RBI panel for four-tier framework for urban cooperative banks
- The group, led by former RBI Deputy Governor NS Vishwanathan, has advocated creating an umbrella organisation to manage co-operative banks, as well as allowing them to operate additional branches if they meet all regulatory standards.
- The expert committee on urban co-operative banks (UCBs) of the Reserve Bank of India (RBI) has proposed a four-tiered regulatory framework based on deposit size.
- The panel stated in its report that the RBI should not be hesitant to employ the mandated merger path to resolve UCBs that do not meet prudential requirements. Between 2004-05 and March 2020, 136 UCBs merged, with Maharashtra accounting for more than half of them, followed by Gujarat. According to the committee, UCBs can be classified into four tiers for regulatory purposes based on bank cooperation, capital availability, and other factors:
- Cooperative banks are financial institutions that are owned by their members and operate on a cooperative basis.
- This means that a cooperative bank’s clients are also its proprietors.
- These financial institutions offer a comprehensive range of standard banking and financial services. They do, however, differ from other banks in a few areas.
- They were established with the goal of encouraging individuals to save and invest, particularly in rural areas of the country.
In India, the structure of co-operative banks is as follows:
- Cooperative banks in India are broadly separated into two types: urban and rural.
- Short-term or long-term rural cooperative credit institutions are possible.
- State Co-operative Banks, District Central Co-operative Banks, and Primary Agricultural Credit Societies are the three types of short-term cooperative credit institutions.
- In the meantime, either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) are long-term institutions (PCARDBs).
- Urban Co-operative Banks (UBBs), on the other hand, are either scheduled or non-scheduled.
Monitoring of Cooperatives banks:
- The States Cooperative Societies Act governs cooperative banks in India.
- They are also subject to RBI regulation under two laws: the Banking Regulations Act of 1949 and the Banking Laws (Co-operative Societies) Act of 1955.
- In 1966, they were placed under the control of the RBI, which brought with it the issue of dual regulation.
Amendments to the Banking Regulation Act:
- Cooperative banks have long been regulated by both the state Registrar of Societies and the Reserve Bank of India.
- As a result, despite failures and scams, many banks have eluded scrutiny.
- Cooperative banks are now directly supervised by the RBI, thanks to revisions to the Banking Regulation Act enacted by Parliament in September 2020.
Amendments in the law are required because:
- There are 1,540 urban cooperative banks in India, with an 8.6 crore depositor base and deposits of at least Rs 5 lakh crore.
- Last year, the Finance Minister told the Lok Sabha that the financial health of at least 277 urban cooperative banks was poor, with roughly 105 cooperative banks failing to meet regulatory capital requirements.
- The gross non-performing asset ratio of urban cooperative banks deteriorated from 9.89 percent in March 2020 to 10.36 percent in September 2020, according to the RBI’s latest financial stability report.
- Not only do these banks have a large number of problematic loans, but they also have a small capital basis, which the new law attempts to address by allowing them to issue shares with RBI permission.
- These banks also have a problem with political intervention in personnel appointments, which has contributed to inefficiency.
Changes introduced in Act:
- After consultation with the concerned state government, the new statute gives RBI the power to supersede the board of directors of cooperative banks.
- Previously, it could only provide such orders to multi-state cooperative banks.
- In addition, urban cooperative banks will henceforth receive the same treatment as commercial banks.
- A cooperative bank can also issue equity, preference, or special shares to its members or any other person resident within its region of operation by public issue or private placements, with prior authorisation from the RBI.
- It can also issue unsecured debentures or bonds with a 10-year maturity period.
- This essentially means that non-members can become bank shareholders, allowing the RBI to easily consolidate failed banks