Urban Co-operative Banks (UCBs) are integral to India’s banking sector, primarily serving urban and semi-urban areas. Supervised by the Reserve Bank of India (RBI) and governed by laws such as the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955, these banks play a crucial role in facilitating Priority Sector Lending (PSL). The Ministry of Cooperation and the Multi-State Cooperative Societies Act, 2002, further strengthen their functioning. This article will delve into the recent measures taken by the RBI to bolster UCBs, the potential implications of these actions, and an overview of cooperative banks in India and the key challenges they face.
Key Measures Taken by the RBI
To fortify 1,514 urban co-operative banks, the RBI has introduced four major measures. Firstly, UCBs can now open new branches without prior approval from the RBI, accounting for up to 10% (maximum 5 branches) of the number of branches in the last fiscal year. Secondly, UCBs are now permitted to execute One-Time Settlements similar to commercial banks. Thirdly, the deadline for UCBs to meet PSL targets has been extended by two years till March 31, 2026, allowing any surplus deposits post-clearing the PSL shortfall during FY 2022-23 to be repaid to the UCB. Lastly, a nodal officer will be allocated for improved coordination between RBI and the cooperative sector.
Potential Outcomes of RBI’s Initiatives
These initiatives are expected to boost UCBs, mainly operating in urban regions and struggling to meet PSL targets. By treating cooperatives on par with other economic entities, the Ministry of Cooperation reinforces its commitment towards strengthening them.
Understanding Cooperative Banks in India
Cooperative banks are institutions established on a cooperative basis to handle ordinary banking tasks. These banks, founded through share collection, deposits acceptance, and loan disbursement, function as cooperative credit societies. Members of a community come together to extend loans to each other under favourable terms, and these banks operate under the relevant state’s Cooperative Societies Act or the Multi-State Cooperative Societies Act, 2002.
Defining Urban Cooperative Banks (UCB)
UCBs refer to primary cooperative banks located in urban and semi-urban areas. Initially, they only lent money for non-agricultural purposes until 1996 but have since extended their services. Traditionally serving small borrowers and businesses, their operations have significantly broadened over time.
Recent Developments in UCBs
Noteworthy developments have occurred in the UCB sector recently. In January 2020, the RBI revised the Supervisory action Framework (SAF) for UCBs, and in June 2020, an Ordinance was passed to bring all urban and multi-state cooperative banks under RBI’s direct supervision. Moreover, in 2022, a 4-tier regulatory framework was introduced for categorising UCBs based on their deposit size.
Challenges Faced by Cooperative Banks
Despite playing a significant role in India’s banking ecosystem, cooperative banks face several challenges. This includes structural drawbacks that obstruct cooperative federalism and constrain financial institutions supplying agricultural finance. The utilization of technology can potentially mitigate these limitations, providing better reach and service to rural clients.