A small entity like UCB too can be systemically important, says RBI

RBI deputy governor Swaminathan J countered the popular notion that a small entity like an Urban cooperative Bank (UCB) is not systemically important and underscored the importance of governance standards among others to strengthen them.

“Some may argue that UCBs are not systemically important in view of their size and turnover” RBI deputy governor Swaminathan J.” However, if we consider the inter-connectedness that binds the entire spectrum of financial entities, it becomes evident that any vulnerable link has the potential to erode public trust and confidence” Mr Swaminathan J said in his speech titled “ Urban Co-operative Banks: Upholding Governance and Professionalism with Capacity Buidling and Technology Upgradation” delivered to the South based UCBs at Hyderabad last week.

In an increasingly interwoven financial landscape, the ripples of even an apparently small disturbance can resonate far beyond its initial impact, said citing that the failure in 2001 of a Gujarat based UCB and more recently in 2019 to a Mumbai based UCB attest to the contagion risks posed by even relatively smaller banks.


UCBs form a critical layer of the financial system of the country. Despite the sector's consistent 3-4% presence in the overall banking business, its significance should not be underestimated, he said. In terms of sheer numbers, with a count around 1,500, UCBs significantly outnumber commercial banks. Their outreach extends to a broad spectrum of society, serving common citizens, marginalized sections, small and medium-sized businesses, agriculture, and allied activities.

Transparent decision-making, accountability, and adherence to best practices are paramount. Only Boards whose members meet the standard of fit and proper in terms of age, relevant qualifications, experience and proven clean track record along with the right aptitude will be in a position to deliver the desired results.

The RBI deputy governor also urged UCBs to have a good vigilance system, effective internal audit and fraud detection mechanisms in place. When frauds occur, the bank should promptly report to the regulator and other concerned authorities.” Root causes should be suitably addressed. There should be zero tolerance towards acts of malfeasance” he said.

Another area the deputy governor highlighted was technology. By being proactive in adopting technology, UCBs can position themselves as modern and forward-thinking institutions, attracting a broader customer base and retaining relevance in a digital age. UCBs will continue to leverage on member loyalty.

“However, this can wane with time, generational changes, and of course, competition” he said. “Therefore, I would urge Directors to be receptive to adoption of latest technology but ensure that it is procured through credible suppliers and after proper due diligence”.