The Reserve Bank of India deputy governor Vepa Kamesam today said there is an urgent need for clarity in defining the roles of various control institutions to remove overlapping of controls over cooperative banks presently vested with the state governments, the Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (Nabard).
While the RBI regulates and supervises banking activities carried on by urban co-operative banks, supervision of state co-operative banks (SCBs) and district central co-operative banks (DCCBs) is carried out by Nabard. The core principles of supervision in relation to co-operative banks have thus to be formulated and implemented by RBI in respect of UCBs and by Nabard in respect of SCBs & DCCBs and there is an emergent need to constantly beef up the supervisory system through proper on-site monitoring and adequate off-site surveillance.
Kamesam, who was speaking at the National Convention of Urban Co-operative Banks here today, observed that regulatory policy can only set the broad contours of an appropriate investment strategy. In this regard, the audit committees of the board in co-operative banks should be independent of the management in the banks.
"Even the most comprehensive regulatory framework and effective supervisory system need not be a foolproof mechanism against a pliant management acting in collusion with unscrupulous clients. Supervision is only periodic and therefore it cannot be a substitute for effective and continuous internal control backed by an independent and efficacious audit system," he averred.
The early warning signals, if any, need to be analysed and picked up, in respect of any irregularities in the investment portfolio of these banks, from the periodic review reports on such transactions which are received from them.
According to him, the power and decision-making in co-operative banks are "all too often concentrated at the top in too few hands." The signs of financial mismanagement in an institution or a group of institutions regardless of the reasons is liable to set off similar problems in other institutions and open serious risks in the financial system. He said that co-operative performance has been for a long time characterised by lack of participation and sense of involvement.
Corporate governance especially in the co-operative sector has come into sharp focus because more and more co-operative banks in India, both in urban and rural areas, have experienced grave problems in recent times which has in a way threatened the profile and identity of the entire co-operative system. These problems include mismanagement, financial impropriety, poor investment decisions and the growing distance between members and their co-operative society.
There is an absence of a proper system of placement and skill upgradation inputs which constrain professional management in co-operative banks. "Though there is a system of training in place in many co-operative banks, attempts are seldom made to match them with the current and future staff requirements.... It is also necessary to keep the staff sufficiently motivated through periodic job rotation, job enrichment and recognition of performance. It is in this context that professionalism and accountability of the banks' boards assume such critical significance," he said.
