will gain momentum. It may take around 15 months or so from the date of registration of NBFC for the UO to commence its operations in stages.
Formation of the UO is not just the question of having another new institution; it is about willingness to change our mindset to have a structure wherein we, as individual banks, are ready to co-operate, network and to help one another. More importantly, it is about our willingness to submit to certain mutually agreed selfdiscipline that will make the UO more effective.
Our success in formation of Umbrella Organisation will be an affirmation of cooperation among the co-operatives and a proof of the fact that despite marked heterogeneity in respect of size, spread and even business profile, urban cooperative banks can come together, network and be important players in the financial sector of the country.
The mission and objective in formation of UO is that all UCBs should be vibrant, growth oriented, competitive, technology driven and should meet all the parameters of financially sound and well-managed banks as per the norms prescribed by Reserve Bank of India.