'Existing legal framework for urban co-op banks needs to be revisited'

Our Bureau Mumbai | Updated on June 10, 2014 Published on June 10, 2014

R Gandhi, Deputy Governor, RBI

To facilitate further growth of large urban co-operative banks, which have reached a certain threshold in the size and complexity of business, the existing legal and regulatory framework governing them need to be revisited to enable their smooth transition into commercial banking, said a top Reserve Bank of India official.

Addressing the Conference of Urban Co-operative Banks (UCBs) in Ahmedabad, R Gandhi, Deputy Governor, RBI, said “…once cooperative banks reach a certain threshold level, they are also expected to follow a regimen like large banks and standardised global practices, which may not be possible within the existing legal structure of cooperative banks.

“Thus, before we move forward, the existing legal and regulatory framework needs to be revisited to enable smooth transition. Specifically, we need to debate the needed legal framework that will facilitate conversion of cooperatives into joint stock companies, conversion of deposit holders into share holders etc.”

The other alternative could be to allow the UCBs to grow and sustain themselves in the existing set-up.

“In that event, the obvious question that comes to mind is what are the existing restrictions that can be liberalised and what further measures can be envisaged for the smooth non - disruptive growth of the sector? I hope the delegates will deliberate on these issues and suggest possible measures,” Gandhi said.

Over the last few years, India’s largest UCB bank, Saraswat Co-operative Bank, has been considering the possibility of converting into a private sector bank to overcome the inherent restrictions in the co-operative banking model on raising capital.

According to RBI data, the number of financially weak banks in the UCB sector declined and consequently the total number of UCBs declined from 1770 as end-March 2008 to 1606 by end-March 2013.

However, the deposits and advances of urban banks increased from ₹1,39,871 crore and ₹90,444 crore to ₹2,76,941 crore and ₹1,80,960 crore, respectively, during the same period.

Umbrella Organisation for UCBs

Gandhi observed that the UCB sector in India needs to have the benefit of an umbrella organisation. This organisation could give the smaller UCBs liquidity support as well as management, IT and training and other services which the UCB sector needs.

“The proposals (relating to umbrella organisation) are being examined by the RBI in consultation with urban bank federations and other stakeholders,” said Gandhi.

In European countries, Australia, USA, and Canada, these organisations are serving the sector well and have not only resulted in greater efficiency of operations of their members at the grassroots, but have also contributed significantly in augmenting financial stability and safeguarding depositors’ interests. This has given comfort to the regulators.

Published on June 10, 2014
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