The Madhava Rao Committee has not only provided a blueprint for UCBs but has set out a roadmap, writes S S Tarapore
The urban co-operative banks (UCBs) are a disparate lot. The total deposits of the 1,500 UCBs amount to over Rs 50,500 crore but of these 89 large banks with deposits over Rs 100 crore each account for over Rs 27,500 crore, while small banks each with deposits of Rs 10 crore or less number 779 accounting for a total of less than Rs 3,000 crore. The High Power Committee on Urban Co-operative Banks (chairman K Madhava Rao) had the unenviable task of tailoring its recommendations for a motley crowd whose only common banner is the word co-operative. Given the almost impossible task the Madhava Rao Committee has commendably pulled it off by painstaking efforts to carefully distinguishing between various constitutes within its ambit.
The committee set about its task with five broad objectives i.e. (i) to preserve the co-operative character of UCBs, (ii) protect depositor interest, (iii) reduce systemic risks, (iv) put in place strong regulatory norms at the entry level and (v) align UCBs with other segments of the banking industry in terms of prudential norms and removing the irritants of dual control.
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The committee recognises that the UCBs deposits have been rising rapidly and there are systemic risks in a weak and permissive structure and therefore a strong regulatory framework is recommended. The committee recommends what it considers as a strong start-up capital and requisite norms for promoters eligibility at the entry point and for viability standards it recommends norms like capital to risk assets ratio (CRAR), tolerance limits for minimum non-performing assets (NPAs) and operational efficiency.
The committee has made a pragmatic recommendation of a quantum jump in the entry point minimum capital requirement and the authorities should immediately put these norms in place. It must be recognised that the Madhava Rao Committee entry point norms of Rs 5 crore, where the population is over 15 lakh, and Rs 50 crore, where the population is below 2 lakh, though representing a sharp increase over the present norms would still be very weak. The committee makes the right genuflections to reservation and recommends the continuation of lower entry point norms for the next five years for special categories.
But this is where the weakness of the UCBs would become more acute. Banking is a risky, nay dangerous, business and there is no place for egalitarian principles when it comes to bank soundness. The country just cannot afford to have a weak banking system on this count.
Distributive justice is very important but this is a responsibility of the fisc and bank soundness cannot be sacrificed at the altar of distributive justice. But given the committee's pragmatic approach it has accepted the ground realities which necessitate such concessions. The difficulty with differential entry points is that the easiest entry point is used to penetrate a system and thereby nullifying the strengthening of entry point norms.
The committee lays great store by the CRAR norms and recommends that scheduled UCBs should have the same CRAR norms for commercial banks from March 2003, while other UCBs should attain a 9 per cent CRAR by March 2003. This would be a major safeguard in the system but the problem lies in the implementation of the CRAR even for commercial banks. At the present time, if the CRAR is not maintained by a commercial bank the regulatory authorities do not take any adverse action. A country cannot claim to have a well regulated banking system if a bank with a CRAR of minus 8.94 per cent is permitted to garner further deposits. The fact that the bank concerned is in the public sector is totally relevant from the standpoint of prudent regulation and supervision.
In this context, the Madhava Rao Committee needs to be commended for laying down quantitative criteria for adverse action in the case of weak UCBs. According to the committee, a bank would be deemed to be a weak bank if the CRAR falls below the level of 75 per cent of the minimum prescribed and net NPAs are 10 per cent or more of advances or there are net losses for two of the last three years. The committee argues that a bank should be classified as sick if the CRAR falls below the level of 50 per cent of the minimum prescription and net NPAs are 15 per cent or more of advances or shows net losses in operation for each of the last three years. The committee recommends that once a bank is classified as a weak bank, action should be taken to place the bank under moratorium and either reconstructed or amalgamated and if this is not possible the licence to carry on banking business must be withdrawn. As of March 1999, 293 UCBs are classified as weak and in all probability most of these would, over time be categorised as sick. The committee deserves to be commended for setting out clear criteria and the authorities would do well not only to implement this criteria for UCBs but also for all commercial banks including public sector banks.
The Rehabilitation Fund is, however, fraught with hazards as such a fund being used to shore up the CRAR of sick banks may, in fact, delay the ultimate solution. Moreover, the size of the fund, estimated at around Rs 40 crore, could end up being grossly under estimated. In any case, the RBI should, under no circumstances, contribute to the Rehabilitation Fund.
The committee has made a vital and pragmatic recommendation in urging that licensing of UCBs should be made transparent. If an unlicensed bank attains the prescribed CRAR, net NPA are not in excess of 10 per cent, the bank has profits in each of the past three years and the other regulations are complied with, the bank should be licensed. There are a large number of unlicensed banks because of the automatic route of transformation of primary credit societies into UCBs. The committee makes the substantive recommendation that all unlicensed banks should be given a license by March 2002 if they comply with the norms or otherwise their applications should be rejected and they should be stopped from undertaking banking business.
The committee has been forthright in indicating that the dual control regime is perhaps the most vexatious problem of the UCBs; this is compounded by the absence of a clear-cut demarcation of functions of the state governments and the RBI. The committee rightly stresses that this ambiguity should be removed and the state governments or the RBI should have unfettered powers in their area of responsibilities. The present situation is totally untenable as both the state governments and the RBI use dual control as an excuse for inaction.
The Madhava Rao Committee has not only provided a blueprint for UCBs but has set out a roadmap which could be traversed with benefit by the commercial banking system especially in dealing with sickness. Closure cannot be an unmentionable word in the banking system and the financial sector has much to be grateful to the committee for its endeavours.