UCBs need new regulatory paradigm

The urban co-operative banking (UCB) sector, caught in a crisis of late, has sought rationalisation of existing regulatory approach by the Reserve Bank of India (RBI).

"The UCB sector has witnessed rapid growth in recent years, but at the same time, there has also been a growth in a large number of non-viable banks. Many such banks have collapsed which also poses a great risk to the smaller but stronger UCBs, a threat which cannot be ignored," said a Surat-based UCB source requesting anonymity.

He said that in order to reduce such risks, it is imperative that RBI should take measures for consolidation of UCBs.

"The RBI should concentrate on a more focused and continuous supervision of the banks. It must also set up a supervisory system that is based on an in-depth analysis of the urban co-operative banks, and one that aims at strengthening the sector," he suggested.

He also suggested the creation of a separate authority for regulating UCBs.

"The urban co-operative banks are governed by dual control. While some of the powers are invested with the state registrar (co-operative societies), on the other hand, RBI also has some regulatory power. The multiplicity of command centres and absence of a clear-cut demarcation between the functions of the registrar and the RBI, have reduced the effectiveness of regulatory initiatives which are a must for proper development of the UCB sector. A separate authority which regulates the UCBs is the need of the hour," he said.

A state-level task force on co-operative urban banks (TAFCUB) needs to be set up to deal with the UCBs.

"The strategy to deal with UCBs needs to be state specific. A TAFCUB comprising the registrar, the regional director of RBI, an official from the urban banks department of RBI and a representative of the federation of the UCBs, should be set up to explore viable state-specific solutions," he said.

"The TAFCUB could identify the weak but viable UCBs and frame a programme for revival for such entities. The RBI could closely monitor the progress made by the bank vis-a-vis the revival plan, and initiate appropriate action, in case of non-achievement of the targets," he stated.

"The UCBs, not viable in view of the TAFCUB, could be made to exit from banking business, either voluntarily or they could be even taken into liquidation by the registrar at RBI's behest," he said.

The chairman of another UCB suggested signing of a tripartite memorandum of understanding (MoU).

"According to provisions of State Co-operative Societies Act and Banking Regulations Act, RBI is not empowered to take action against the bank management. A working arrangement, in the form of a tripartite MoU, between the concerned state government, UCBs and RBI, should be devised," he said.

"The MoU could give RBI the flexibility to initiate action against banks, like directly superseding the board of directors and removing the CEO/ chairman. The MoU could also authorise the RBI to institute special audits by chartered accountants nominated by it," he said.

"Every authority concerned with the co-operative sector - the state government, central government and RBI, will have to play its part to protect the interest of depositors. The authorities need to understand that UCBs are not co-operative societies, but are banking entities, having management structure similar to that of a co-operative. These authorities should work collectively to put in place mechanisms and systems that would enable the UCBs to work in the interest of the depositors and thus help in strengthening the UCB sector," he added.