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Uniform Regulatory Structure Is Highest Priority For Cooperative Banks: RBI Report

Highest priority needs to be assigned for setting up of an umbrella organisation to offer liquidity support to cooperative banks.

The Reserve Bank of India (RBI) logo is displayed on a wall inside the central bank’s regional headquarters in New Delhi, India, Monday, July 8, 2019.  Photographer: T. Narayan/BloombergDirect Download  
The Reserve Bank of India (RBI) logo is displayed on a wall inside the central bank’s regional headquarters in New Delhi, India, Monday, July 8, 2019. Photographer: T. Narayan/BloombergDirect Download  

In the aftermath of the PMC Bank crisis, India’s central bank stressed on the need for setting up of a uniform regulatory framework for cooperative lenders.

Unearthing of irregularities in one of the urban co-operative banks has brought to the forefront issues relating to low capital base, weak governance, inability to prevent frauds, slower adoption of new technology and inadequate system of checks and balances, the Reserve Bank of India said in its ‘Trend and Progress of Banking in India for 2018-19’ report released on Tuesday.

Cooperatives in India are faced with a problem of dual regulation where banking-related functions are regulated by the central bank while management-related functions are controlled by state/central government concerned, the report said, adding that the control over cooperative banks is also not on par with commercial banks. This system impedes effective regulatory control of the reserve bank over cooperative lenders, it said.

Highest priority, according to RBI, is needed to be assigned to the establishment of a uniform regulatory and supervisory structure and an umbrella organisation to provide liquidity and capital support to urban cooperative banks.

A cross-country study by the central bank on international cooperative models highlights that in some countries, the umbrella organisation provides voting rights based on “one member one vote”. These organisations also provide access to resources by tapping into capital markets, while maintaining their cooperative nature. Members of the organization, too, provide mutual support during financial difficulties.

The RBI annual report, that collated data until March 2019, found that the balance sheet of urban cooperative banks saw moderate expansion in 2018-19, led by robust deposit growth that financed the pick-up in lending. While asset quality improved, a fall in interest income impacted profitabiliy.

There has also been a deterioration in the capital-to-risk-weighted assets ratio of scheduled urban cooperative banks to 9.8 percent in the first half of the ongoing fiscal from 13.5 percent a year ago. Non-scheduled urban cooperative banks, characterised by a lower asset base, had better capital positions than their scheduled peers until March 2019, the report said.