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Merger of cooperative banks on anvil

By Oommen A. Ninan

MUMBAI, FEB. 7. With the Reserve Bank of India issuing guidelines for mergers and acquisitions in the cooperative banking sector, many banks, especially scheduled urban cooperative banks (UCBs), are showing keen interest in taking over sick cooperative banks. This move is expected to, in the long run, ensure better protection to depositors. Industry sources say that the Saraswat Cooperative Bank, an UCB, is planning to acquire the Maratha Mandir Cooperative Bank, while the Shamrao Vithal Cooperative Bank is interested in the South Indian Cooperative Bank. Other leading cooperative banks, among them the North Kanara Goud Saraswat Cooperative Bank, the Kapol Cooperative Bank and the Abhyudhaya Cooperative Bank, are also exploring acquisitions.

The RBI recently stated that cooperative banks planning to buy weaker compatriots should assure protection to deposits of all customers of the acquired bank. Announcing the guidelines to facilitate mergers and acquisitions in the cooperative banking sector, the RBI stated that, this is "with a view to encouraging and facilitating consolidation and emergence of strong entities and providing an avenue for the non-disruptive exit of weak and unviable entities in the cooperative banking sector." The RBI has further stated that in all cases of mergers and amalgamations, the financial parameters of the acquirer bank, post-merger, will have to conform to the prescribed minimum prudential and regulatory requirements for UCBs.

A cooperative bank can merge only with another cooperative bank situated in the same State or with a cooperative bank registered under Multi-State Cooperative Societies Act. This places multi-State UCBs at an advantage since they can acquire cooperative banks from other States. Both Saraswat Cooperative Bank and the Shamrao Vithal Cooperative Bank have multi-State presence.

The RBI has stated that while considering merger proposals, it will confine itself to the financial aspects of the union. This translates into securing the interests of depositors and ensuring the stability of the financial system.

The RBI has in recent times refrained from giving cooperative banks permission to expand their branch network. "The RBI wants us to expand by acquiring cooperative banks that are not doing well," said Suresh S. Hemmady, Chairman of the Shamrao Vithal Cooperative Bank. Mr, Hemmady added that, given the circumstances, mergers and acquisitions were the key for growth in the segment.

"We also expect some concessions from the RBI in terms of writing off the losses of the acquired bank over a period, with a minimum of five years, and concessions in the classification of non-performing assets (NPAs)," said Mr. Hemmady.

The Shamrao Vithal Cooperative Bank has already conducted a due-diligence exercise with respect to the South Indian Cooperative Bank. While the latter has NPAs of Rs. 80.08 crores (as on September 30, 2004), the Maratha Mandir Cooperative Bank is shouldering an NPA burden of Rs. 53.30 crores (as on November 30, 2004).

The acquirer banks are planning to offer voluntary retirement scheme for excess employees of sick banks. Furthermore, they are likely to request the RBI to allow them to close overlapping branches of the entities they acquire and, in lieu of these, be granted the licence to open the same number of branches in other areas.

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