Why is the RBI governor concerned about urban cooperative banks?

Reserve Bank of India (RBI) governor Shaktikanta Das recently expressed concern over high gross non-performing assets (GNPA) ratio of 8.7% in urban cooperative banks (UCBs). Das emphasized the urgent need for these institutions to improve governance standards and focus on credit risks. Mint takes a look at the significance of UCBs and the central bank's initiatives to fortify these banks.

What are urban cooperative banks?

Urban Cooperative Banks operate primarily operate in urban and semi-urban regions of India. Registered under the Cooperative Societies Act, these member-owned and run entities cater to banking requirements of small businesses, individuals, and communities, who find it difficult to access services of the mainstream banking segment.

Services include deposit accounts, loans, remittances, and other financial products and services.  

What is the reach and scope of UCBs in India?

Currently, there are 1,514 UCBs in India, accounting for 11% of the total credit to agriculture. The total deposit base of UCBs stands at ₹5.26 trillion. As on 31 March 2020, an estimated 94% of the entities in the banking sector were UCBs. However, their share in the banking sector’s deposits stood at only 3.24% and advances at 2.69%. 

UCBs cater to the financial needs of about 85.2 million depositors and 6.7 million borrowers, who are mainly from low-income segments of the population. UCBs have a significant role in aiding financial inclusion, despite their lower market share when compared to commercial banks.

Why is the RBI concerned about UCBs?

UCBs' governance and performance metrics have long been on the RBI's radar. The 2019 downfall of the Punjab and Maharashtra Cooperative (PMC) Bank intensified the scrutiny on the urban cooperative banking system. 

RBI has revoked the licenses of several UCBs due to their unsatisfactory financial health. The central bank has cancelled licences of 54 UCBs since FY16 because of poor financial performance. According to RBI data, nine non-scheduled UCBs were voluntarily merged with financially stronger banks during FY22. Since FY05, the sector has witnessed 145 mergers, with the majority in Maharashtra, followed by Gujarat and Andhra Pradesh. 

UCBs have the highest net NPA and gross NPA ratios across the banking sector. Even the provision coverage ratio of UCBs is considerably lower than that of public sector banks.

What has the RBI recommended?

In a recent speech, RBI governor Das emphasized that cooperative banks should focus more on the quality of governance, which is based on three pillars of compliance, risk management, and internal audit. He asked UCBs to come out with a risk analysis report on a quarterly basis and submit it before the board. He also asked these banks to improve internal audit functions. 

Das suggested that bank boards democratize discussions and prevent excessive dominance by few members, saying that board members of cooperative banks should have adequate expertise. The board should not be static and there should be new inductions, new minds and younger persons coming into the board, Das said, while asking boards to focus on improving recovery from the top 20 defaulters to tackle asset quality issues.