Urban Co-operative Banks

Urban Co-operative Banks

Subject – Economy

Context – A Reserve Bank appointed committee has suggested a four-tier structure for the urban cooperative banks (UCBs).

Concept –

• Co-operative Banks, which are distinct from commercial banks, were born out of the concept of co-operative credit societies where members from a community group together to extend loans to each other, at favourable terms.
• Co-operative Banks are broadly classified into Urban and Rural co-operative banks based on their region of operation.
• Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits and grant loans.
• The history of Indian cooperative banking started with the passing of Cooperative Societies Act in 1904.
• A Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
• Co-operative banks in India are registered under the States Cooperative Societies Act.
• The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the
  • Banking Regulations Act 1949
  • Banking Laws (Co-operative Societies) Act, 1955.
• Democratic Member Control – democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
• Urban Co-operative Banks (aka Primary Cooperative Banks) are regulated and supervised by State Registrars of Co-operative Societies (RCS) in case of single-State co-operative banks and Central Registrar of Co-operative Societies (CRCS) in case of multi-State co-operative banks and by the RBI.
• The banking related functions such as issue of license to start new banks/branches, matters relating to interest rates, loan policies, investments and prudential exposure norms are regulated and supervised by the Reserve Bank under the provisions of the Banking Regulation Act, 1949.
  • Reserve Bank of India is both the controlling and inspecting authority for the Primary Cooperative Banks.
• NABARD provides refinance support and takes care of inspection of StCBs and DCCBs.

Difference between UCBs and Commercial Banks

• Regulation: Unlike commercial banks, UCBs are only partly regulated by the RBI. Their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms. However, their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government.
• Borrower can be a Shareholder: In general for a commercial bank, there is a clear distinction between its shareholders and its borrowers whereas in a UCB, borrowers can even double up as shareholders.

All-inclusive directions (AID)

• The committee, headed by NS Vishwanathan, a former Deputy Governor of the RBI, emphasised that all-inclusive directions (AID) should be treated on a par with moratorium under Section 45 of the Banking Regulation Act.
• If AID is imposed, a bank should not continue thereunder beyond the time permitted to keep a bank under moratorium — three months extendable by a maximum of another three months.
• Some UCBs (about 50 UCBs) have been under AID for many years.

A Stage III UCB is one where its capital to risk-weighted assets ratio/ CRAR is less than 4.5 per cent and/or net non-performing assets/NNPAs is greater than 12 per cent.