The Reserve Bank of India (RBI), the country’s central monetary authority, has recently turned its focus towards Urban Cooperative Banks (UCBs). The RBI’s Governor addressed concerns regarding the functioning of UCBs, emphasizing on strengthening their governance. Although the UCB sector has demonstrated overall financial growth, there are individual entities with vulnerabilities that need to be addressed for the stability of the sector.
Concerns Regarding Urban Cooperative Banks (UCBs)
There are a few key areas of concern in relation to UCBs. First on the list is the financial vulnerabilities some UCBs face, such as low capitalization, high levels of non-performing assets (NPAs), or insufficient reserves, which indicate potential instability.
Another significant concern is about governance issues. A lack of robust governance practices can hinder a UCB’s overall performance and integrity, leading to issues of mismanagement, non-compliance and moral concerns.
Compliance challenges suggest irregularities in regulatory and legal adherence, which can result in penalties and damage reputation.
Poor risk management, credit risk, liquidity risk also pose concerns about the ability of some UCBs to effectively identify, assess, and manage various types of risks.
Lastly, information technology infrastructure and cybersecurity also require attention, with UCBs needing to establish secure IT systems to protect sensitive data.
RBI’s Recommendations for UCBs
To address these concerns, the RBI has issued several recommendations. It has directed UCBs to bolster their governance practices, specifically the three pillars of compliance, risk management, and internal audit.
The central bank urged UCB boards to be more proactive in Asset Liability Management and manage liquidity risk systematically. It highlighted five aspects around the functioning of the boards including skills, expertise, diversity, and tenure of board members, and the effective functioning of board-level Committees.
The RBI cautioned against dubious accounting practices that could concealing the actual financial position. It also encouraged UCBs to adopt suitable business strategies and explore appropriate technology solutions for their growth and better customer service.
What are Urban Cooperative Banks (UCBs)?
Born out of the concept of cooperative credit societies, Cooperative Banks function differently than commercial banks by extending loans to each other at favorable terms. Based on their region of operation, Co-operative Banks are classified into Urban and Rural co-operative banks.
UCBs are regulated and supervised by State Registrars of Co-operative Societies (RCS) in the case of single-state co-operative banks, and Central Registrar of Co-operative Societies (CRCS) in the case of multi-state co-operative banks. However, in 2020, all UCBs and multi-state cooperatives were brought under the supervision of the RBI.
According to a committee appointed by the RBI in 2021, UCBs were suggested to follow a 4-tier structure based on their deposit size. As of March 2021, India has about 1,539 UCBs with a deposit base of Rs 5 lakh crore and advances over Rs 3 Lakh crore. Despite these numbers, UCBs’ market share in the banking sector is low and declining, standing at around 3%.
UPSC Civil Services Examination, Previous Year Question
In the UPSC Civil Services Examination, Previous Year Question (PYQ), Prelims posed a question regarding UCBs, related to their supervision, regulation, and equity and preference shares issuance. The correct answer indicated that the UCBs are not overseen by local state boards but are regulated by the RBI and governed by Banking Regulations Act, 1949 and Banking Laws (Co-operative Societies) Act, 1955. UCBs can issue equity and preference shares to increase capital and the Banking Regulation Act, 1949 was extended to them through an Amendment in 1966.
