Are urban cooperative banks under RBI?

Yes, urban cooperative banks are regulated and supervised by the Reserve Bank of India (RBI).

Is urban cooperative bank a government bank?

No, urban cooperative banks are not government banks; they are governed by cooperative societies.

What is an urban cooperative bank explain its functions?

Urban cooperative banks perform functions such as accepting deposits, granting loans, providing financial services, and promoting economic development in urban areas.

Which is the largest urban cooperative bank in India?

The Saraswat Cooperative Bank is the largest urban cooperative bank in India.

Urban Cooperative Banks in India, Functions and Challenges

Table of Contents

Context: The Reserve Bank of India (RBI) has decided to replace the SAF with the PCA framework to strengthen supervisory intervention for financially weak Urban Cooperative Banks (UCBs).

Urban Cooperative Banks (UCBs)

Urban Cooperative Banks (UCBs) are financial institutions that operate in urban and semi-urban areas in India. They are registered under the Cooperative Societies Act and function as cooperative entities owned and operated by their members.

State Cooperative Societies Acts (for single-state operations) or
Multi-State Cooperative Societies Act, 2002 (for operations across multiple states).

UCBs provide a wide range of banking services to their members and customers, including deposit accounts, loans, remittances, and other financial products and services. They primarily serve the banking needs of small businesses, individuals, and communities in urban areas.

Prompt Corrective Action (PCA) Framework

It is a supervisory tool used by the RBI to address financial stress in banks.
Key areas of monitoring: Adequate capital, asset quality and profitability.
It will replace the Supervisory Action Framework (SAF), which was introduced in 2012.
Conditions for Invocation of PCA:
- Capital Adequacy Ratio (CAR): If CAR falls up to 250 basis points (bps) below the required level.
- Asset Quality (Net Non-Performing Assets – NPAs): If Net NPAs exceed 6% but remain below 9% of total advances.
- Profitability: If the UCB incurs losses for two consecutive years.
Application: All UCBs in tier 2, tier 3 and tier 4 categories

Urban Cooperative Banks in India

The 1st urban cooperative credit society of India was “Anyonya Sahakari Mandali,” established in 1889 in Baroda. UCBs are governed by a board of directors elected by their members and operate on a cooperative principle, where each member has equal voting rights. They are regulated and supervised by the Reserve Bank of India (RBI) under the Banking Regulation Act, of 1949, and are subject to various prudential norms, regulations, and guidelines issued by the RBI to ensure their stability and soundness.

Categories of UCBs

Tier 1 – Deposits up to Rs 100 crore.
Tier 2 – Deposits above Rs 100 crore and less than Rs 1,000 crore.
Tier 3 – Deposits above Rs 1,000 crore and less than Rs 10,000 crore.
Tier 4 – Deposits above Rs 10,000 crore.

What are Cooperative banks?

Co-operative banks are financial entities established on a cooperative basis and belonging to their members. This means that the customers of a cooperative bank are also its owners.
They are registered under the Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, 2002.
The Cooperative banks are governed by the Banking Regulations Act, 1949 and the Banking Laws (Cooperative Societies) Act, 1955.

Urban Cooperative Banks History

Urban Cooperative Banks (UCBs) in India have a history that dates back to the early 20th century. Here is a brief overview of the history of UCBs in India:

Early Development (1904-1966)

The first urban cooperative bank, The Cooperative Credit Society of Haryana, was established in 1904 in Haryana.
The Cooperative Credit Movement gained momentum in the 1920s, with the formation of various cooperative credit societies across the country.
The cooperative banking sector witnessed significant growth during the 1950s and 1960s, primarily driven by rural and agricultural credit needs.

Regulation and Expansion (1966-1991)

UCBs function under a dual regulatory framework:

Banking Regulation Act, 1949: Since 1966, RBI has been supervising UCBs regarding licensing, capital adequacy, loan policies and financial stability.
- The Banking Regulation (Amendment) Act, 2020 has given RBI more control over UCBs, allowing it to intervene in their management and governance.
Registrar of Cooperative Societies (RCS): The respective state governments or the central government control administrative functions through the RCS.

Reforms and Consolidation (1991-Present)

Following the liberalization of the Indian economy in 1991, significant reforms were introduced to strengthen the cooperative banking sector.
The Narasimham Committee Report in 1998 recommended reforms to improve the governance, capitalization, and regulation of UCBs.
The Multi-State Cooperative Societies Act was enacted in 2002 to facilitate the formation and functioning of multi-state cooperative banks.
The RBI has taken several measures to enhance the regulatory framework and improve the financial health of UCBs, including capital adequacy norms, risk management guidelines, and periodic inspections.

Difference Between Urban Cooperative Banks and Commercial Banks

The major differences between Urban Cooperative Banks (UCBs) and Commercial Banks can be summarized below.

Aspect	Urban Cooperative Banks (UCBs)	Commercial Banks
Purpose	Financing agro/rural industries, trade, and urban industry (up to a certain limit)	Provide banking services to individuals and businesses
Regulatory Framework	Registered under the Cooperative Societies Act, 1965	Incorporated under the Banking Regulation Act, 1949
Area of Operation	Limited area of operation	Larger area of operation
Ownership Structure	Cooperative organizations	Joint stock companies
Borrowers’ Influence	Borrowers are members with voting power	Borrowers are account holders without voting power
Primary Business Function	Accept deposits from members and the public, and grant loans to farmers and small businessmen	Accept deposits from the public and provide loans to individuals or businesses
Product Range	Limited products offered	Diverse range of products
Interest Rates on Deposits	Typically higher interest rates on deposits	Typically lower interest rates on deposits

Challenges Faced by Urban Cooperative Banks

Urban Cooperative Banks (UCBs) face several challenges in their operations. Here are the challenges faced by UCBs based on the provided information:

Capital Restriction

UCBs in India are not permitted to pay more than 15% dividend to their shareholders. This limitation can hinder their ability to raise capital when needed, especially during times of financial distress.

Difficulty in Raising Capital

Unlike commercial banks, UCBs have limited options for raising capital. They can only increase their membership or ask existing members to buy more shares. This reliance on members for capital infusion can be challenging, as members may not have the financial capacity or incentive to contribute significant amounts of fresh capital.

Lack of Diversification

Small UCBs often lack diversification in their operations and have a high degree of overlap between their members and clients. This can pose difficulties during financial difficulties, as members may not be in a position to provide substantial amounts of additional capital.

Limited Alternatives for Funding

UCBs can face challenges in accessing alternative sources of funding. Issuing securities may require high remuneration and decision-making procedures for raising new capital can be cumbersome and time-consuming.

Low Incentives for Profit Distribution

In the absence of investment-driven shareholders, UCBs may have limited incentives to pay out a significant share of profits as dividends. This can affect their ability to attract capital and may impact their growth potential.

Pressure on Solvency and Liquidity

Expansionary policies and acquisitions can strain the solvency and liquidity of UCBs. Without the ability to finance acquisitions through the issuance of new equity, UCBs often resort to debt or liquidating assets, leading to a deterioration in their balance sheets.

These challenges highlight the unique financial constraints and operational limitations faced by UCBs, requiring them to carefully manage their capital, liquidity, and expansion strategies to ensure financial stability and sustainable growth.

Supervisory Action Framework for UCB

The Supervisory Action Framework (SAF) for Urban Co-operative Banks (UCBs) was introduced by the Reserve Bank of India (RBI) in 2014 to better manage stressed UCBs and ensure the timely resolution of financial stress. The SAF is similar to the Prompt Corrective Action (PCA) framework imposed on Scheduled Commercial Banks.

Under the SAF, the RBI assesses the financial position of UCBs and issues directions or instructions based on the provisions of the Banking Regulation Act, of 1949. The framework sets threshold limits for asset quality, profitability, and capital adequacy. In the early stage of deterioration, UCB management is expected to take self-corrective action.

However, if the financial position of the UCB does not improve, the RBI initiates the SAF. Once a UCB’s net non-performing assets (NPAs) exceed 6% of its net advances, it may be placed under the framework. The regulator may then take multiple actions depending on the severity of the stress.

In December 2019, the RBI proposed reducing the loan amounts UCBs can lend to a single entity and a group of borrowers to 10% and 25%, respectively. This was aimed at preventing large exposure to one group and avoiding scams similar to the Punjab and Maharashtra Co-operative (PMC) Bank case.

The revision of the SAF in early 2020 further strengthened the supervisory framework for UCBs, enabling the RBI to closely monitor and regulate UCBs to ensure their financial stability and protect the interests of depositors and stakeholders.

Reforms Needed in Urban Cooperative Banks

The committee headed by N S Vishwanathan, former RBI Deputy Governor, made several recommendations for reforms in Urban Cooperative Banks (UCBs). Here are the key reforms suggested by the committee:

Functioning as Small Finance Banks (SFBs)

Well-governed large UCBs meeting certain parameters should be allowed to operate as SFBs and universal banks, similar to commercial banks.

Four-Tiered Regulatory Structure

The committee proposed a four-tier structure for UCBs based on their deposit size. Each tier would have different capital adequacy and regulatory norms, ranging from Tier-1 (up to Rs 100 crore deposits) to Tier-4 (over Rs 10,000 crore deposits).

Norms for Each Tier

The minimum Capital to Risk-Weighted Assets Ratio (CRAR) for UCBs would vary depending on the tier. Tier-3 UCBs (Rs 1,000 crore to Rs 10,000 crore deposits) meeting a 15% capital adequacy ratio could function like SFBs, while Tier-4 UCBs (over Rs 10,000 crore deposits) meeting a 9% capital adequacy ratio could operate as universal banks.

Separate Ceilings and Stipulations

The committee recommended separate ceilings for home loans, loans against gold ornaments, and unsecured loans for different categories of UCBs. It also suggested that the loan portfolio of Tier-3 UCBs should align with the stipulations for SFBs.

All-Inclusive Directions (AID)

AID should be treated similarly to moratorium under Section 45 of the Banking Regulation Act, and banks should not continue under AID beyond the specified time, which is three months extendable by another three months.

Merger and Consolidation

The RBI should be neutral to voluntary consolidation of UCBs, but mandatory mergers can be considered as a supervisory action if UCBs fail to meet prudential requirements.

Changes to Supervisory Action Framework (SAF)

The SAF should follow a twin-indicator approach, considering only asset quality and capital (measured through net non-performing assets and CRAR) instead of the current triple indicators. The objective of SAF should be to provide a time-bound remedy to the financial stress of a UCB.

These recommendations aim to strengthen governance, enhance capital adequacy, improve asset quality, and provide a framework for resolving financial stress in UCBs, ensuring their stability and better regulation in line with the changing banking landscape.

SWOT Analysis of Urban Cooperative Banking Sector in India

SWOT Analysis	Details
STRENGTHS	UCBs are self–reliant in financial with less risk in operations. They have been filling the credit gap in the urban, suburban and semi-urban areas. One hundred years of existence. UCBs have responsibility for the economic upliftment of the weaker sections of the community. Non-discrimination against caste, class, creed, religion, and gender. The principle of member participation has resulted in a unique system of share capital linked to borrowing in UCBs. Democratic management is the principle of the cooperative sector. The deposits of UCBs are protected by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). There is a good network of UCBs organized at grassroots levels. Cooperatives are required to maintain lower reserve requirements i.e., 3% and 25% of their time and demand liabilities towards CRR and SLR respectively. This provides greater liquidity to cooperatives.
WEAKNESSES	UCBs had the highest net non-performing asset (NNPA) ratio (5.26%) and gross non-performing asset (GNPA) ratio (10.96%) across the banking sector as of March 2020. These levels correspond to around twice that of private sector banks, and around five times that of small finance banks. Staff recruitment is not done properly in UCBs. There is a shortage of manpower. The process of computerization of UCBs is rather slow. Though computers have been installed, trained staff is not available. Lack of professional management. Regional imbalance in the distribution and development of UCBs. Political factors play an adverse role and hamper the smooth functioning of banks i.e., organizing loan melas and campaigning for waiver of loan in the same breath. Ineffective supervisory mechanism and internal control system. The low business level is one of the major reasons for non- viability of UCBs. The financial margin of UCBs is inadequate to meet transaction and risk costs. Poor image in the minds of people about cooperative institutions. UCBs concentrate more on jewel loans than others. Lack of initiative and innovation among the staff and members.
OPPORTUNITIES	UCBs are integrated into their local environment and their role goes beyond that of provider of financial services. On account of their proximity to their members and their firms, UCBs have a good scope for enlarging the membership. UCBs are pioneers in the field of microfinance. Collective efforts not only enhance the chances of success but also increase the economy of scale by reducing the per capita cost of operation and increasing productivity.
THREATS	Acute competition in the market. Increasing incidence of fraud and misappropriation. The tightening of Income Recognition and Asset Classification Norms had a direct bearing on the balance sheet of the UCBs. Higher cost of management especially for interest on deposits and establishment cost. External pressure to finance ineligible borrowers. Loan waiver announcement of government then and there.

Urban Cooperative Banks UPSC

Understanding the functioning and challenges of Urban Cooperative Banks (UCBs) is important for the UPSC (Union Public Service Commission) exam as it falls under the Economics and Governance topics of the UPSC Syllabus. By staying updated on the latest developments, reforms, and challenges in UCBs, candidates can demonstrate their understanding of the Indian banking sector’s functioning and its impact on the economy.

Keeping track of such topics can be facilitated through UPSC Online Coaching and UPSC Mock Test, which provide comprehensive study materials, practice questions, and exam simulations to enhance the candidates’ knowledge and analytical skills.