RBI flags concerns over a few urban cooperative banks

Subject :Economy

Section: Monetary Policy

Context: RBI Governor notes concerns and vulnerabilities for some urban cooperative banks.

Key Points:

RBI Governor noted that while the Urban Cooperative Bank (UCB) sector has shown improved financial performance at an aggregate level in recent times, concerns and vulnerabilities were seen for certain individual entities.
The major observations were as follows:
- There is a need for the UCBs to strengthen financial and operational resilience to contribute to the overall financial and banking sector stability.
- Quality of governance is the most important aspect in ensuring stability of individual banks.
- Directors of UCBs should strengthen governance practices, especially the three supporting pillars of Compliance, Risk Management, and Internal Audit.
- The board’s involvement in upholding rigorous credit risk management is very important. This includes:
  - Robust underwriting standards,
  - effective post-sanction monitoring,
  - timely recognition and mitigation of incipient stress,
  - rigorous follow up of large NPA borrowers for effective recovery, and
  - maintaining adequate provisioning.
Recently RBI has started engaging with the directors of its regulated entities(RIs) functioning in different segments of the financial system. Two separate conferences with Directors on Boards of Public Sector Banks and Private Sector Banks have been held this year.

Urban Cooperative banks (UCB)

The term Urban Cooperative Banks (UCBs) is not formally defined but refers to primary cooperative banks located in urban and semi-urban areas.
Cooperatives Banks are established on a cooperative basis to deal with the ordinary banking business.
They are registered under the Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, 2002.
The Co-operative banks are governed by:
- Banking Regulations Act, 1949
- Banking Laws (Co-operative Societies) Act, 1955.
Since 2020 RBI has brought the revised Supervisory action Framework (SAF) for UCBs.
- It entails initiation of corrective action by UCBs and/or supervisory action by the Reserve Bank on breach of the specified thresholds (triggers) in respect of the specified financial parameters/indicators, namely:
  - If Capital to Risk-weighted Assets ratio (CRAR) falls below 9 per cent.
- If net non-performing assets (NNPAs) exceed 6 per cent of its net advances.
In June 2020, the Central government approved an Ordinance to bring all urban and multi-state cooperative banks under the direct supervision of RBI.
In 2022 RBI has announced 4 tier regulatory framework for categorization of UCBs:
- Tier 1: UCBs having deposits up to Rs 100 crore.
- Tier 2: UCBs of deposits between Rs 100 crore and Rs 1,000 crore
- Tier 3:UCBs of deposits between Rs 1,000 crore and Rs 10,000 crore
- Tier 4: UCBs of deposits more than Rs 10,000 crore.