Statsguru: A look at the performance of UCBs as RBI gets more control

Recently, the Union government took the ordinance route to give more supervisory powers to the Reserve Bank of India (RBI) over urban co-operative banks (UCBs) and multi-state co-operative banks. 

Following the Punjab and Maharashtra Co-operative Bank crisis, there has been a growing call to give more teeth to RBI in regulating such banks as the dual control often resulted in delayed action. State governments also regulate co-operatives. This creates duality and attendant pressure, often leading to weak oversight. 

As of March 2019, there were 1,544  UCBs in the country and the number has been steadily declining since March 2004 (chart 1). In the same time period, there have been 132 mergers in the UCB space. Most mergers happened in Maharashtra (chart 2), followed by Gujarat. 
 

At the end of March 2019, tier-II UCBs, which have a larger deposit base and wider geographical presence, controlled more than 90 per cent of the total assets of UCBs (chart 3). 

Since 2015, the statutory liquidity ratio (SLR) requirements of UCBs are being reduced progressively in line with the prescription applicable to scheduled commercial banks (SCBs). As of March 2019, SLR investment of UCBs constituted 88.9 per cent of its entire investments (chart 4). A CAMELS (capital adequacy; asset quality; management; earnings; liquidity; and systems and control) rating model is used to classify UCBs for regulatory and supervisory purposes. UCBs in the top-ranking categories — with ratings A and B — accounted for 78 per cent of the sector (chart 5). 

Till 2014-15, non-performing assets (NPAs) of UCBs were higher compared to SCBs but that trend reversed due to asset quality review and gradual improvement in asset quality over time. As of March 2019, gross NPAs of UCBs stood at 7.1 per cent (chart 6). UCBs recorded a decline in net profit after taxes in 2018-19. Non-interest income also followed a similar trajectory. The profitability of UCBs, measured in terms of return on equity (RoE), deteriorated marginally (chart 7).

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Source: Report on Trend and Progress of Banking in India 2018-19, RBI; compiled by BS Research Bureau