Urban Cooperative Banks
Urban Co-Operative Banks of India
Co-operative credit societies established in urban areas are referred to as urban co-operative banks. In most states, however, no clear-cut definition of an urban co-operative bank is statutorily followed.
In Maharashtra State, only those urban credit societies can be called as ‘banks’ which conduct banking business in accordance with Sec. 277F of the Indian Companies Act, 1913 or Sec. 5(b) of the Banking Regulation Act, 1949 and should have a paid-up share capital exceeding Rs. 20,000.
Urban co-operative banks are confined to the municipal area of a town. They are of types:
(i) Unit banking type
(ii) Branch banking type
Urban co-operative banks usually meet the needs of specific types or groups of members pertaining to a certain trade, profession, community or even locality.
Urban Co-operative Banks are also called Primary Co-operative Banks (PCBs) by the Reserve Bank. The Reserve Bank of India defines PCBs as ‘small-sized co-operatively organised banking units which operate in metropolitan, urban and semi-urban centres to cater mainly to the needs of small borrowers, viz., owners of small scale industrial units, retail traders, professionals and salaried classes’.
The Reserve Bank grants banking licences to existing/ new banks and branches. The Urban Banks Department, established in the Reserve Bank in 1984, monitors and regulates the growth of PCBs.
UCBs are unique in terms of their clientele mix and channels of credit delivery. UCBs are organised with the objective of promoting thrift and self-help among the middle class/lower middle class population and providing credit facilities to the people with small means in the urban/semi-urban centres. On account of their local feel and familiarity, UCBs are important for achieving greater financial inclusion.
In recent times, however, UCBs have shown several weaknesses, particularly related to their financial health. Recognising their important role in the financial system, it has been the Endeavour of the Reserve Bank to promote their healthy growth.
However, the heterogeneous nature of the sector has called for a differentiated regime of regulation. In recent years, therefore, the Reserve Bank has provided regulatory support to small and weak UCBs, while at the same time strengthening their supervision.
Prudential norms were also fine-tuned to the evolving circumstances and newer business opportunities were opened for UCBs to enhance their fee-based and other non-interest income. Several important measures relating to improvement in credit delivery, customer service, financial inclusion and financial markets, taken for the commercial banks were extended to UCBs with suitable adaptations.
To strengthen the urban co-operative banking sector, the Reserve Bank took several policy initiatives during the year relating to prudential norms, credit delivery, improvement in customer service and enhancement of business opportunities, and financial inclusion.
Urban co-operative banks are regulated and supervised by State Registrars of Co-operative Societies (RCS) in case of single-state co-operative banks. Central Registrar of Co-operative Societies (CRCS) in case of multi-state co-operative banks and by the Reserve Bank.
The RCS exercises powers under the respective Co-operative Societies Act of the States with regard to incorporation, registration, management, amalgamation, reconstruction or liquidation. Such powers in case of UCBs, that have multi-state presence, are exercised by the CRCS.
The banking related functions such as issue of license to start new banks/branches, matters relating to interest rates, loan policies, investments and prudential exposure norms are regulated and supervised by the Reserve Bank under the provisions of the Banking Regulation Act, 1949 (aACS).
The draft vision document identified this duality of command as the main cause of difficulties in implementing regulatory measures with the required speed and urgency, and as an impediment to effective supervision. In order to develop greater coordination between the agencies responsible for regulation and supervision of UCBs it was proposed in the Vision Document to have a working arrangement in the form of a Memorandum of Understanding (MoU) between the Reserve Bank and the respective State Governments.
As per the commitment made in the MoU with the respective States, the Reserve Bank forms a State level Task Force for Co-operative Urban Banks (TAFCUB) comprising the Regional Director of the Reserve Bank for the concerned State as the Chairman, Registrar of Co-operative Societies as co-chairman, an official each from the Reserve Bank, National Federation of Co-operative Urban Banks (NAFCUB) and the State Federation of the UCBs as its members.
TAFCUBs, as per their terms of reference, identify the potentially viable and unviable weak banks in the Stale and suggest revival plans for the potentially viable banks and a non-disruptive exit route for unviable/ weak banks.
The non-disruptive exit route could include merger/amalgamation with strong banks, conversion into society or, as a last resort, liquidation. TAFCUBs also make recommendations on the future set up of unlicensed banks in the State, based on the assessment of their financial position and strength.
MoU have already been signed with eight States, viz. Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Rajasthan, Uttaranchal. Chhattisgarh and Goa. In each of these States, a task force has also been constituted. These states together account for 45.5 per cent of the total number of UCBs and about 22.0 per cent of deposits of all UCBs.
In 2005-06, four TAFCUBs examined the position of over 250 UCBs and made various recommendations on the future course of action for these banks. Based on the recommendations of the TAFCUB, supervisory actions that have been taken include exiting banks through mergers with other UCBs cancellations of license of unviable UCBs and rejections of license applications of unlicensed co-operative societies.
The MoU signed between the Reserve Bank and the State Government also envisages signing of another MoU between tile Registrar of Co-operative Societies of the State and the Regional Director of the Reserve Bank.
This MoU stipulates the broad measures to be taken by the signatories for implementing the recommendations of the TAFCUB for each of the potentially viable/non-viable UCBs that are placed for consideration of the TAFCUB (RBI, Report).