Urban co-operative banks (UCBs) have requested the Reserve Bank of India to allow them to do one-time settlement (OTS) of bad loans along the lines of OTS available for commercial banks.

UCBs emphasised that since the 2020 amendment to the Banking Regulation (BR) Act has addressed the vexing issue of dual regulatory control, the Central bank is empowered to permit them to undertake OTS for recovery from non-performing assets (NPAs), said Jyotindra Mehta, President, National Federation of Urban Co-operative Banks and Credit Societies (NAFCUB).

Under dual regulatory control, the Registrar of Co-operative Societies/Central Registrar of Co-operative Societies were empowered to look after UCBs’ incorporation, registration, management, recovery, audit, supersession of the Board of Directors and liquidation.

The Reserve Bank was vested with regulatory oversight on banking activities of UCBs, State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs).

With the 2020 BR Act amendment narrowing the regulatory arbitrage between commercial banks and UCBs, Mehta said the OTS avenue should be opened up for UCBs to clean up their balance sheets.

Recovery policy

Currently, commercial banks have Board approved ‘Recovery Policy’ vis-a-vis OTS, which provide a simplified, non-discretionary and non-discriminatory mechanism for OTS of bad loans in retail, micro, small & medium enterprises and agriculture sectors.

Banks cannot enter into compromise settlement in cases of wilful default, fraud and malfeasance. 

Mehta underscored that when regulations governing UCBs have been tightened to bring them on par with commercial banks, the former should get a level playing field on the recovery front.

As of end-March 2022, there were 1,514 UCBs, with deposits and advances aggregating ₹5,26,021 crore and ₹3,14,741 crore, respectively. Their gross NPAs and net NPAs stood at 9.7 per cent (of gross advances) and 4.4 per cent (of net advances), respectively, per RBI data.

Access to capital

According to the RBI, the amendment to BR Act seeks to protect the interests of depositors and strengthen co-operative banks by improving governance and oversight by the central bank, while enabling better access to capital. 

Meanwhile, in a meeting with NAFCUB, select Federations of UCBs from various States and the CEOs of select UCBs last week, RBI Governor Shaktikanta Das advised UCBs and their federations to strengthen governance and risk management, adopt appropriate business strategies and explore suitable technology solutions to enable them to sustain and grow their business and serve their customers, keeping in mind the interest of the depositors.