Irregularities Persist in UCBs despite RBI Interventions

Context:

Urban cooperative banks in India have been subjected to scrutiny for a long time, with stronger preventive measures required.

Regulatory Interventions and Persistent Irregularities

• Financial irregularities continue to emerge despite the RBI’s efforts to establish governance in Urban Cooperative Banks (UCBs).
• Most recent case
  • New India Cooperative Bank (Mumbai) was restricted from issuing fresh loans, deposit withdrawal was capped at ₹25,000 due to alleged embezzlement of ₹122 crore.
• Past instances include
  • PMC Bank Crisis (2019) Over 73% of its advances were tied to fraudulent loans to HDIL.
  • Abhyudaya Cooperative Bank (2023) RBI superseded the board owing to poor governance.
  • Sarvodaya Cooperative Bank & National Cooperative Bank (2024) Restrictions were imposed upon due to financial deterioration.

Challenges to Regulate UCBs

• No Checks and Balances
  • Most UCBs are run under dynastic style with weak internal oversight.
  • Creative accounting often hides financial stress.
• Difficulties in Supervision
  • Too many UCBs (1,472) have precluded on site audits.
  • The lack of technological upgrades is another limiting factor working against the RBI monitoring remotely.
• Declining Mergers as a Useful Strategy
  • Previously, the merger of the sick UCBs with sound ones would work.
    • But with liberal branch licensing, banks tend to open new branches rather than absorb the weak UCBs.
• Political Influence and Resistance from Across the Sector
  • Such cooperative banks having political backing makes the process of reforms much more difficult.
  • There are some UCBs which are not willing to convert into Small Finance Banks, even when encouraged by the RBI.

Regulatory Reforms and Protection of Deposits

• The regulatory developments following the PMC Bank crisis include
  • Along with regulatory powers of oversight, RBI’s own powers were increased.
  • The coverage of deposits under insurance was earlier ₹1 lakh limit which has now been raised to ₹5 lakh (first revision in 27 years).
  • More flexible to raise capital for cooperative banks.
• Some ongoing considerations now
  • A government review is being conducted on whether deposit insurance coverage is to be lifted even higher.
  • RBI may strengthen its exercise by augmenting annual audits with surprise inspections and by creating trackable cash flow patterns.

A Few Bad Banks or a Systemic Problem?

What is a Bad Bank?

A bad bank is an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.

• The Trend and Progress Report by the RBI for 2023-24 points out that capital buffers and asset quality are improving in the UCB sector.
• Main question: Are the failures of a few banks reason enough to put the entire sector in the dock?
  • Some officers claim that most UCBs are functioning properly.
  • Others are of the opinion that systemic governance issues continue to prevail in the sector, warranting regulatory scrutiny.

While most UCBs might be working well, the repeated emergence of irregularities calls for stricter oversight. Therefore, the RBI should tighten governance parameters, improve auditing mechanisms and promote technological innovations in thes

Source: Business Standard