THIRUVANANTHAPURAM: The Kerala government is unlikely to hold any direct shareholding in Kerala Cooperative Bank (KCB) or Kerala Bank, the ‘cooperative banking monolith’ being formed by amalgamating all district cooperative banks (DCBs) with the extant Kerala State Cooperative Bank (KSCB).
Kerala Government currently owns Rs294.20 crore or 43.34 per cent of the Rs678.74 crore paid up capital of Kerala State Cooperative Bank Ltd (KSCL) as on March end, 2017.
According to the plans, the Kerala Government will convert its equity in the system, Rs474 crore, into subordinate debt and keep itself away from the ownership structure of the new bank.
While the aggregate capital of district cooperative banks will be Rs825 crore, the other prospective contributions to the capital of Kerala Bank are from the capital of KSCB (Rs385 crore), reserves of KSCB (Rs431 crore), losses of KSCB (Rs341 crore- which needs to be netted off), free reserves of DCB (Rs704 crore) and undistributed profit of DCB (Rs118 crore).
However, there is no official confirmation to this yet and, more importantly, the figures will inevitably undergo marginal changes due to the time gap between the report and the establishment of the bank.
After deducting Rs474 crore, which was the government contribution, the capital available for Kerala Bank will be Rs1,734 crore (computed at the time of preparing report). Another Rs75 crore, which is the individual capital investments in the system, will be redeemed once the bank is formed.
Given the extent of financial scams that make regular headlines in India of late, the Kerala Government’s laissez-faire approach towards the new venture will always be a positive, according to banking experts.
If Sriram Committee report can be looked forward as the blueprint for the new bank, the government will convert its capital share in the system into subordinate debt, which can certainly be counted while computing capital adequacy ratio (CAR) of the new bank though it won’t be represented in share capital.
The roadmap entails that all 14 district cooperative banks (DCBs) will be phased out and the third tier of the state’s cooperative credit system – the primary agricultural credit societies (PACS) – is poised to play the key role in terms of business as well as ownership in the soon-to-be launched bank.
The formal application for in-principle approval for the new bank has already been forwarded to the Reserve Bank of India (RBI), according to sources, and if things fall in place as expected, Kerala Bank can become a reality before long – thus creating a new platform that is strong and efficient enough to compete with the other commercial banks in the state.
Though businessbenchmark.news tried to get more details of the new bank from the finance ministry headed by Dr Thomas Isaac, emails have not elicited any response.
Talking to this business news portal, CP John, who has served twice as member of State Planning Board, expressed hope that the representation in the shareholding of Kerala Bank will be more broad-based as PACS and other cooperative entities will be keen to have increased presence in the ownership of this innovative financial institution.
The way it is envisaged, the KCB will provide financial, technical and support services to the PACS and its members in a manner that the members of PACS need not look elsewhere for any financial product and/or service.
In keeping with the spirit of licencing of universal banks by the RBI, the Sriram Committee had suggested that the shareholding of the merged entity be as broad-based as possible, not involving the State government in the equity structure, but opening up membership to all types of co-operative entities.
In essence, KCB should be a bank that represents the stake of as many cooperative institutions as possible and provides priority services to the co-operative sector. The committee also recommended removing the category of individual shareholders and redeeming their share capital at each stage of the merger process
Deposits
Overall there are around Rs53,000 crore deposits in the system if all the deposits made by the DCBs in other DCBs and the KSCB are netted off. The challenge for the merged entity would be to retain these deposits.
Loans
Once the amalgamation exercises are completed, the consolidated loan book of KCB will be Rs28,322 crore. “Unlike the other states, where the co-operative system is highly leveraged and predominantly a lending institution, in Kerala, the people have saved significantly and the system in itself has not been able to adequately deploy the resources,” the Sriram Committee Report observed.
The credit-deposit (CD) ratio at the PACS level is about 68 per cent, and more significantly, at the DCB level the ratio is 53 per cent, whereas at the KSCB level, it is less than 50 per cent. Therefore, it is evident that the PACS are the most efficient in deploying the resources, and most of the resources at the PACS level are deployed in the retail sector.
Additional capital
Given the size of the loan book of the new bank at Rs28,322 crore and the available capital at Rs1,734 crore, the system needs a capital infusion in the whereabouts of Rs800 crore to be adequately capitalized and to meet the prescribed capital adequacy ratio (CAR) of 9 per cent.
The provisional figures of profits of the KCB and DCBs indicate that this might get modified downwards. This is largely because the co-operative system is operating on a rather low CD ratio and therefore the resources are deployed mostly in risk-free assets such as investments in financial instruments that are safe, carrying a lower risk weight.
