Can the new rules save co-operative banks from crippling politicization?

It is a contentious issue whether India’s urban co-operative banks (UCBs) can now fuel the growth of such entrepreneurs in the largely changed banking landscape. This could have been possible in the 90s when urban co-operative banks grew rapidly and mainstream banks shied away from lending without the backing of collateral.

It is now a challenging and transitional phase for these banks in the face of possible consolidation, more regulatory oversight after parliamentary approval in 2020; And their poor financial performance over the years. This may explain the recent RBI move that UCBs should also conform to the same high disclosure standards or norms as commercial banks in reporting deviations in asset classification. The decision of the Indian banking regulator to require banks to recognize high level of bad loans after conducting an asset quality review in 2015 and publicly report such deviations in classifying their bad loan accounts and thus making it more difficult for lenders Providing capital is clearly evident. Helped clean up bank balance sheets. The cultural change and the importance of integrity in accounting should be reflected in the cooperative banking segment in the next few years as well, albeit a difficult transition phase.

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The data on UCBs in one of the expert committees set up by RBI is not quite encouraging though there are some well-run banks in this segment. At the end of March 2020, this data indicates that although 94 per cent of entities in the banking sector were UCBs, their share in banking sector deposits was just 3.24 per cent while it was 2.69 per cent in advances or loans. The financial ratio looks very worrying, which probably explains the recent steps taken by the regulator and the government to address it. Gross NPAs or bad loans were twice that of private banks and five times of small finance banks which are out of date recently. They also underperformed on other key indicators like net interest margin, return on equity and return on capital. And the report said that in the last five years, there has been a southward movement on both deposits and loans, which during the past two years has been intensified by the pandemic and the impact of scams in some large co-operative banks such as PMC. The confidence of the depositors has been shaken.

The politicization of many cooperatives in India may have cast a shadow on their operation and management. That political possession may have troubled the regulator in the past. But now with a regulatory order, a new four-tier regulatory framework with higher capital norms for fourth-tier urban co-operative banks with deposits above Rs 10,000 crore and other parameters almost at par with other banks, some successful ones. can help equip. UCB to make changes to the new system.

More importantly, these co-operative banks hold great promise in ensuring last mile loan disbursement to low-income urban workers and families, small businessmen and entrepreneurs in terms of small-ticket loans with their competitive lending rates. UCBs have a depositor base of over 8.5 crores and a borrower base of 67 lakhs. There is a market segment that UCBs can clearly cater to in urban and semi-urban areas. This would also mean stepping up on their digital banking infrastructure and products to counter the growing number of fintechs and MFIs and improving governance.

But unlike their larger commercial bank peers, urban co-operative banks may not be in a position to quickly adapt to the new classification and recognition norms, because of the capital set aside and their structural limitations in raising funds. A more staggered or divergent approach may help if these banks are committed to professionalizing their management and raising governance standards.

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