Regulation of Urban Cooperative Banks (UCBs)

Context: The Reserve Bank of India (RBI) Governor has said while the Urban Cooperative Bank (UCB) sector showed improved financial performance at an aggregate level in recent times, concerns and vulnerabilities were seen for certain individual entities.

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About Urban Cooperative Banks

  • Primary Cooperative Banks, popularly known as Urban Cooperative Banks (UCBs) are registered as cooperative societies under the provisions of, either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002. 

Regulation of UCBs

  • Earlier, they were regulated and supervised by the Registrar of Cooperative Societies (RCS) of the State concerned or by the Central Registrar of Cooperative Societies (CRCS). 
  • The applicability of banking laws to cooperatives societies since March 1, 1966 ushered in ‘duality of control’ over UCBs between the Registrar of Cooperative Societies/Central Registrar of Cooperative Societies and the Reserve Bank of India. 
  • The Reserve Bank regulates and supervises the banking functions of UCBs under the provisions of Banking regulation Act, 1949(AACS). 
  • Within the Reserve Bank, a separate department, viz. The Urban Banks Department has been entrusted with these functions. Urban Banks Department functions in close coordination with other regulators viz., RCSs and CRCS. The functions of the department can be broadly divided into (i) regulatory (ii) supervisory and (iii) developmental. 
  • Regulatory: 
    • The Reserve Bank has vested powers to issue licences to UCBs under Section 22 and 23 Banking Regulation Act, 1949 (AACS) to carry on banking business and to open new places of business(branches, extension counters, etc.) respectively. For this purpose, guidelines on the eligibility criteria for issue of banking licence / branch licence are issued to UCBs from time to time. 
    • As a regulator, the Reserve Bank has prescribed prudential norms in various areas, e.g. capital adequacy, income recognition, asset classification and provisioning, exposure to single/group borrowers, exposures to sensitive sectors, loans and advances, investments, liquidity requirements, etc. 
  • Supervisory:
    • The Reserve Bank carries out on-site inspections and off-site surveillance of UCBs. It also issues directions and operational instructions to UCBs, wherever necessary to streamline the functioning and to protect the interests of the depositors. 
  • Developmental: 
    • As a part of developmental functions, the Reserve Bank imparts training to the officials of UCBs to upscale their knowledge, skill and expertise. The Reserve Bank has entered into a memorandum of understanding (MOU) with the Central Government and various State Governments for harmonisation of regulation and supervision. 

Problems with Regulation of Urban Cooperative Banks

  • Dual Regulation: Urban cooperative Banks are under dual regulation of RBI and Registrar of Cooperative societies. Such dual regulation leads to lack of coordination between regulating entities. This enables cooperative Banks to escape from greater scrutiny leading to financial irregularities and lapses. This can be understood by looking at PMC Bank, which was consistently under-reporting its NPAs, but both regulators failed to see the problem.
  • Poor regulation by Registrar of Cooperative Societies: Several core functions such as audit of accounts and supersession of Board of Directors are required to be performed by Registrar of Cooperative Societies. However, some of UCBs are controlled by local level influential political leaders and businessmen. Hence, due to strong political pressure, Registrar of Cooperative societies have failed to perform their role efficiently. 
  • Lack of Empowerment of RBI: RBI has been adequately empowered to regulate the Banking related functions of the Scheduled Banks. RBI has been empowered to set a minimum level of qualifications for the Board of Directors. RBI can supersede the Board of Directors of the scheduled Banks. Auditing of such Banks is conducted in accordance with best practices laid down by RBI. However, such powers are not entrusted with RBI with respect to the regulation of UCBs leading to laxity.

Salient Features of Banking Regulation (Amendment) Act, 2020

  • The act does not put complete end to dual regulation of Urban Cooperative Banks. The act does not completely take powers of the State Registrar of Cooperative Societies/Central Registrar of Cooperative Societies. However, their powers have been substantially curtailed and regulatory powers of RBI have been substantially enhanced. For example, audits of such Banks will take place according to the best practices laid down by the RBI. 
  • The RBI would be empowered to supersede the Board of Directors. The RBI would also be empowered to lay down the minimum level of qualifications for the Board of Members.
  • Hence, the overall idea behind the Ordinance is to strengthen the regulatory oversight of the RBI.

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