Urban Co-operative Banks (UCBs)

In News

• Recently, the committee headed by former RBI Deputy Governor NS Vishwanathan has proposed setting up an umbrella organisation to oversee co-operative banks.

Key Findings of the Panel

• Mandatory Merger: 
  • The RBI should not hesitate to use the route of mandatory merger to resolve Urban Cooperative Banks (UCBs) that do not meet the prudential requirements. 
  • Beginning 2004-05 till March 2020, UCBs have undergone 136 mergers, with Maharashtra accounting for over half of them, closely followed by Gujarat.
• UCB in 4 tiers: It has suggested a four-tiered structure to regulate them, based on size of deposits.
  • Tier 1 with all unit UCBs and salary earner’s UCBs (irrespective of deposit size) and all other UCBs having deposits up to Rs 100 crore, 
  • Tier 2 with UCBs of deposits between Rs 100 crore and Rs 1,000 crore, 
  • Tier 3 with UCBs of deposits between Rs 1,000 crore and Rs 10,000 crore and 
  • Tier 4 with UCBs of deposits more than Rs 10,000 crore. 
• Governance: 
  • The Umbrella Organisation should be financially strong and be well governed by a professional board and senior management, both of which are fit and proper.
  • The panel suggested that they should be allowed to open more branches if they meet all regulatory requirements.
• Capital to risk weighted asset ratio:
  • The committee has suggested that the minimum capital to risk-weighted assets ratio (CRAR) for them could vary from 9 per cent to 15 percent and for Tier-4 UCBs the Basel III prescribed norms would apply.
• Acquisition: 
  • The committee advocated that the smaller banks, which are more rooted in co-operative principles, should be allowed to acquire scale through the network of the umbrella organisation, while the larger ones should have scale on a stand-alone basis.
• Capital raising from market:
  • The umbrella organisation, structured as an NBFC, will be able to raise capital from the market and also on-lend it to member UCBs. 
  • The umbrella organisation (UO), at a later stage, can consider converting into a universal bank owned by member banks. 
  • Once the UO stabilises, licensing of new UCBs could be considered.
• Globally Accepted System:
  • As an alternative to mandatory consolidation, the Committee preferred smaller banks acquiring scale via the network of the UO, which is one of the successful models of a strong financial cooperative system globally.
• RBIs role in consolidation and otherwise:
  • On consolidation of UCBs, the panel said the RBI should be largely neutral to voluntary on consolidation except where it is suggested as a supervisory action. 
  • The powers to order compulsory amalgamation should be used as the backstop.

Urban Cooperative Banks

• Brief History:
  • The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. 
  • These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. 
  • These banks were traditionally centred around communities, localities and workplace groups. 
  • They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.
• Urban banking Movement:
  • The origins of the urban cooperative banking movement in India can be traced to the close of the nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. 
  • Cooperative societies are based on the principles of cooperation, – mutual help, democratic decision making and open membership. 
  • Cooperatives represented a new and alternative approach to organization as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.

(Image Courtesy: TOI )

Recent Status of UCBs

• According to the Trends and Progress of Banking in India report published by the Reserve Bank of India (RBI),:
  • Urban commercial banks have witnessed a decline in deposits from 6.1 per cent in 2018-19 to 3.5 per cent in 2019-20. 
  • In terms of loans and advances too, there has been a sharp decline from 8 per cent in 2018-19 to 0.8 per cent in 2019-20.
  • By the end of March 2020, the sector comprised 1,539 UCBs and 97,006 rural cooperative banks, with a depositor base of 8.6 crore.
  • Rural cooperatives make up 65 per cent of the total asset size of all cooperatives taken together.

Issues in UCBs

• Recent Failures: Cooperative banks in India have been struggling to survive for the last few years. The issue came into the limelight after the Punjab and Maharashtra Cooperative (PMC) bank fiasco, which left frantic depositors visiting the branches in attempts to withdraw their hard-earned money.
• Challenging Changes: The evolving changes in the financial sector combining and integrating micro finance, FinTech companies, payment gateways, social platforms, e-commerce companies and NBFCs challenge the continued presence of the UCBs, which are mostly small in size, lack professional management and have geographically less diversified operations.
• Sinking balance sheet: Sharper decline is seen both in terms of loans and deposits.
• Large share of Rural cooperatives: They make up 65% of the total size of all cooperatives taken together.
• Diminished share in agricultural lending
  • Cooperative banks have played a major role in providing financial support to the rural sector.
  • They started with an aim to promote saving and investment habits, specifically in the rural areas.
  • Report noted that despite this crucial role played by the sector, its share in total agricultural lending diminished considerably over the years from as high as 64% in 1992-93 to just 11.3 % in 2019-20.
• Declining number of UCBs: After liberalisation in licensing policy in 1993, nearly one-third of the newly licensed ones became financially unsound within a short period.
  • However, the Reserve Bank’s Vision Document 2005 reversed the liberal licensing policy while envisaging a multi layered regulatory and supervisory strategy aimed at shoring up their viability. Example, the merger of weak UCBs with strong ones.
• Dual control: For years, such banks have escaped scrutiny despite failures and frauds due to dual regulation by the state registrar of societies and the RBI.
  • In 2020, an amendment was introduced to bring UCBs under the supervision of RBI.
  • As a result, 1482 urban cooperatives and 58 multi state cooperative banks were brought under direct supervision of RBI.
  • This gave sufficient power to the central bank to control the cooperatives.
• Frauds, COVID etc affected the asset quality: This, even, resulted in the decline of profitability of Urban Cooperative Banks.
  • Lax corporate governance standards combined with political influence and interference was a prominent reason for the downfall of the sector.

Way Ahead

• Recent amendments giving the central bank more regulatory and supervisory leeway will probably encourage the UCBs to function in a disciplined manner. 
• Besides, with the shrinkage of ‘dual’ control, the RBI will be able to regulate UCBs more directly and effectively. Consequently, a lot of legal complexities will also be reduced.
• Most of the unit banks could be sold to those new generation banks who need to improve their footprint, if need be, by a DICGC financial bail-out. 
• Further, there is an urgent need to review the desirability or otherwise of having a genre of banks creating confusion and doubts in the minds of depositors and regulators. 
• If the UCBs can manage themselves efficiently, there will be increasing freedom for them.

Source: IE