For quite some time, urban cooperative banks (UCBs) weren’t fully regulated by the RBI. There were some reasons for the same which needs to be understood first.
A cooperative enterprise is usually member-driven, member-controlled, and member-protected. The members of the society carry out all the roles and responsibilities enshrined in the cooperative’s constitution.
In post-colonial India when people were figuring out things, this was quite an important feature. Hence, an urban cooperative bank would be a financial institution for the people, by the people which was the status quo until 1966.
Soon people came to realize that financial institutions needed some oversight. So the RBI took a more proactive approach by setting out banking guidelines. RBI decided the kind of money UCBs were supposed to set aside, the kind of cash they were supposed to hold at all times, and other related matters.
RBI left the regulatory aspects related to governance and auditing functions to state and central governments. The only problem was that these functions were loosely regulated. The members were still responsible for most administrative decisions.
That is the reason why many UCBs like Punjab and Maharastra Cooperative Bank have failed in the recent past.
Last year, as told by the finance Minister Nirmala Sitharaman, the financial situation of at least 277 UCBs was weak, and around 105 cooperative banks were not even capable of meeting the minimum regulatory capital requirement (money-related requirement). Among them, 47 banks had a negative net worth, and as many as 328 urban cooperative banks had bad loans of more than 15%.
Since these banks meant a great deal to many people, the government decided to put it in the purview of RBI and the Banking Regulation Act was amended by the Parliament in September 2020.
Now, these banks are at par with regular commercial banks as far as regulations are concerned. The only problem that lies is that the UCBs are still fundamentally different from the likes of SBI and HDFC.
In order to solve this problem, the central bank set up a committee in February to examine the issues troubling these banks and the possible recourse to handle those troubles.
The committee has submitted its findings in the form of a report.
The gist of those findings is that the committee believe it’s best to impose different regulatory restrictions depending on the scale and scope of the UCB in question. The committee wants all UCBs to be categorized into four tiers depending on the size.
- Tier-1 with deposits up to ₹100 crores
- Tier-2 with deposits between ₹100 — ₹1,000 crores
- Tier-3 with deposits between ₹1,000 — ₹ 10,000 crores
- Tier-4 with deposits of over ₹10,000 crores, who may be allowed to function like universal banks if they meet some other special money-related requirements.
With this kind of categorization, different kinds of restrictions can be imposed on each tier. For example, there could be strict ceilings on home loans, loans against gold ornaments, and unsecured loans, for some tiers of UCBs.
This is perhaps the first time when the central bank is putting in the work to optimize its regulatory approach towards these special institutions. This will definitely bode well for customers and stakeholders of UCBs across the country.
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