Urban Cooperative Banks Get Some Tough Love From The RBI
Why is the RBI levying so many penalties on urban cooperative banks?
The Reserve Bank of India has stepped up enforcement action against urban cooperative banks, backed by greater legislative powers to supervise and regulate these lenders.
According to data collated by BloombergQuint, the RBI's enforcement department has imposed penalties worth Rs 93.85 lakh against 39 cooperative banks since Jan. 1. This compares with three cases where the regulator had imposed monetary penalties in the first three months of 2021. It is also higher than the 12 months of 2021 when RBI penalised 21 urban cooperative banks with penalties worth Rs 77 lakh.
The regulator's actions against urban cooperative lenders stems from an attempt to avoid situations like Punjab & Maharashtra Cooperative Bank, said a person familiar with the matter, who chose to speak on the condition of anonymity. The regulator's supervision department is attempting to catch problems in the urban cooperative banking system early, this person added.
India has 1,534 urban cooperative banks, according to the RBI's latest report on Trends and Progress in Banking. Of these, 846 banks were in Tier-I towns, while 688 banks were in Tier-II towns. However, urban cooperative banks in Tier-II towns hold 93.6% of the Rs 5.27 lakh crore worth of deposits held by all such lenders.
These lenders have also been the most frequent to fail.
According to data from the Deposit Insurance And Credit Guarantee Corporation, the cumulative amount of claims paid out or provided for in respect of 365 cooperative banks since inception amounted to Rs 5,466.9 crore. In contrast, a cumulative amount of Rs 295.9 crore was paid towards claims in respect of 27 commercial banks since the inception of deposit insurance.
What Has Changed?
While a number of cooperative banks have failed over the years, the recent collapse of PMC Bank put these lenders under the spotlight. PMC Bank was registered as a multi-state cooperative bank.
Dual control of state government and the RBI over the lenders delayed the resolution of PMC Bank, which prompted the regulator to push for greater powers.
Legislation introduced by the government in September 2020 handed the RBI greater regulatory and supervisory oversight. It also made it easier for the regulator to initiate enforcement action.
Previously, the regulator had to go through the state government or central government machinery to initiate any enforcement action against non-compliant cooperative banks, the person quoted above said. With the change in legislation, the RBI can now take direct action.
The RBI found that there were three major areas where urban cooperative banks had compliance issues, this person said.
Breach of norms related to exposure to individual borrowers and sectors.
Loans to directors and relatives.
Poor asset classification and reporting.
BloombergQuint's parsing of the enforcement action initiated by the RBI shows that of the 39 cooperative banks on which penalties were imposed, in 14 instances exposure norms were breached. In the case of seven urban cooperative banks, loans were extended to directors and relatives, while in five banks poor asset classification, provisioning, and reporting was noted.
The other compliance issues that the RBI found included breach of Know Your Customer norms, fraud reporting norms, cybersecurity and IT framework norms, and norms governing unclaimed deposits.
What Do The Norms Say?
The RBI's exposure norms for urban cooperative banks mandate that the prudential exposure limits for a single borrower or party, and a group of connected borrowers or parties shall be 15% and 25%, respectively, of their Tier-I capital. In case of loans and advances to directors and their relatives, the RBI prohibits urban cooperative banks from doing so.
The regulator has been gradually moving towards activity-based regulation, rather than entity-based regulation, said R Gandhi, former deputy governor, RBI. This means that irrespective of their individual characteristics, the RBI will look at compliance across all regulated entities.
"Typically, problems such as extending loans to directors will not be seen in universal banks and small finance banks, since their governance structures are stronger and these lenders are also governed by the Companies Act. But in case of urban cooperatives, this is a persistent problem," Gandhi said.
According to Jyotindra Mehta, president, National Federation of Urban Cooperative Banks and Credit Societies, a lot of these issues stem from ignorance.
"Lower level employees of these banks, who are not well-versed with the regulatory framework, tend to make these errors. It is not that every case, where these compliance issues are found, are malicious," Mehta said.
Proactive Measures Over Reactive Measures
To reduce the number of failures amid cooperative banks, the RBI has also started taking more proactive measures. This includes checking for anomalies in fortnightly reports submitted by these banks, reaching out to statutory auditors and checking on preparedness of these lenders on the technology front, the person quoted above said.
According to Gandhi, the regulator had initiated off-site inspections specifically for this purpose.
"On-site inspections require time and resources to do thorough, in-depth checks. Considering the large number of urban cooperative banks, there are some limitations. Off-site inspections, which involve checking bank filings through algorithms and models, allow the RBI to find any major issues with these banks in a relatively easier manner," Gandhi said.
The turnaround time for supervision, show cause notices and enforcement actions have also reduced dramatically at the RBI owing to these off-site checks, said the person quoted above.
According to Mehta, while better supervision is always welcome, cooperative banks have limited room for appeal in these situations.
"There is no room for appeal with these RBI orders. We might think that the penalties levied are very small. But when you look at some cooperative lenders with small deposit bases, the cost of compliance can be quite heavy," Mehta said.
The National Federation of Urban Cooperative Banks and Credit Societies is working on setting up an umbrella entity, which can help with governance at all urban cooperative banks. This will aid in reducing the compliance burden for a lot of these lenders and help with technology, Mehta said.