Recently, a committee appointed by the Reserve Bank of India (RBI) proposed a new four-tier structure for the Urban Cooperative Banks (UCBs). The move is a result of the Central government’s decision in June 2020 to bring all urban and multi-state cooperative banks under the RBI’s direct supervision. The RBI then updated the Supervisory Action Framework (SAF) for UCBs in January 2020.
Categorization of UCBs
According to the proposal, UCBs will be classified into four tiers for regulatory purposes. This classification would be based on several factors such as cooperativeness of the banks, capital availability, among others.
Tier 1 will encompass all unit UCBs, salary earner’s UCBs, regardless of deposit size, and any other UCBs with deposits up to Rs 100 crore. Tier 2 will include UCBs with deposits between Rs 100 crore and Rs 1,000 crore. Tier 3 will cover UCBs with deposits poised between Rs 1,000 crore and Rs 10,000 crore, while Tier 4 will account for UCBs having deposits exceeding Rs 10,000 crore. The minimum Capital to Risk-Weighted Assets Ratio (CRAR) for these banks could range from 9% to 15%. For Tier-4 UCBs, the Basel III prescribed norms would apply.
The Proposed Umbrella Organization
The committee has recommended creating an Umbrella Organisation (UO) to oversee the cooperative banks. Accordingly, the UO should be financially stable and governed professionally by a fitting board and a senior management team. They also suggest that these banks should be allowed to open more branches once they meet all regulatory requirements.
Reconstruction of UCBs
The RBI, under the Banking Regulation (BR) Act, 1949, can device a scheme for compulsory amalgamation or reconstruction of UCBs. This is similar to the measures applicable to banking companies.
Revising the Supervisory Action Framework
SAF should be redesigned to employ a twin-indicator approach focusing on asset quality and capital measured via Net Non-Performing Assets and CRAR. The revised SAF aims to offer timely solutions to a bank’s financial stress. If a UCB remains under stringent SAF stages for long, it may further hurt its operations and financial health.
Need for Reforms: Addressing Restrictive Policies
Historically, rules for cooperative banks have been restrictive, affecting their operations and growth due to issues surrounding ‘capital,’ statutory framework gaps, and a lack of regulatory comfort. The enactment of the Banking Regulation (Amendment) Act, 2020, has addressed these issues significantly.
Promoting Financial Inclusion
Cooperative banks play a crucial role in promoting financial inclusion. With a growing customer base, the need to review regulatory strategies to enhance the sector’s resilience and facilitate stable and sustainable growth is paramount.
About Co-operative Banks
Cooperative Banks differ from commercial banks, originating from cooperative credit societies where community members collectively extend loans to each other at favorable terms. Co-operative Banks can be broadly classified into Urban and Rural co-operative banks based on their region of operation. They operate under the Co-operative Societies Act of the concerned State or the Multi-State Co-operative Societies Act, 2002, are governed by the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.
Key Features of Co-operative Banks
Cooperative Banks are unique in that their members are both customers and bank owners. Their governance is democratic, with members electing a board of directors. A substantial portion of the yearly profit is allocated as reserves, some of which can be distributed to the cooperative members within legal and statutory limitations. They have played a pivotal role in the financial inclusion of rural masses, providing affordable credit.
About Basel III Norms
Basel III is a globally agreed-upon set of measures developed by the Basel Committee on Bank Supervision, in response to the 2007-09 financial crisis. The norms aim at strengthening the regulation, supervision, and risk management of banks and are based on three pillars: improving the banking sector’s resilience to financial and economic shocks, enhancing risk management and governance, and reinforcing banks’ transparency and disclosures.