UCBs: RBI panel for four-tier structure

Context:

The Reserve Bank of India’s (RBI’s) expert committee on urban co-operative banks (UCBs) has suggested a four-tiered structure to regulate them, based on size of deposits.

Relevance:

GS-III: Indian Economy (Banking Sector and NBFCs)

Dimensions of the Article:

1. Cooperative Banks
2. Urban Cooperative Banks (UCB)
3. Problems with Cooperative Banking in India
4. Recommendations of the RBI appointed committee on UCBs

Cooperative Banks

• Co-operative banks are financial entities established on a co-operative basis and belonging to their members.This means that the customers of a co-operative bank are also its owners.
• Cooperative Banks continue to be important and the ideal organisations even in the changing economic environment, as participation and inclusion are central to poverty reduction.

More details about Cooperative Banks

• Co-operative banks in India are registered under the State’s Cooperative Societies Act.
• The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.
• The Registrar of Cooperative Societies (RCS) is in control of management elections and many administrative issues as well as auditing, and the RBI brought them under the Banking Regulation Act as applicable to cooperative societies.
• Urban cooperative banks have been under the radar of the RBI, but because of dual regulation either of them did not have as much control over these banks in terms of supersession of boards or removal of directors.

Structure of co-operative banks in India:

Broadly, co-operative banks in India are divided into two categories – urban and rural.

• Rural cooperative credit institutions could either be short-term or long-term in nature.
• Short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.
• Long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).

Urban Co-operative Banks (UCBs)

• 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 work place groups.
• They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.
• About 79 percent of these are located in five states, – Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu.
• Recently the problems faced by a few large UCBs have highlighted some of the difficulties these banks face and policy endeavours are geared to consolidating and strengthening this sector and improving governance.

Difference between UCBs and Commercial Banks

• Unlike commercial banks, UCBs are only partly regulated by the RBI. Their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms. However, their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government.
• In general for a commercial bank, there is a clear distinction between its shareholders and its borrowers whereas in a UCB, borrowers can even double up as shareholders.

Problems with Cooperative Banking in India

1. Politicians in local as well as in state use them to increase their vote bank and usually get their representatives elected over the board of director in order to gain undue advantages.
2. The cooperatives in northeast states and in states like West Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and Gujarat. There is a lot of friction due to competition between different states, this friction affects the working of cooperatives.
3. A serious problem of the cooperative credit is the overdue loans of the cooperative banks which have been continuously increasing over the years.
4. Large amounts of overdues restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the cooperative.
5. The cooperatives have resource constraints as their owned funds hardly make a sizeable portfolio of the working capital.
6. Raising working capital has been a major hurdle in their effective functioning.

Recommendations of the RBI appointed committee on UCBs

• Based on the cooperativeness’ of the banks, availability of capital and other factors, UCBs may be categorised into four tiers for regulatory purposes: 
  1. 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.
  2. Tier 2 with UCBs of deposits between Rs 100 crore and Rs 1,000 crore.
  3. Tier 3 with UCBs of deposits between Rs 1,000 crore and Rs 10,000 crore.
  4. Tier 4 with UCBs of deposits more than Rs 10,000 crore.
• The minimum Capital to Risk-Weighted Assets Ratio (CRAR) for them could vary from 9% to 15% and for Tier-4 UCBs the Basel III prescribed norms.
• The committee has proposed setting up an Umbrella Organisation (UO) to oversee co-operative banks and suggested that they should be allowed to open more branches if they meet all regulatory requirements.
• Under the Banking Regulation (BR) Act, 1949 the RBI can prepare a scheme of compulsory amalgamation or reconstruction of UCBs, like banking companies.
• Supervisory Action Framework (SAF) should follow a twin-indicator approach – it should consider only asset quality and capital measured through Net Non-Performing Assets and CRAR – instead of triple indicators at present The objective of the SAF should be to find a time-bound remedy to the financial stress of a bank. 
• Owing to lack of the desired level of regulatory comfort on account of the structural issues including ‘capital’ and the gaps in the statutory framework, the regulatory policies for co-operative banks have been restrictive with regard to their business operations, which, to some extent, has been one of the reasons affecting their growth.
• Given the importance of the sector in furthering financial inclusion and considering the large number of its customer base, it is imperative that the strategies adopted for the regulation of the sector are comprehensively reviewed so as to enhance its resilience and provide an enabling environment for its sustainable and stable growth in the medium term.

-Source: Indian Express