The Hindu Business Line : Propping up co-op banks

If there is one segment of the financial system that has proved remarkably responsive to policy changes, it is the urban co-operative banking (UCB) sector. Forty three years ago when UCBs were brought under the Banking Regulation Act of 1949 there were a little over a thousand of them with a deposit and advances base of around Rs 150 crore. In 1992 when the Reserve Bank of India (RBI) on the advice of the Marathe Committee opened up the sector, the numbers grew rapidly as did the business; by 2003 there were 1,941 banks flush with funds — Rs 1,01,546 crore deposits and a little over half those lent out. The numbers told a story of success with liberal licensing; in a year however, the dirt had hit the ceiling as scandals rocked some high profile and lesser known UCBs and the RBI hastily rolled back its liberal policy. It focussed on consolidation of a sector riddled with governance and capital adequacy problems. Five years later the figures tell yet another successful story, this time of internal resilience. But that consolidation has not solved some critical issues that plagued the sector long before the scandals.

Since the doors shut on new UCB licences in 2004, the pattern of business has gradually shifted; the number of UCBs has contracted from the high of 2003 and the share of business by the stronger UCBs termed Grade I and II has grown so that they account for two thirds of all deposits and advances. Business growth has shifted to the more healthy UCBs with concentration of both deposits and advances expansion restricted just to the top 0.9 per cent. The share of business, historically never close to that of the commercial banks, has declined from around 6 per cent in 2000 to 3.7 per cent eight years later. For a sector so central to financial inclusion both for deposits of the un-banked and financial support for small businesses, the decline in market share is a matter of concern, all the more so since most of the UCBs are concentrated in the five most-industrialised states — Maharashtra, Andhra Pradesh, Karnataka, Gujarat and Tamil Nadu.

A recent report by a working group of the RBI has now advised the need for an umbrella organisation, a non-deposit taking NBFC to provide capital support, offer payment and settlement services and State-wise emergency fund that would help weak UCBs. But the dilemma remains for those States that do not have a co-operative credit presence and need it. With further expansion of UCBs virtually at a stop and the formal banking sector also weak in the backward states, financial inclusion seems that much further away.

Related Stories:
RBI panel suggests umbrella organisation to revive urban co-ops
RBI pushing for acquisition of weak, sick urban co-ops
RBI move puts co-ops in a bind

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