The ‘threat’ posed by 96,000 rural co-operatives outside RBI compass

Nine months after the Punjab and Maharashtra Co-operative (PMC) Bank fiasco, the Cabinet has approved an ordinance to bring urban and multi-State cooperative banks under the supervision of the RBI, to ease depositors’ concerns.

With numerous co-operative banks going bust time and again, the move to strengthen these banks by improving governance and oversight through the RBI is welcome. But only 1,544 urban co-operative banks (including 58 multi-state cooperative banks), will be covered under the ordinance.

There are 96,000-odd rural co-operatives that constitute about 65 per cent of the total assets of co-operatives. Among them, Primary Agricultural Credit (PAC) Societies (about 95,000 in number as of March 2018) continue to remain outside the purview of the Banking Regulation Act, which is a cause for worry, given their wide presence in the remote hinterlands.

Still outside RBI purview

Co-operative banks can be categorised as urban co-operative banks (UCBs) and rural cooperatives. UCBs and, among the rural co-operatives, State co-operative banks and district central co-operative banks, are registered either under the Co-operative Societies Act of the State concerned or under the Multi State Co-operative Societies Act, 2002. Banking laws were made applicable to co-operative societies since March 1, 1966.

Hence, in these co-operative banks, the dual regulation by the RBI — concerning banking functions such as prudential and capital requirements, and by the Registrar of Co-operative Societies — for incorporation, management constitution, audits etc., led to huge regulatory gaps.

Now, with the recent amendment, UCBs and multi-State cooperative banks will come under the purview of the RBI, which will help in timely regulatory action against weak banks. But there are still over 96,000 rural co-operatives, which may continue to pose a threat due to weak governance structure. The state co-operative banks and the district central co-operative banks may continue to face issues owing to dual regulation.

A look at the performance metrics of the District Central Co-operative Banks (that form half of the total assets of the rural co-operatives) suggests that a lot needs to be done to reduce the risk in these entities, too. In FY18, of the 363 district co-operative banks, 52 were loss-making. While the overall NPA ratio stood at 11 per cent, in some States, such as Bihar, Madhya Pradesh, and Maharashtra, the NPA ratio was higher, at over 20 per cent.

PACs are completely outside the purview of the Banking Regulation Act. According to the RBI’s latest data (as of March 2018) of the 95,000 PACs, 40 per cent, or about 37,800, are loss-making.

The next step will be to strengthen the corporate governance structure at these banks.

Bringing UCBs in order

While bringing UCBs under the RBI purview is welcome, how the regulator goes about setting the house in order will be important. A look at the financial performance of scheduled UCBs as of March 2019 suggests that there is a need for significant improvement in the metrics of many of these banks.

Nineteen of the 54 scheduled UCBs had an ROA (return on assets) of less than 0.5 per cent. The gross NPA ratio of scheduled UCBs stood at 7.1 per cent as of March 2019, with a provision cover of 65 per cent.

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