The Hindu Business Line : Cooperative banks

THIS is with reference to the editorial "No credit for coop directors" (May 4, 2004): When it is admitted that the right of any person to take loan against his own money is "unexceptionable", where is the logic in qualifying it by saying that "the ban must remain in place given the structural infirmities plaguing the cooperative banks"? We have been reasoning with the regulators that such actions will, instead of solving the problems identified with the sector, only aggravate them. We have been voicing concern about duality and ambiguity in controls for long and we are satisfied that there is a positive movement in this direction. We agree that a "superior regulatory infrastructure" needs to be put in place.

We have been emphasising that community-based credit institutions like urban cooperative banks, which form an important component of the credit delivery system, need regulation and supervision though not necessarily identical to that of commercial banks. Equally urban cooperative banks must themselves professionalise all aspects of their functioning. Only then will the perceived "infirmities" of the sector be addressed and the urban banks be able to fulfil their potential.

The stakes for the nation in bringing back the public confidence levels in urban banks are high. This would be best achieved by introducing second generation prudential norms gradually and by raising the bar of critical parameter to the extent that it is negotiated without difficulty by 60-70 per cent of the institutions. Structural infirmities will definitely not go away by restrictions like ban on loans against deposits, or by prescribing norms that would deny 90 per cent of the banks to undertake simple non-fund-based activities like insurance agency, or refusing any tie up with money transfer companies.

The Government and the Regulator should put in place an enabling administrative and regulatory system which will encourage growth of urban cooperative banks. Of the 2000 cooperative banks in the country, over 80 per cent operate in five States. There is, therefore, a vast scope for such institutions to come up in the other States.

D. Krishna, Chief Executive, National Federation of Urban Coop Banks and Credit Societies Ltd., New Delhi

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