Urban Cooperative Banks – Future Concerns
Urban Cooperative Banks (UCBs) occupy nearly 8 percent of the financial sector space. The topic for discussion at the College of Supervisors on the 24th July 2023 was on “Business Development Plans, Risk Management and Governance.”
UCBs are neighbourhood banks coming under the regulations of
both the State Cooperative Acts and the Banking Regulation Act 1949 and its
amendments. Financial Stability Report June 2023 acknowledges their
contribution to the financial sector. Credit growth of UCBs both scheduled and
non-scheduled UCBs reaching 6.7 percent and 4.9 percent respectively.
The discussion is timely for more than one reason: After the
Third Five Year Plan, there was no mention of Cooperatives as economic sector
in the subsequent plans until the NDA government formed a separate Ministry of
Cooperation and formulated a National Cooperative Policy. Second, Multi-State
Cooperative Act 2023 was on the anvil. (It was passed in the Parliament on the
25th July 2023. Third, these UCBs were in the media and the press
for several reasons: 1. failure of PMC Bank, RBI raising the threshold of
guarantee limit of deposits from Rs. One lakh to Rs.5 lakhs; 2. depositors’
interests occupied the prime interest of the regulator after a series of
failures and irregularities;3. consolidation of banks through merging of weak
banks with strong banks, 4. introduction of 4-tier structure in UCBs based on
their business levels considering their heterogeneity, 5. implementing some of
the Viswanathan Committee recommendations – particularly to help raising
capital beyond the membership through setting up National Urban Cooperative
Finance and Development, an Umbrella Organisation, 6. Board of Management with
functional experts as a support mechanism for the elected Boards has been put
in place; 7.inter-cooperative agency cooperation in strengthening the sector, increasing
number of penalties on good number of banks for several regulatory breaches; 8.new
threshold of lending to priority sector by 2026 depending on the tier to which
they belong, 9. poor governance and 10. risk management standards.
It has been noticed that majority of the Tier-3&4 UCBs
have been conforming to the regulatory directives, introduced core banking
solutions (CBS), opened ATMs, integrated with the larger payment systems like
the UPI through appropriate technologies, and mostly compliant with the
prudential norms prescribed by the RBI.
All the UCBs follow the regulation of submitting their
Annual Business Plans to the RBI. This is more ritualistic. Business
Development Plans are not prepared with bottom-up approach. There is no Board
approved strategy for preparation of such plans annually. Even after the constitution
of the Boards of Management as adjuncts to the Board (These BoMs do not have
any discretion and they perform only advisory role). The credit to risk
weighted assets ratio (CRAR) of scheduled UCBs (around 52 banks) remained
stable at 15 percent and the non-scheduled UCBs at 17.8 percent. FSR
acknowledges that ‘tier-wise CRAR of UCBs is well above the minimum regulatory
requirement.’ Net worth of all the
UCBs is stated to be comfortable. Yet there are continuing concerns on their
contribution. Some of the financially sound and well managed banks (FSWM) have
been attempting total transformation akin to commercial banks relating to
technology, like internet banking, mobile banking, one-stop solutions etc.
Capacity building at various levels in this regard and cyber security are the
challenges they are facing.
Three important aspects that seized my attention while
reviewing their performance are: 1. The role of Board of Management, 2.
Priority Sector lending imperative, and 3. Umbrella Organization.
Board of Management is supposed to guide and assist the
Board of Governance with no delegation or commitment to them. They are outside
the actual Board of Directors and yet in it. Instead of such ambiguity, there
can be negotiation with the State Governments to adopt certain rules to
facilitate the elected Boards to have nominated Directors from professional
cadres satisfying the fit and proper criteria for such nominations too. This
would settle the issue of enhancing the capability of the Boards. Further, training
of the Board of Directors, measuring the performance of the Board of Directors
on the basis of a written statement of what value addition they would like to
bring to the Board and how they would like to participate in the stability and
sustainable growth of the institution, annual Board retreats etc., should
receive the attention of the regulators.
Agenda of the Task Force on Cooperative banks (TAFCUB) in
several states is being prepared by the RBI while the concerned Registrar of
Cooperatives of the State and the Associations as the other constituents are
not being consulted mostly, save exceptions. Its functioning has become too
routinised during the last ten years. Since the purpose of the TAFCUB is to
resolve local regulatory issues without escalating them to higher levels, and
improving the functional efficiency of UCBs, it is desirable and necessary that
the agenda becomes more consultative.
Viswanathan Committee ‘s view is that “there is ample space for financial institutions that
operate on the principles of co-operation and the inclusivity that they get. As
such, the Vision for the UCB sector should be to emerge as the neighbourhood
bank of choice powered by passion for inclusive finance as the core of the
business model. This can happen only if their operations are founded on
financial strength, strong branding, cutting edge technology driven processes,
and skilled human resources coupled with an enabling regulatory environment.
These internal drivers can be available to a bank either on a stand-alone basis
or acquired through network arrangements. There are now several enabling
factors, both for the UCBs themselves and the RBI as the regulator, to
actualise this vision.”
Action
still awaits the validated recommendations of the above Committee. Many of
these aspects have been discussed while delivering my talk, the PPt of which is
attached.
*Text of the address at the College of Supervisors, RBI on
the 24th July 2023 at Mumbai.
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