MUMBAI, SEPT 26:
The Reserve Bank of India will consider financial restructuring proposals of stressed urban co-operative banks (UCBs) involving conversion of deposits into equity or debt instruments.
This move comes as financially stronger banks are unwilling to acquire weak UCBs, where the deposit erosion is large. In such situations, restructuring of the liabilities (deposits) of the weak UCB may be a viable proposition, said the RBI
The conversion of deposits will be considered even if the lenders’ networth (equity plus reserves) does not become positive post-conversion, said a central bank circular.
However, the conversion of deposits will be subject to the consent of depositors, including small depositors, the Reserve Bank of India (RBI) said in a notification.
Earlier, the RBI did not permit conversion into equity in the case of small depositors, i.e. depositor having deposit up to Rupees one lakh.
NET WORTH
Further, it had stipulated that the proportion of deposits converted into equity / debt instruments should be such that the net worth of the bank after reconstruction turns positive.
According to Jyotindra Mehta, Chairman, Gujarat Urban Co-operative Banks’ Federation. “Once deposits get converted into equity, a weak UCB’s liability will go down and its networth will increase. This move will help in its revival.”
Depositors, especially above Rs one lakh, may stand to gain from restructuring compared to what they would be entitled to receive from the Deposit Insurance Credit Guarantee Corporation in case of liquidation of the bank.
The RBI said the clause in the earlier notification whereby a portion of the deposit of individual depositors above Rs one lakh may be converted into equity holds good.
INSTITUTIONAL DEPOSITORS
Likewise, a portion of the deposits of the institutional depositors may be converted into Innovative Perpetual Debt Instrument (IPDI), which is eligible for inclusion as Tier I capital.
The total amount raised by a bank through IPDIs cannot exceed 15 per cent of its core capital. These are perpetual instruments with no maturity. The interest payable to the investors is either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate.
IPDIs come only with call option, which can be exercised by the bank after 10 years.
Courtesy : The Hindu Business Line
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