The unearthing of irregularities in one of the urban co-operative banks (UCBs) has brought to the forefront issues related to low capital base, weak corporate governance, inability to prevent frauds, slower adoption of new technology, and inadequate system of checks and balances, according to the Reserve Bank of India.

Going forward, UCBs need to break out of these drags, the RBI said in its report.

This observation of the central bank comes in the backdrop of the massive fraud at Punjab and Maharashtra Co-operative (PMC) Bank.

“The highest priority needs to be assigned to the establishment of a uniform regulatory and supervisory structure, and an umbrella organisation in the architecture, which will provide liquidity and capital support and galvanise the spread of and leveraging on IT infrastructure and other capacity and skill-building facilities,” the report said.

The central bank observed that looking ahead, the co-operative sector faces dual challenges: first, increasing competition from not only Scheduled Commercial Banks but also from small finance banks and payments banks; and second, vulnerability stemming from internal weaknesses, including the inability to prevent frauds.

“Although this sector accounts for just 10.6 per cent of the commercial banking sector, the need to strengthen it from the financial stability point of view cannot be overemphasised, given its predominant domestic orientation, its massive financial inclusion quotient, and sheer presence across the country, especially in lower-tier towns and villages.

“In view of this important role, there is a need to undertake reforms aimed at upgrading corporate governance and strengthening their financials,” the central bank’s report added.