Improve governance practices or perish: RBI to urban cooperative banks

MUMBAI: The Reserve Bank has asked urban cooperative banks, which have been facing a steady decline in their market share for over a decade now, to improve their management and governance practices so that customers repose their trust in them and the banks can remain relevant.

Since the fall of the Madhavpura Cooperative Bank scam of 2002, urban cooperative banks (UCBs) have been witnessing a steady fall in their market share, which declined from 6.4 per cent in FY02 to 3.3 per cent in FY17, according to Reserve Bank deputy governor NS Vishwanathan.

As of March 2017, there were 1,562 UCBs with deposits of Rs 4,43,468 crore and advances of Rs 2,61,225 crore, accounting for about 3.6 per cent of deposits and 2.9 per cent of advances of the banking sector, he said.

On an aggregate basis, deposits grew 13.1 per cent and advances grew 6.6 per cent in FY17. Gross NPAs stood at little over 7 per cent and 91 per cent UCBS were reasonably capitalised with a core capital of over 9 per cent under the Basel I norms, he said.

"While one may be tempted to attribute the decline in market share of UCBs to the emergence of other competing alternatives within and outside the banking sector, there is no gainsaying the fact that UCBs need to regain and retain the confidence of their depositors to remain in business," Vishwanathan told an event organized by the Gujarat Urban Cooperative Banks Federation in Gandhinagar on August 4.

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"The real barometer of public confidence is the market share of the sector, which has nearly halved between FY02 when it had stood at 6.4 per cent and FY17 when it had plunged to 3.3 per cent," Vishwanathan was quoted as saying in a speech posted on its website today.

He said as the regulator RBI has taken several measures to restore public confidence in UCBs and listed the signing of the tripartite agreements with states and formation of a task-force in most states as the most impactful of them.

As a result, he said overall, UCBs with under 3 per cent core capital has come down from 224 in FY08 to 160 in FY13 and further down to 114 in FY017.

As a result, as many as 91.5 per cent UCBs had the mandated 9 per cent or more core capital as of FY17, up from 88.1 per cent in FY13 and 82.3 per cent in FY08, he said.

On the NPA side, he said such an improvement was not visible as UCBs primarily dealing in small ticket advances, had 7 per cent NPAs at the aggregate level. This is despite the fact they are still under Basel I framework and, therefore, mere compliance with CAR may not be enough.

On the governance issues he said, the need to infuse professionalism in boards is the top priority and partly admitted that RBI has been failing to do much about it due to the "dual control which results in lesser ability of the Reserve Bank to address problems that arise."

"What is needed is a proper segregation of the roles between the governance structure having responsibility for adherence to cooperative principles by UCBs and the one entrusted to run the entity as a bank funded by public deposits," he said, adding it was to address this issue that RBI recently issued draft guidelines on board of management.

As a part of this effort at confidence building, the Reserve Bank also announced the intent to allow UCBs to voluntarily convert into small finance banks.

He suggested that since UCBs and small finance banks do more or less the same type of business it would be better for UCBs to avail of the RBI provision of converting themselves in to small finance banks or just merge.

There are 124 UCBs with deposit size of under Rs 10 crore and another 232 with deposit size of Rs 10-25 crore and there are 171 which have yet to fully implement CBS.

Between 2005 and March 2018, there have been only 127 mergers among the UCBs, he said.