UP, RBI to ink deal on urban co-ops

Uttar Pradesh has become the third state, after Gujarat and Andhra Pradesh, to sign a memorandum of understanding (MoU) with the Reserve Bank of India (RBI) for the revival of sick urban co-operative banks (UCBs) in the state. The MoU is likely to be signed next month.

According to the MoU, the RBI will constitute a state-level task force comprising the regional director of the RBI, the registrar of UP Co-operative Societies, and representatives of the State Urban Co-operative Bank Federation and the National Urban Co-operative Bank Federation. The move, initiated at the instance of the RBI, will involve no monetary assistance either by the bank regulator or the state government.

There are 73 UCBs in UP with a deposit base of over Rs 2,000 crore. According to prudential norms applicable to UCBs, 17 banks are categorised as belonging to Grades III and IV, while two UCBs are being liquidated. A senior official at the office of the Registrar of Co-operative Societies, however, said the number of sick UCBs in UP was likely to be reduced to 13 during the next fiscal 2008-09 as they have shown signs of turnaround.

UCBs with less than 10 per cent NPAs are categorised as those of Grade I, above 10% and up to 15% as grade II, above 15% as grade III. UCBs incurring losses for three consecutive years and NPAs above 15% and with a capital risk adequacy ratio of less than 9% are categorised as Grade IV.

The RBI had initiated the process of reviving sick UCBs in March 2005. The RBI, as part of the revival process, had proposed that an MoU be signed between it and the state government for developing the UCBs on sound lines through the formation of a state-level task force on UCBs (TAFCUB). The task force will have representatives from UCBs, besides the RBI, for the identification of the potentially viable and non-viable banks.

The TAFCUB will also draw up a time-bound monitorable action plan for the revival of the former and a non-disruptive exit path for the latter.

In March 2005, the RBI had put in the public domain a draft vision document for UCBs. The draft proposed to categorise UCBs into two different regulatory tiers and subject the smaller banks to a less rigorous prudential regime in the medium term.

"Given the fact that the UCBs are subject to dual control of state governments and the RBI, there is need to put in place an arrangement through which state governments and the RBI have a convergence on the approach and remedial action required to be taken for facilitating the development of the UCB sector into a strong and vibrant system that conforms to all prudential requirements over the medium term," said a senior official of the department of co-operatives.

The National Federation of Urban Co-operative Banks and credit societies Ltd, has also approved the proposal mooted by the RBI. As per the MOU the audit of the UCBs will be done by the Chartered Accountant instead of Chief Audit Officer, co-operative societies and Panchayats of UP government.