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P. Devarajan

BETWEEN 1991 and 2004, the number of urban co-operative banks has moved up from 1,307 to 2,105 with deposits rising by over 1,100 per cent from Rs 8,600 crore to over Rs 1,00,000 crore and advances by 733 per cent from Rs 7,800 crore to over Rs 65,000 crore.

By geographical spread, five States — Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu — account for 1,523 banks with Maharashtra heading the league, going by the Draft Vision Document for Urban Co-operative Banks of the RBI. That seems to be the saner part of the story. The sad part of the tale is the regulation of urban co-operative banks (UCBs) is split between the RBI and the State Registrars of Co-operative Societies and the Central Registrar of Co-operative Societies (for multi-state co-operative banks) with one cutting into the other and none probably doing the job well. Politicians and the urban rich do influence the working of UCBs, leading to a loss of public confidence.

The RBI does not have the critical power to bridle non-performing managements of UCBs; banking functions such as issue of licence to start new banks/branches, interest rates, loan policies, investments and prudential exposure norms come under the RBI.

The Registrar of Co-operative Societies of the States flaunt powers under the Co-operative Societies Act for incorporation, registration, management, amalgamation, reconstruction or liquidation. Many times the State registrars and the RBI have not worked in tandem, with politicians stifling corrective suggestions by the central bank.

"Various committees in the past, which went into the working of the UCBs, have found that the multiplicity of command centres and the absence of clear-cut demarcation between the functions of State Governments and the RBI have been the most vexatious problems of the urban co-operative banking movement. This duality of command is largely responsible for most of the difficulties in implementing regulatory measures with the required speed and urgency and impedes effective supervision," admits the Vision Document.

To get round the duality, the RBI has signed MoUs with Andhra Pradesh and Gujarat governments to set up Task Forces on Urban Co-operative Banks (TAFCUB) and work jointly with the registrars on remedial action. The TAFCUB is headed by an RBI official with the State registrar coming in as co-chairman to limit conflicts and help take tough decisions on the structure of UCBs. Political excuses to stall changes will carry less conviction. With legal remedies hard to come by, the TAFCUB (suggested by the Vision Document), can work if politicians allow it to.

Some of the important draft terms of reference of the TAFCUB are: to identify banks which are viable, potentially viable and unviable; to recommend the various conditions, including the nature and extent of funds required to be infused in each UCB identified as potentially viable, the source thereof, changes in management where necessary and the time frame for achieving viability; the TAFCUB may fix responsibility on different agencies for helping the turnaround; to recommend the future set-up of the existing unlicensed banks whose applications are pending with the RBI; to recommend the manner and time frame for exit of the unviable banks, which could be in the form of merger/amalgamation, conversion into a credit society and liquidation; and to recommend on the management aspects of a bank placed under a revival plan.

In February 2005, the RBI came out with guidelines on merger and amalgamation of UCBs which will apply when the TAFCUB tries to trim bank population. It is quite possible that the 2-tier operating framework in the Vision Document will guide the working of the MoUs in Andhra Pradesh and Gujarat. The first tier will have unit banks with deposits up to Rs 50 crore and will bear less stringent regulations with, say, capital adequacy ratio giving way to the Net Owned Funds to NDTL ratio. All other banks will fall under the second tier to abide by the regulatory prescriptions for commercial banks.

"Banks that do not comply with the regulations should either reduce their operations to qualify for the relaxed regulations applicable for unit banks with deposits less than Rs 50 crore or may be required to convert into co-operative societies," says the Vision Document. There will be less need for revamp funds from the State Governments if the merger route is seriously pursued. The experiment deserves a try.

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