Urban cooperative banks urgently need to get their act together

Sub: Eco

Sec: Monetary Policy

Context:

Jean Baptiste Alphonse Karr’s quote, “the more things change, the more they stay the same,” applies aptly to the recurring challenges faced by Urban Cooperative Banks (UCBs) over the past quarter-century.
Fraud and mismanagement continue to plague the sector, causing significant hardship to depositors and borrowers.

Spotlight on UCBs:

UCBs have been in the spotlight due to incidents of fraud. A notable example is the ₹122-crore scam at the Mumbai-based New India Cooperative Bank (NICB).
While there are several financially sound and well-managed UCBs, the presence of some rogue players tarnishes the reputation of the sector.
The RBI plays a critical role in addressing such issues, working to protect depositors’ funds and restore trust in the system.

The Case of PMC Bank:

The RBI previously intervened to rescue the Punjab and Maharashtra Cooperative (PMC) Bank through a novel solution, where Centrum Financial Services Ltd. took over the bank, converting it into Unity Small Finance Bank.
Now, there is uncertainty over whether a similar rescue plan will be applied to NICB or if alternative solutions will be explored.

Reviving NICB:

The National Federation of Urban Cooperative Banks and Credit Societies Ltd. (NAFCUB) has expressed a desire to work on a revival plan for NICB, though it lacks sufficient information from the RBI.
A key challenge is ensuring that major depositors, who make up 90% of NICB’s depositors, do not withdraw their funds before a revival plan is executed.
While small depositors (under ₹5 lakh) will be compensated by mid-May 2025 through the Deposit Insurance and Credit Guarantee Corporation (DICGC),larger depositors face a longer recovery process.
If this happens, a potential buyer, such as a small finance bank or non-banking financial company (NBFC), may not find the bank an attractive acquisition target.

RBI’s Powers:

The amendment of the Banking Regulation Act in 2020 has empowered the RBI to take decisive actions against errant UCBs.
This includes the authority to reconstruct or amalgamate a bank with the approval of the central government.
These powers are aimed at ensuring early intervention to preserve depositors’ trust and to prevent further damage to the sector.

The Dynastic Control Issue:

The issue of dynastic control in some UCBs has been raised as a significant concern.
RBI Director Satish K. Marathe highlighted that internal lapses are often first noticed by the bank’s staff, management, auditors, and board.
Dysfunctional boards and lack of vigilance from shareholders are often the root causes of mismanagement.

Urban Cooperative Banks:

Co-operative Banks are broadly classified into Urban and Rural co-operative banks based on their region of operation.
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.
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.