Uniform regulatory structure for co-op banks top priority: RBI

The co-operative banking sector accounts for only 10.6% of the commercial banking.

In the aftermath of the PMC Bank crisis, the Reserve Bank of India (RBI) said that the “highest priority” needs to be assigned to the establishment of a uniform regulatory and supervisory structure and an umbrella organisation to provide liquidity and capital support.

In its ‘Report on trend and progress of Banking in India’, the RBI said that a number of issues continue to plague urban co-operative banks (UCBs) including a low capital base, weak corporate governance, inability to prevent frauds, slower adoption of new technology and inadequate system of checks and balances. “Going forward, UCBs need to break out of these drags,” the report said.

Currently, there is duality of control over state cooperative banks, district central cooperative banks and urban cooperative banks between the Registrar of Cooperative Societies or the Central Registrar of Cooperative Societies and the RBI.

The report has identified two challenges for the cooperative banks — rising competition from not just scheduled commercial banks (SCBs), but also small finance and payments banks, and vulnerability due to internal weaknesses such as inability to prevent frauds.

The co-operative banking sector accounts for only 10.6% of the commercial banking. However, it is vital to ensure financial stability of the cooperative banks given their role in financial inclusion, presence in lower tier towns and villages and predominant domestic orientation.

During 2018-19, UCBs registered moderate improvement in their asset quality, driven by the decline in the gross non-performing asset ratio (GNPA) of non-scheduled UCBs, the report said. “Although their asset quality and provisions improved, a fall in interest income adversely affected profitability,” the report found.

The consolidated balance sheet of UCBs expanded moderately in 2018-19 on the back of robust deposit growth which financed the pick-up in lending.

Among short-term rural co-operatives, the financial health of state co-operative banks and district central co-operative banks weakened on account of an increase in the NPA and slowdown in profitability, the report said.