Insights into Editorial: Co-operative banks: Is dual regulation the problem?
Recently, the Reserve Bank of India (RBI) imposed restrictions on withdrawals from the Punjab and Maharashtra Cooperative (PMC) Bank, one of the largest urban cooperative lenders.
Bank customers have been in a state of panic and the central bank has sought to assuage concerns about the banking sector’s health.
About Cooperative Banks:
- Cooperative Banks continue to be important and the ideal organisations even in the changing economic environment, as participation and inclusion are central to poverty reduction.
- Cooperative organisations in many countries have exhibited greater resilience during global crises, underscoring their importance in macroeconomic and financial stability.
- Reserve Bank of India (RBI) committee, in 2015, suggested that multi-state urban cooperative banks with a business size of Rs.20,000 crore or more be converted into full-fledged commercial bank, if the lender has no special need to remain a cooperative bank.
- Co-operative banks in India are registered under the States Cooperative Societies Act. The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.
- In most countries, they are supervised and controlled by banking authorities and have to respect prudential banking regulations, which put them at a level playing field with stockholder’s banks.
How are cooperatives overseen:
- Cooperative banks came directly under the RBI’s radar in 1966 but faced the problem of dual regulation.
- The Registrar of Cooperative Societies (RCS) is in control of management elections and many administrative issues as well as auditing.
- And the RBI brought them under the Banking Regulation Act as applicable to cooperative societies, which included all the regulatory aspects, namely, the granting of the licence, maintaining cash reserve, statutory liquidity and capital adequacy ratios, and inspection of these banks.
- So, in a sense, urban cooperative banks have been under the radar of the RBI, but because of dual regulation, one always had a feeling that one did not have as much control over these banks in terms of supercession of boards or removal of directors, as the RBI has over private sector banks.
- There was a proliferation of licences issued between 1991 and 1998. RBI to deal with the problems of cooperative banks issued a vision document in 2004-05 and stopped all licences of new branches and new bank entities.
Problems with Cooperative Banking in India:
- Politicians in local as well as in state use them to increase their vote bank and usually get their representatives elected over the board of director in order to gain undue advantages.
- The cooperatives in northeast states and in states like West Bengal, Bihar, Odisha are not as well developed as the ones in Maharashtra and Gujarat. There is a lot of friction due to competition between different states, this friction affects the working of cooperatives.
- A serious problem of the cooperative credit is the overdue loans of the cooperative banks which have been continuously increasing over the years.
- Large amounts of overdues restrict the recycling of the funds and adversely affect the lending and borrowing capacity of the cooperative.
- The cooperatives have resource constraints as their owned funds hardly make a sizeable portfolio of the working capital.
- Raising working capital has been a major hurdle in their effective functioning.
What can the government and the regulator do to restore Bank customers faith?
Many depositors opt for cooperative banks because they give a higher interest rate.
The confidence comes from governance and regulation.
RBI has been urging cooperative lenders to act professionally. We need confidence-building for all banks, not just for cooperatives, but even NBFCs.
A recent study showed that small cooperatives are doing better in terms of non-performing assets and other aspects, while large urban cooperatives are not doing well.
Under the vision document, a Memorandum of Agreement was entered into by the RBI with each of the States, where the State accepted an audit by professional auditors, and constituted a Task Force for urban cooperative banks.
Conclusion: To look at how to supervise large cooperatives better:
The RBI has announced a scheme for voluntary transition of urban cooperative banks into small finance banks, in line with the recommendations of a high-powered committee chaired by former Deputy Governor of the RBI, R. Gandhi.
RBI has given the choice to urban cooperative banks to convert to small finance banks.
That option is there for those players with more than Rs.50 crore capital and 15% capital adequacy. This is an incentive as they will then be able to grow their capital by issuing shares at a premium.
- Malegam recommended having a board of management in actual control of operations as opposed to elected directors.
There must be a push for a fit and proper management, otherwise the elected director can get away with fraud.
RBI has also said that for urban cooperative banks there could be an umbrella organisation promoted by the banks themselves to raise capital as a joint stock company can from the markets.