Money & Banking

‘RBI must release a vision document for UCBs to thrive’

K Ram Kumar Mumbai | Updated on December 20, 2018

To strengthen the urban co-operative banking sector, the Reserve Bank of India needs to come up with a vision document in the light of the experience gained from reviving banks under the aegis of the Task Force on Co-operative Urban Banks (TAFCUB), according to Satish Marathe, Patron, Sahakar Bharati, an all-India organisation for promoting the co-operative movement in the country. Referring to the decline in the market share of UCBs from 6.4 per cent in 2002 to 3.3 per cent in 2017, Marathe, who is also a member of RBI’s Central Board, attributed this to the fact that licences were not given to set up new banks in the UCB segment in the last 15 years.

In an interaction with BusinessLine, Marathe observed that instead of RBI seeking conversion of large UCBs into private banks and other UCBs into Small Finance Banks and asking banks to create a board of management below the board of directors, the Banking Regulation (BR) Act should be suitably amended so that the banking regulator is equipped with the supervisory powers needed to deal with errant UCBs. Excerpts:

What do you think of the RBI’s move to nudge UCBs to convert into private sector banks?

UCBs are best placed to serve the needs of local communities. So, we want the RBI to come out with a vision document for the sector to thrive. We want the central bank to have adequate powers to regulate this sector. As Sahakar Bharati, we are for prudential regulation and good governance of UCBs. It has been more than 50 years since the Banking Regulation (BR) Act became applicable to UCBs.

Now, instead of seeking privatisation of these banks and bringing in a board of management under the board of directors, the government and the RBI should work together and amend the BR Act so that the central bank can effectively initiate action at the proper time in the interests of depositors. About a decade back, TAFCUBs (in each State) were constituted (as an arrangement through which there is a convergence on the approach and remedial actions required to be taken by RBI and Commissioner for Co-operation and Registrar of Co-operative Societies of State/ Centre) for facilitating the development of the sector through a memorandum of understanding between State governments and the central bank.

Based on the experience gained by TAFCUBs, it is high time a clear division of work between the Commissioner for Co-operation and Registrar of Co-operative Societies and RBI emerges. Generally, the RBI is in the driver’s seat. But if the regulator has to intervene, action has to be initiated by the Registrar. So, it is a little cumbersome. It takes time. So, if the RBI seeks some action, it has to be done. That is how it has to work.

What should the regulator do to develop the UCB sector?

RBI should evolve a roadmap for UCBs vis-a-vis capital adequacy, management structure, induction of technology, level of technology, among others. For example, some time in the early 2000s, the RBI came up with guidelines for ownership and governance in private sector banks.

These guidelines specified, among others, minimum capital (₹300 crore), and fit-and-proper norms for directors. In 2011, the Expert Committee on Licensing of UCBs said that ₹5 crore is enough to start a UCB.

But ₹5 crore is irrelevant in today’s context. We should have realistic and financially-strong UCBs. What is needed is a strong urban co-operative financial sector in the country. They will be able to provide the last-mile reach with local connect and expertise. That is why we are asking for the expansion of UCBs.

Why is the market share of UCBs coming down?

If the share of UCBs has come down 6.4 per cent in 2002 to 3.3 per cent in 2017, who is to be blamed? Don’t blame the sector. For the last 15 years or so, not a single licence has been issued to set up a new bank in the UCB segment.

Branches were not allowed to be opened till about five years back. ATMs were not allowed to be set up. So, if UCBs have not grown, then their share is bound to come down when others are expanding very fast with new classes of banks getting licensed. So, to say that the share of UCBs is only 3 per cent is just telling half the story.

Simply putting conditions and not allowing the banks to grow is not proper. The RBI has its own concerns because, like in every sector, there have been some bad eggs in this sector. But not everybody is bad.

Today, my conjecture is that about 1,000 banks out of 1,500 UCBs are in ‘A’ and ‘B’ category – that is 9 per cent-plus capital adequacy and are compliant with RBI norms (otherwise they wouldn’t be in ‘A’ and ‘B’ categories).

And again, my conjecture, 90 per cent-plus business (deposits and advances) is with these 1,000 banks, whose gross and net non-performing assets will be much below the threshold limits of 7 per cent and 3 per cent, respectively.

If 90 per cent of the segment is good, should we not promote UCBs and come out with new things?

Published on December 20, 2018

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