RBI's Heightened Scrutiny Signals Potential Overhaul For Co-operative Banks

While the functioning of the public and private sector banks has improved significantly, challenges for co-operative banks are mounting and several of them have come under the scanner for regulatory discrepancies and noncompliance.

RBI’s Concerns Over Co-operative Banks

Take a look. In May alone, the central bank imposed penalties on more than half a dozen co-operative banks for lapses in regulatory compliances.

The Greater Bombay Co-operative Bank Limited, Vaijapur Merchants Co-operative Bank Ltd, Lokmangal Co-operative Bank Limited and Udgir Urban Co-operative Bank Limited in Maharashtra, the Gandhinagar Urban Co-operative Bank Ltd, the Sutex Co-operative Bank Ltd, and the Bapunagar Mahila Co-operative Bank Ltd in Gujarat and Thoothukudi District Central Co-operative Bank Ltd, Tamil Nadu have been slapped penalties by the Reserve Bank of India (RBI).

In April as many as 10 co-operative banks in Maharashtra, Karnataka, Tamil Nadu and West Bengal were penalised. 

Between January and March more than 30 co-operative banks have come under the RBI scanner.

Besides penalties, licenses of a few banks have been scrapped too. Shree Mahalaxmi Mercantile Co-operative Bank, Hiriyur Urban Co-operative Bank, and Jai Prakash Narayan Nagari Sahakari Bank are among them. 

Instances of money laundering, flouting of know-your-customer (KYC) norms, and embezzlement of funds are not uncommon in co-operative banks. In December, last year, the Enforcement Directorate (ED) arrested Mohammad Shafi Dar, former J&K Co-operative Bank chairman in connection with a Rs 250-crore money laundering case. 

“This presents a rather worrisome picture, we need to understand that these banks are primarily catering to the unbanked or those with limited means. It's therefore imperative to protect their interests and we need to thrash out stringent norms – not just penalties,” a government official, on condition of anonymity, told The Secretariat. “The issue of restructuring these banks is likely to be high on the agenda for the next government,” the person said, adding that well-governed and strong co-operative banks would boost the country’s overall economic performance.

Performance Of The Co-operative Banks

Lack of strong corporate governance, weaknesses in internal checks and control systems and inadequate expertise in the management of funds are a few problems that have been plaguing these banks for years.

Currently, under the ambit of the Ministry of Cooperation, the overall financial health of the cooperative banks has somewhat improved in the last couple of years. Though for the urban cooperative banks (UCBs), the non-performing asset level—loans that do not fetch returns—has reduced from a double-digit figure to 8.8 per cent at the end of 2023, it is still too high for the RBI's comfort level. At the end of 2022, it was 10.27 per cent and in 2021, the figure was 12.1 per cent.

While the country’s public and private sector banks have faired well with combined net profit touching Rs 3.1 lakh crore in 2022-23—a jump of about 39 per cent, the functioning of the cooperative banks is still a matter of concern for the government as well as the regulator.

At present, there are more than 1,500 UCBs with deposits of over Rs 5 lakh crore and loans of about Rs 3.50 lakh crore.

Under the aegis of Union Minister Amit Shah, who is in charge of the Ministry of co-operation besides home, an umbrella organization for UCBs - the National Urban Cooperative Finance and Development Corporation Limited (NUCFDC) to strengthen self-regulation has been set up. “This body could get more teeth in the coming months, if the NDA government come back,” the official noted.

Last year, RBI governor Shaktikanta Das expressed his concern over the functioning of the UCBs. He underlined the need for these banks to have foolproof risk management mechanisms and strengthen their functioning.

“The quality of governance was the most important aspect in ensuring stability of individual banks and the directors of UCBs are urged to further strengthen governance practices,” Das said at a conference last year.

The return on equity for the UCBs at just over 5 per cent at the end of 2023 remained way lower than the pre-COVID level of 7.2 per cent at the end of 2019. For public sector banks, it is about 15 per cent.

The co-operative banking system broadly categorised as urban and rural cooperatives has played an important role in expanding financial inclusion. 

According to ResearchGate, the urban co-operative bank crisis in India has far-reaching implications, not only in the financial domain but also in the socio-economic and psychological well-being of its customers. “Addressing the urban co-operative bank crisis requires a comprehensive approach involving regulatory reforms, enhanced oversight mechanisms, and a commitment to rebuilding trust. Safeguarding the interests of depositors and implementing measures to prevent such crises in the future are imperative,” it said.

A full-blown crisis in these banks could deal a big blow to the common account holders and savers impacting the broader economic parameters.