The Hindu Business Line : Urban coop banks deserve saving

After a slew of scandals that rocked urban cooperative banks over the last decade, the Reserve Bank of India went into overdrive to regulate their operations, sometimes with success and often, when a bank had almost gone belly-up, with little success. Either way it caused much hardship for depositors. Under the Banking Regulations Act 1949, the RBI has appropriated wide and sweeping powers to regulate urban cooperative banks, assuming that as these outfits engage banking activity, they would come under central bank control like other entities. But the fact that many urban cooperative banks have political connections and also come under the jurisdiction of the State governments has rendered the monitoring process uncoordinated.

But the central bank recently decided to revoke the ban on branch expansion by urban cooperative banks that it had imposed after the Madhavpura Cooperative Bank scandal in 2001. It is reaching State-level agreements to coordinate supervision under a tacit acknowledgment that good practices need not be curbed unnecessarily; strong and healthy urban cooperative banks have been expanding their network through mergers and acquisitions and this should be encouraged. But since the entities are subject to dual control, it was essential to reach some kind of understanding on the manner the urban cooperative banks should grow in the interest of depositors and a general well-being of the financial system.

The RBI has signed MoUs with Karnataka, Gujarat, and even Uttaranchal, but surprisingly Maharshtra, home to a third of all urban cooperative banks and two-thirds of deposits collected by them, signed one only last month. With that agreement, in one of the richest States in the country, there should be a convergent approach to the development of the sector and remedial actions when necessary. This is an urgent requirement for an important part of the financial system that has been plagued by an uncoordinated regulatory approach occasioned by the existence of two masters as it were.

This coordination comes not a day too soon. Urban cooperative banks, among all the formal banking entities, historically have had the biggest retail reach and an intimate relationship with clients. That nexus is eroding with the growth of personal banking services and new technology, especially by private banks. Also urban cooperative banks have not been able to service the growing credit requirements of clients or the newer demands for loans in the field of personal finance. That perhaps explains the acquisitive desire of the strong cooperative banks and in the interest of healthy competition the urban cooperative banks should be encouraged to grow. A few bad eggs should not curb the growth of a key banking entity.

More Stories on : Editorial | Co-operatives | Financial Policy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Urban coop banks deserve saving

Irrational responses to asset price changes

A place in Indian sun for the poor and bright

Tongue-lashing by the President

Great expectations from public services

Nuclear deal

Basic sciences ignored