Ganga Narayan Rath/Manas R Das The Cooperative Credit Structure (CCS) in India is broadly made up of urban and rural cooperatives. The financial health of Urban Cooperative Banks (UCBs), numbering about 1,500, has been a matter of concern for decades, necessitating the constitution of a plethora of committees at the national and regional levels to find solutions to the myriad issues plaguing this sector.

The fragility of UCBs is likely to increase during the post-Covid period lockdown(s), due to their ‘concentration risk’. The extent of frailty can be gauged from the fact that by March-end 2020, 357 UCBs were liquidated/amalgamated/reconstructed involving a sum of ₹4,903 crore as the DICGC claim settlement.

Also, during calendar 2020, the RBI had issued directions to four UCBs, extended directions to 28, cancelled three licences and imposed monetary penalties on 17. Besides, UCBs’ weak capital strength may not be able to cushion them from emerging shocks.

It was the report submitted by Sir Fredrick Nicholson in 1895, commissioned by the Madras Presidency, that paved the way for passing the Cooperative Society Act of 1904.

The findings of first committee to review the cooperative movement, under the chairmanship of Sir Edward Mac Lagan in 1914, — illiteracy and ignorance of the masses, embezzling of funds, rampant nepotism — are relevant even today. Since then, over a dozen committees appointed by the Union and State governments as also the central bank have dissected the prevailing regulatory norms and the undulating financial health of the UCBs. Their recommendations notwithstanding, the sector continues to remain anaemic.

In February this year, the central bank appointed yet another national committee, headed by a former RBI Deputy Governor, NS Vishwanathan, to formulate “effective measures for faster rehabilitation and resolution of UCBs and also assess their potential for consolidation in the sector”. The group was also tasked with examining the need for differential regulations and charting out potential permissible activities for the UCBs with a view to enhancing their resilience.

This was preceded by the central bank acquiring full-scale supervisory authority over the UCBs through an amendment to the Banking Regulation Act, 1949 in September 2020. However, these amendments have not gone down well with the Maharashtra government (the State with the highest number of UCBs). The Maharashtra government has constituted a State-level committee under its Minister for Revenue to protect the interests of cooperative banks in the State.

Geographical concentration

The UCBs carry three types of concentration risk: (a) geographical, (b) sectoral and (c) loan size-wise. At the end of March 2020, out of 1,539 UCBs, Maharashtra and Gujarat housed 712 (46 per cent) of them. These two States accounted for nearly 70 per cent of the total UCB branches in the country. In terms of business (deposits + advances), the two States commanded as high as three-fourths of the all-India UCB business. These States have been brutally mauled by Covid-19.

A similar pattern can be observed in Karnataka and Tamil Nadu representing 25 per cent of the total UCBs and 10.5 per cent of the total business. Therefore, it is quite likely that in these four geographically contiguous States, the business, profitability and efficiency parameters of the UCBs must have been seriously under pressure.

At March-end 2020, almost a third of the total advances by the UCBs were outstanding against MSMEs, a sector which has been badly affected by the lockdowns. Their revival will necessitate recapitalisation by the State, return of the migrant workers, restoration of supply and demand dynamics, and above all, speedy and widespread vaccination. Moreover, the sector is in the cusp of a major structural and compositional ‘churning’ in the post-lockdown period. It will take considerable time for the sector to make a comeback, after accounting for the economic time lost. Combined with the exposure to agriculture and housing, the total outstanding of the UCBs stood at over 43 per cent of the total advances.

At March-end 2020, 71 per cent of the UCBs in the country had aggregate outstanding advances of over ₹35,000 crore — almost 12 per cent of the total advances. By contrast, just seven per cent of the UCBs commanded an aggregate outstanding of over ₹1,97,000 crore — about 65 per cent of the total advances. While the former group reflected the dominance of relatively small borrowers, the latter mainly catered to large borrowers. Both the groups potentially make the UCBs more vulnerable; while several small borrowers have lost income and employment, defaults by a few large borrowers can generate fissures. Expecting a government bail-out, many small and large borrowers would be reluctant to repay despite their capability. Perhaps, a less skewed distribution of advances across the UCBs would have been less risky.

The slim net worth of many UCBs may not cushion them against the financial impact of the concentration risks if those don’t pay off. At March-end 2020, the average net worth was woefully low at ₹19 crore for Non-scheduled UCBs (NSUCBs) compared to ₹361 crore for Scheduled UCBs (SUCBs). The corresponding average deposits were ₹183 crore and ₹4,260 crore. Therefore, there is always a lurking fear that in case a UCB goes down, its net worth may prove to be grossly inadequate to pay back its depositors.

Further, a back-of-the-envelope calculation shows that, if during 2020-21, the GNPA amount of all UCBs increase by 57 per cent, compared to 52 per cent in 2019-20, and assuming the last year’s provision coverage ratio at 59.6 per cent, the provisions would increase to over ₹31,000 crore, wiping out almost 66 per cent of the current net worth of the UCBs, compared to 42 per cent in 2019-20.

The way forward

Recent amendments giving the central bank more regulatory and supervisory leeway will probably encourage the UCBs to function in a disciplined manner which will not only make them future-ready, but will stem the frequent disruptions in banking activities through failures that inflict pain on millions of depositors. Besides, with the shrinkage of ‘dual’ control, the central bank will be able to regulate UCBs more directly and effectively. Consequently, a lot of the rigmarole and legal complexities will also reduce.

The evolving changes in the financial sector combining and integrating micro finance, FinTech companies, payment gateways, social platforms, e-commerce companies and NBFCs challenge the continued presence of the UCBs, which are mostly small in size, lack professional management and have geographically less diversified operations.

Most of the unit banks could be sold to those new generation banks who need to improve their footprint, if need be, by a DICGC financial bail-out. The financially sound ones having a diversified geographical presence, beyond a threshold balance sheet size, need to be converted into SFBs.

Further, there is an urgent need to review the desirability or otherwise of having a genre of banks creating confusion and doubts in the minds of depositors and obliging the regulators to persist with differential treatment. The question is not who controls the UCBs; if the UCBs can manage themselves efficiently, there will be increasing freedom for them.

Rath is a former Chief General Manager of the RBI and Das is a former senior economist with SBI. Views are personal (Through The Billion Press)