Urban Cooperative Banks (UCBs)

The governor of Reserve Bank of India (RBI) asked the boards of urban cooperative banks (UCBs) to strengthen financial and operational resilience to ensure overall financial and banking sector stabili

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Context: The governor of Reserve Bank of India (RBI) asked the boards of urban cooperative banks (UCBs) to strengthen financial and operational resilience to ensure overall financial and banking sector stability.

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 co-operative 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 Banking Laws (Cooperative Societies) Act, 1955.

What are 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.
Till 1996, UCBs were allowed to lend money only for non-agricultural purposes. This distinction does not hold today.
The urban cooperative banking movement in India began in the late 19th century, influenced by successful cooperative experiments in Britain and credit movements in Germany.
There were 1,539 UCBs in the country as of March 31, 2020, with deposits worth Rs 5,01,180 crore and advances worth Rs 3,05,370 crore. UCBs accounted for 3.24% of the deposits and 2.69% of the advances in the banking sector.

Challenges faced by the Cooperative Banks

Adapting to Financial Sector Changes: The emergence of microfinance, FinTech firms, e-commerce platforms, and NBFCs, along with shifts in financial trends, poses difficulties for smaller Urban Cooperative Banks (UCBs) lacking diversification and professional management.
Erosion of Trust: Mismanagement incidents have eroded public trust in cooperative banks over time.
- According to the Ministry of Finance, urban cooperative banks reported 323 frauds in FY21, while state cooperative banks witnessed 482 frauds in the same fiscal year.
- While Maharashtra, home to the highest number of cooperatives, accounted for 67% of the fraud cases in urban cooperative banks in FY21, Kerala made up for 44% of the frauds in state cooperative banks.
Reduced Agricultural Lending: Despite historically significant roles, cooperative banks’ contribution to agricultural lending has declined markedly, dropping from 64% in 1992-93 to just 11.3% in 2019-20.
Decrease in Numbers: After liberalization in 1993, a significant portion of newly licensed cooperative banks struggled financially. The RBI merged weaker banks in 2005 to consolidate.
Dual control: The UCBs were under dual regulation by the state registrar of societies and the RBI. But in 2020, all UCBs and multi-state cooperatives were brought under the supervision of RBI.

Swot Analysis of Urban Cooperative Banking Sector in India

STRENGTHS	UCBs are self–reliant in financial with less risk in operations. They have been filling the credit gap in the urban, sub- urban 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’s participation has resulted in a unique system of share capital linked to borrowing in UCBs. Democratic management is the principle of 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 a 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. 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 loan 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 micro finance. 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 increase productivity.
THREATS	Acute competition in the market. Increasing incidence of frauds and misappropriation. 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.

Recent steps taken for UCBs

Categorization of UCBs: In December 2022, the RBI announced a four-tiered regulatory framework for categorization of UCBs.
- The four-tiered regulatory framework is based on size of deposits of the UCBs.
- The RBI has categorised all unit UCBs and salary earners’ UCBs (irrespective of deposit size), and all other UCBs having deposits up to Rs 100 crore in Tier 1.
- In Tier 2, it has placed UCBs with deposits more than Rs 100 crore and up to Rs 1,000 crore.
- Tier 3 will cover banks with deposits more than Rs 1,000 crore and up to Rs 10,000 crore.
- UCBs with deposits more than Rs 10,000 crore have been categorised in Tier 4.
Banking Regulation (Amendment) Act, 2020: It brought management / governance, audit, reconstructions / amalgamation, winding up, etc. of co-operative banks under RBI’s purview to enable improvement in the quality of their management and the standards of their cooperative governance.
- Earlier, the banking related functions of a UCB were regulated by RBI under the provisions of Banking Regulation Act and powers with regard to incorporation, management, audit and winding up were governed by the co-operative societies acts concerned.
Supervisory action Framework (SAF): In January 2020, the RBI revised the Supervisory Action Framework (SAF) for UCBs. SAF seeks to ensure expeditious resolution of financial stress faced by some of the UCBs.
- The SAF is similar to the Prompt Corrective Action (PCA) framework which is imposed on commercial banks.
Umbrella Organisation (UO): RBI had accorded regulatory approval to National Federation of Urban Cooperative Banks and Credit Societies Limited (NAFCUB) in June 2019 for formation of an UO for the UCB sector.
- UO can act as a self-regulatory body for small UCBs, will have a paid-up capital of Rs.300 crore and should provide cross liquidity and capital support to the UCBs when needed.