Good ideas to revamp urban co-op banks

An RBI expert committee on urban cooperative banks (UCB) has rightly called for a tiered regulatory framework and liberal approach on oversight and branch expansion for larger UCBs, given marked heterogeneity in the segment. As of March 31, 2020, 94% of the entities in the banking sector were UCBs, numbering 1,539 albeit primarily concentrated in the western region. However, the UCBs’ corresponding share in bank deposits and advances is in the low single digits. But UCBs have much potential to provide inclusive banking services and credit access to the unbanked. And the recent Banking Regulation (Amendment) Act 2020 does provide clear RBI regulatory oversight over UCBs instead of the dual regulatory approach earlier, with both the states and the Centre (for multi-state UCBs) having a role.

The expert panel finds that financial inclusion furthered organic growth of the larger UCBs, with asset sizes in the Rs 5,000-10,000 crore range. For smaller UCBs, what is recommended is an umbrella organisation (UO) as a non-banking financial company to be floated by RBI that can perform as a self-regulatory body for the sub-segment. The idea is that the UO would provide cloud-based information technology and other standardised services to the smaller UCBs, whose asset bases can be well below Rs 100 crore. The suggestion is that the UO extend branding and hand-holding expertise and duly leverage channel networks so that the smaller UCBs are also able to provide mutual funds, insurance and pension products.

The bottomline is that with proximity to the borrower and better understanding of local requirements, the larger UCBs can well be empowered to provide more complex banking services with higher capital adequacy and professional management.