New licensing regime for urban co-operative banks in the pipeline

Report of committee headed by ex-RBI deputy governor may be submitted in a fortnight

A brand new licensing regime for urban co-operative banks (UCBs) is on the cards for financially sound and well-managed co-operative credit societies. This comes 17 years after the Reserve Bank of India (RBI) stopped issuing them, with the number of UCBs now at 1,539, down from 1,926 in 2003-04.

A rethink on constituting a board of management (BoM) for UCBs with deposits of over Rs 100 crore is also in the works, along with the framing of modalities for a national umbrella organisation.

These moves will constitute a part of a comprehensive review of regulations and plot the flight path for UCBs by the newly-minted Ministry of Co-operation (MoC), which is also expected to refresh the National Co-operative Development Policy (2002).

“These issues are expected to be taken up by the MoC, North Block, and the RBI after the monsoon session of Parliament concludes,” said a top regulatory official.

The authorities also expect the expert committee on primary (urban) co-operative banks, headed by former RBI deputy governor N S Vishwanathan, to submit its report within a fortnight. Its mandate is to take stock of the regulatory measures taken by the RBI and other authorities for UCBs and assess their impact over the past five years to identify key constraints and enablers, if any, in fulfilment of their socio-economic objective, and review the current regulatory and supervisory approach.

Incidentally, this committee was set up in February, four months before the MoC, headed by Amit Shah, came into existence.

It was pointed out that the upcoming review should be seen in the light of the RBI’s powers over UCBs having increased after recent amendments to the Banking Regulation Act, 1949 (BR Act, 1949). Its regulatory and supervisory powers over UCBs are now on a par with scheduled commercial banks.

On the BoM front, the RBI’s notification of December 31, 2019, had said “the BoM would have specialists drawn from accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, and information technology”. This comes under sub-section 2 of Section 10A of the BR Act, 1949, even though the central bank’s notification of December 2019 did not specifically mention this sub-section.

The pain here is that at a time when even mainline banks are struggling to on-board first-rate directors, it is felt that a BoM for UCBs, in addition to their existing board of directors (BoD), has to be re-examined. The RBI had not spelt out clearly if the BoD was to mirror the provisions in sub-section 2 of Section 10A in its entirety. “If so, this is needless duplication. It would have been better to insist the BoD be spruced up,” said another source. The point being that the insistence on a BoM has distracted UCBs' management from its business.

The RBI’s Report on Trend and Progress of Banking in India (T&P: 2019-20) had dropped broad hints on the future trajectory.

UCBs - along with banks and non-banking financial companies – were tasked with carrying out stress tests due to the pandemic. This was to proactively assess likely shortfalls in capital. While this may have been a generic hygiene aspect, the T&P was relatively more upfront in its sectoral observation - that co-operative banks, with their grass-root level customer base and domain knowledge, can attract new customers and retain existing clientele.

“A change in outlook, processes, business model, and strategy are, however, required to achieve goals in a new development strategy that is in sync with the fast-changing landscape,” it had noted. On the technology front, more than 99 per cent of them are now compliant with the adoption of core banking solutions norms.

SHAPE-SHIFTING BOARD DYNAMICS

• Number of UCBs now at 1,539, down from 1,926 in 2003-04
• Rethink on board of management for UCBs with deposits of over Rs 100 crore
• Framing of modalities for a national umbrella organisation
• Refresh of National Co-operative Development Policy (2002)
• Ministry of Co-operation, North Block, and the RBI to take up issues after monsoon session of Parliament concludes
• Review to be seen in the light of recent amendments to the Banking Regulation Act, 1949