Set a vision to emerge as neighborhood bank of choice: RBI to urban cooperative banks

The Reserve Bank of India appointed expert committee on Urban Co-operative Banks (UCBs), under the chairmanship of former Deputy Governor NS Vishwanathan, makes a point that there is ample space for financial institutions that operate on the principles of co-operation.

In the last few decades, cooperative banks have been the troublemakers for the regulator as the maximum moratoriums took place in this sector. The political interference, lack of technology and digitisation, high-cost structure, and the higher NPAs have made them a spent force.  

In fact, the RBI came out with a new differentiated model of Small Finance Banks (SFBs) and Payments Banks to achieve financial inclusion by way of using cutting-edge technology and innovative product offerings.  

But, there seems to be a change in thinking. The RBI report says the vision for the UCB sector should be to emerge as the neighborhood bank of choice, powered by a passion for inclusive finance as the core of the business model.

"This can happen only if their operations are founded on financial strength, strong branding, cutting edge technology-driven processes, and skilled human resources coupled with an enabling regulatory environment," it says.

In fact, an important recent step has already been taken to grant in-principle for the setting up of an Umbrella Organisation (UO). The thought process on the UO has evolved over a long period of time since it was first mooted in 2006.

"The UO can and should be seen as a game-changer for the sector and as such the National Federation of Urban Co-operative Banks and Credit Societies should expedite the process of setting it up," says the report.

According to RBI's 175-page document, the UO should be financially strong and well-governed by a professional board and senior management, both of which are fit and proper. The RBI committee prefers smaller banks acquiring scale through the network of the UO, which is one of the successful models of a strong financial cooperative system globally. The UO should provide cross liquidity and capital support to the UCBs when needed, as also the cloud services for facilitating IT-enabled operations by the member banks. "The provision of cloud services has several advantages. It will standardise the IT platform across all member UCBs and avoid the need for each UCB to either have skills or to hire services for maintaining the IT infrastructure," it says.

In addition, due to the aggregation being done by the UO, it will provide to all member banks the benefit of innovation on an ongoing basis, including the advantages from emerging advancements on the IT front at a lower cost.

The committee makes a case for allowing larger UCBs to raise capital from the market. It also suggests categorisation of UCBs based on deposits. The four-tier structure will have UCBs up to Rs 100 crore deposits under tier-1,  Rs 100 crore to Rs 1,000 crore UCBs under tier-2 , Rs 1,000 crore to Rs 10,000 crore under tier-3, and UCBs with deposits of over Rs  10,000 crore under tier-4.

Also Read: 'Regain market share': HDFC Bank's credit card strategy after lifting of RBI's ban

Also Read: IBA moves RBI seeking licence to set up Rs 6,000-cr bad bank