Governance of Urban Cooperative Banks: Current Status, and Issues

Context: Governance of Urban Cooperative Banks, Recently, the Reserve Bank of India (RBI) took over the board of Mumbai-based Abhyudaya Cooperative Bank Ltd for a year due to poor governance standards. 

What are Cooperative Banks?

• Financial Institutions: Owned and controlled by their members, who are also its customers.
• Establishment: To deal with the ordinary banking business. 
  • Cooperative banks are founded by collecting funds through shares, accepting deposits, and granting loans.
• Registration: Under the Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, of 2002.
• Governing Provisions: Banking Regulations Act, 1949 and Banking Laws (Co-operative Societies) Act, 1955.
• Profit Sharing: The profits are distributed among the members in the form of dividends.
• Providing Services: They offer a range of banking and financial services to their members, including savings accounts, loans, and insurance.
• Focus On: Serving their local communities’ needs and promoting economic development.
• Guiding Values: Democracy, equality, and solidarity and aim to operate ethically and sustainably.
• Classification: They are broadly divided into Urban and Rural Cooperative Banks.

Also Read: Banking Sector of India

What are Urban Cooperative Banks?

• Availability: These are organized and operated cooperatively in urban and semi-urban areas. Currently, there are 1,514 Urban Cooperative Banks in India.
• Division on the basis of Tiers: N S Vishwanathan Committee (2021) suggested a 4-tier structure.
  • Tier 1 with deposits up to Rs 100 crore,
  • Tier 2 deposits between Rs 100 crore and Rs 1,000 crore,
  • Tier 3 with deposits between Rs 1,000 crore and Rs 10,000 crore, and
  • Tier 4 with deposits more than Rs 10,000 crore.
• Significance of Urban Cooperative Banks:
  • Credit to Agriculture Contribution: Contributing 11% of the total credit to the sector.
  • Prevalency: As of March 31, 2020, an estimated 94% of entities in the banking sector were Urban Cooperative Banks, showcasing their prevalence.

What are the issues with Urban Cooperative Banks?

• Weak Governance led to financial mismanagement and fraud in some cases.
• Lack of Professional Management and may not have the skills to manage the bank effectively.
• Lack of Compliance with Regulatory Norms
• Limited access to Capital to expand and modernize their operations. Due to their structure, they cannot raise capital from any other except their members.
• Competition from Other Banks that have better access to resources like private banks.
• Lack of Clarity over the oversight mechanism between the RBI and the state government.
• High Non-Performing Assets (NPA) Ratio.

Also Read: NPA in India

Way Forward:

• Strengthening Governance and ensuring trained and professional management teams.
• Need for strengthened and efficient Credit Risk Management.
• Enhancing compliance with regulations such as capital adequacy, asset classification, etc.
• Exploration of ways for improving access to capital.
• Establishment of IT and Cybersecurity Infrastructure.
• Collaborating with other banks to leverage resources and expertise and expand their reach.
• Need to work on the Recommendations of RBI for Cooperative Banks, such as:
  • Governance Focus: Emphasizes that cooperative banks should prioritize the quality of governance, focusing on the three pillars of compliance, risk management, and internal audit.
  • Risk Analysis Report: Urges Urban Cooperative Banks (UCBs) to submit a quarterly risk analysis report before the board to enhance transparency and risk management.

Conclusion:

To thrive, Urban Cooperative Banks in India need better management, careful risk handling, and more ways to get money, focusing on growth and stability.