Kerala Bank gets RBI nod, but HC cases still stand in the way

Thiruvananthapuram: A year after the RBI accorded its in-principle nod, the apex bank has given its final approval for the merger of 13 district cooperative banks with the apex State Cooperative Bank to form the Kerala Bank. The Malappuram District Cooperative Bank is the lone DCB that has voted against the merger.

The RBI, in a communique sent to the Kerala Government on October 9, has also made the merger conditional on the High Court verdict in the various cases that have been filed against the 14(A) clause inserted in the Kerala Cooperative Societies Act.

"Now that the RBI has given its nod, we are not really worried about the cases," minister for cooperation Kadakampally Surendran said while announcing the RBI decision here on Wednesday. Nonetheless, he refused to say when the Bank would become functional. The RBI's approval has validity only till March 31, 2020.

Evidently, the Bank's fate lies in the hands of the High Court. For a district cooperative bank to merge with the State Cooperative Bank, the Act had originally insisted on a two-third majority in each DCB. As it turned out, the merger had the consent of two-third members only in seven DCBs.

To get over this hurdle, the LDF government introduced the 14(A) clause that reduced the requirement to a simple majority. As a result, except for the Malappuram DCB, others fell in line. The downside was that a slew of cases were filed in the High Court against the 14(A) clause.

"The Malappuram DCB voted against the merger thinking that the RBI will not give its approval to the Kerala Bank," Kadakampally Surendran said. "Now that the situation has changed, we will give them another chance to rethink their decision," the minister added.

The RBI has also listed six conditions for the merger, which the minister said Kerala has already complied with.

One, the proposed bank is short of Rs 97.92 crore to achieve capital adequacy. The state government has to transfer the amount to the bank before the merger begins. The minister said that the shortage was based on October 2018 figures. "By now we have made up," the minister said.

Two, a transfer price scheme should be instituted in the proposed bank on the basis of the net worth of DCBs. Three, representatives of societies that have no voting rights should be included as special invitees on a rotation basis in the governing council of the new bank.

Four, the structure of the Board of Management should be based on the guidelines set for urban cooperative banks. Five, there should be at least two professionals in the governing council of Kerala Bank. Six, the RBI approval will be valid only till March 31, 2020, after which the Bank has to once again submit a status report to the RBI through NABARD.

The two-tier bank

The proposed Kerala Bank is a two-tier system with the apex Kerala Cooperative Bank at the Centre and the large network primary agricultural cooperative societies (PACS) functioning as "autonomous nodes" around it. "They will be free to do all that they have been doing," the cooperation minister said.

While KCB will roll out modern banking services, PACS will continue to serve people independently at the local level. The second tier in the existing three-tier cooperative banking structure in the state, the district cooperative banks, will cease to exist.

The director boards of all the 14 DCBs were dismissed on April 10, 2017. In September, 2016, the Registrar of Cooperatives had frozen fresh recruitments in DCBs, and also prohibited the opening of branches by them.