Urban Co-operative Banks (UCBs) need to discourage very long and continuous tenures of their directors, in accordance with the provisions of the Banking Regulation Act, to avoid vested interests exercising undue influence over the functioning of the board, according to the RBI.

Induction of new directors will facilitate infusion of fresh ideas and perspectives in the Board, per the RBI’s ‘Report on Trend and Progress of Banking in India 2022-23.’

The central bank cautioned that the absence of a comprehensive risk management policy makes certain UCBs vulnerable to external and internal risks.

“Deficient compliance culture is prevalent among certain UCBs and is reflected in persisting irregularities in some areas of their functions,” said the RBI.

The central bank observed that availability of skilled personnel to manage core banking solution (CBS) and other critical information technology (IT) and database functions is usually constrained in UCBs.

“As a result, these crucial functions are often outsourced, exposing them to outsourcing risk. These banks are less prepared to prevent, detect, respond to and recover from cyber-attacks,” said the report.

‘needs review’

The RBI underscored that non-integration of various modules, like treasury, letter of credit, forex and anti-money laundering solutions with CBS, has been a source of supervisory concern and needs comprehensive review.

As of March-end 2023, there were 1,502 UCBs in the country. The central bank said liberal licensing policy adopted in the 1990s resulted in the mushrooming of a large number of UCBs. Nearly a third of the newly licensed banks subsequently turned financially unsound, it added.

“Starting 2004-05, the Reserve Bank initiated a process of consolidation, including mergers of unviable UCBs with viable counterparts, cancelling licences of non-viable entities and suspension of new licence issuances.

“Cumulatively, the UCB sector has undergone 150 mergers since 2004-05, including 3 in 2022-23. Maharashtra and Gujarat accounted for 80 per cent of the total mergers. Licence cancellations have also been high during this period, with the total number of cancellations being 46 since 2015-16,” said the RBI.