Impact of dividend restrictions on Grade II, III, IV urban cooperative banks

 N K BALDOTA

 CMD,

 The Greater Bombay

 Co-operative Bank

 Urban cooperative banks (UCBs) have played an important role in the development of nation.

 Their success can be attributed to a variety of factors such as quick decision making and prompt implementation of ideas and support and confidence of the public.

 Cooperative banks have a different structure, and they function in a different customer setup and environment.

 The restriction on dividend payments will spur cooperative banks to strive their best to rake in profits by keeping pace with the market.

 Most of them have already started adopting new technology and best services akin to other banks.

 The transparency level in cooperative banks will improve. Cooperative banks should be professional and work on sound managerial systems, taking care of future projections so as to retain and improve their market share and identity.

 It is in this context that professionalism and accountability of boards is critical.

 The management of every cooperative bank should adopt best banking practices and prudential norms.

 Professional management and corporate governance are the key to improving transparency levels.

 The directives are a welcome measure to bring about certain objectives and transparency criteria for declaration of dividend by UCBs.

 Those banks, which have been declaring dividend without compliance of the MCS Act, will be forced to provide at least 25 per cent of the net profit to statutory reserve and other statutory provisions.

 Other provisions such as adequate provisioning for NPAs, dividend to be paid out of net profits after making all statutory provisioning and fulfilling the criteria of Grade I or Grade II banks and get themselves upgraded are steps in the right direction.

 UCBs have been facing a spate of restrictive regulatory control measures since the last three years, starting from the scam in Madhavpura Cooperative Bank, followed by fall of some other banks in cooperative sector.

 Management of cooperative banks is governed under the principles of promoting thrift among the people with limited means.

 The directors are elected within these set of people with limited means and the governance by them is covered under the provisions of relative statutes, both by MCS Act or BRA 1949.

 However, in some UCBs, the management undertook shameful acts to the detriment of the institution.

 The regulator has issued several directives during the last 1-2 years, first restricting credit exposure to directors and then relatives from 10 per cent to 5per cent of the DTL and now total prohibition on grant or renewal of credit exposure to them.

 The main emphasis behind these restrictions is to discourage wrong practices among cooperative banks so as to safeguard public money.

 Finally, these restrictions will help cooperative banks to bring up their level in competition and also ensure financial discipline.

 Risk of capital depletion

 VINAYAK Y TARALE

 Secretary,

 The Maharashtra State

 Co-op Banks