A Reserve Bank of India move to offer Rural Cooperative Banks (RCBs) more fundraising options would help strengthen their capital ratios and enable them to boost rural lending, experts said.
Wider access to funding would also pave the way for RCBs to develop new products and strengthen their digital infrastructure to meet customers' changing needs and expectations, multiple bankers and analysts told Moneycontrol.
In a notification on April 19, RBI said RCBs can raise funds through the sale of preference shares and debt instruments to people in their area of operation or existing shareholders.
Such fundraisings could help rural banks strengthen their capital adequacy ratio, an indicator of financial strength expressed as the ratio of capital to risk-weighted assets.
The lenders need to follow certain conditions like not using their fixed deposit rate as a benchmark so that prospective investors become well aware of the risk involved in buying the new instruments.
These banks also need to make some disclosures prominently, especially ones saying the instruments through which the funds are being raised are not fixed deposits.
The move follows RCBs coming under the amended Banking Regulation Act. Until now, cooperative banks have been governed by a dual regulatory structure, regulated both by the RBI and the respective State Co-operative Societies Act.
Playing the rural recovery
RCBs, which include state cooperative banks and district central cooperative banks, are responsible for ensuring credit flow to the agriculture sector. The short-term cooperative credit structure is divided into three levels: village-level Primary Agricultural Credit Societies (PACS), district-level Central Cooperative Banks (DCCBs), and state-level State Cooperative Banks (StCBs). The government, along with RBI, is striving to increase credit flow to agriculture and other priority sectors.
“By bringing this notification, the RBI has rightly allowed these lenders to broad-base their liability raising. This is an enabling provision that gives these lenders more access to funding from other sources,” said a top official at a state-run financial institution, requesting anonymity.
“In the 1960s and 1970s, these banks were giving 60-to-70 percent of the credit to the agriculture sector, and now that share has dropped drastically to 15%," the official said. “These players are not as capable as public sector banks and are miles behind small finance banks in terms of digital infrastructure. Better access to funding will also help address that gap.”
Experts said RCBs can use the additional funds to play the rural economic recovery in the country by pushing credit growth. With better access to funds, RCBs are likely to extend their customers loans at cheaper rates.
“The RBI’s latest regulations will act as a big facilitator for providing more credit in the rural areas at better terms and competitive rates, which in turn will support faster development of the rural economy,” said Jyoti Prakash Gadia, managing director at Resurgent India.
Resurgent India is a Gurugram-based investment bank that focuses on micro, small and medium enterprises (MSMEs), corporate entities and banks in the areas of fundraising through sales of equity and debt instruments.
Experts said there could be a need for more clarifications by the regulator to assess market response and more clarity would emerge once these banks tap the debt market.
“The call option mentioned for the additional debt raise, through the capital market, is a minimum of 10 years, as compared to five years for scheduled commercial banks. This means that these banks will have to keep servicing their debt for a minimum 10-year period, which can be challenging at times,” said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, a Mumbai-based debt advisory firm.
No credit rating criteria has been mentioned in the RBI circular, Srinivasan said, adding the investor base could be limited in the beginning.
Moreover, the dual regulation could also be challenging, experts said. PACs have strong political patronage, which may also pave the way for corruption and inter-party linkages if access to more funds becomes easy.
“For this, it could be prudent that the RBI completely takes them under their ambit,” said another senior banker with a state-run bank.