GIVING INDIA’S URBANCOOPERATIVE BANKS ANOTHERCHANCE

A Presentation by Priya K.N.L (17F332)Priyank Jain (17F333)Sraddha Sarkar (17F346)Utkarsh Sharma (17F350)

URBAN COOPERATIVE BANKS

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A cooperative bank located in urban/semi-urban center is known as Urban Cooperative Bank (UCB).These banks were essentially formed to finance small business

Usually a cooperative society is formed around communities, localities or small groups with a commoninterest. Cooperative banks work on the basis of mutual benefit

While the commercial banks are registered under the Companies Act, the UCBs are registered ascooperative societies

With the entry of commercial banks in a big way in financing the small borrowers and businesses, thedistinction between them and the UCBs in the market segments in which they operate is getting blurred

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EVOLUTION OF UCBs

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1889-1966

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UCBs started in India back in 1889 in GurajatThe real growth and proliferation began after this sector was brought under the purview ofBanking Regulation Act in 1966

1966-2003

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Liberal licensing policy pursuing the recommendations of the Marathe CommitteeAdvances increased from Rs.1.53 Bn in 1966 to Rs. 650 Bn in 2003 due to liberalization oflicensing norms (May 1993)

2004-2008

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Nearly one-third of the newly licensed UCBs became financially unsound in a short periodRBI appointed a screening committee to review the licensing policy

2009-2015

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Due to RBI’s initiatives, number of financially weak UCBs reduced; It resulted in an average annualgrowth of 20%Malegam Committee (2010) was setup for granting new UCB licenses

Current Status of UCBs 4

R GANDHI COMMITTEE

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A committee headed by R.Gandhi was constituted in January 2015 on the recommendation Malegam Committee forthe following reasons.

To determine permissible business lines and appropriate size with respect to UCBs

To explore the options of converting UCBs into commercial banks/SFBs

To facilitate further of growth of UCBs without undue risk to the current stakeholders

To test the conclusion of Malegam Committee

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R GANDHI COMMITTEE - RECOMMENDATIONS

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The committee recommended that conversion and business size of multi state UCBs must be made into joint stockbanks whereby business size of INR 20,000 Crore or higher could be the threshold limit after which UCB may beconverted into a commercial bank

Smaller UCBs with business size of lower than INR 20,000 Crore wishing to convert to SFBs can apply for conversionprovided they meet selection criteria and licensing window for SFB is open

Licenses should be issued to financially sound, efficiently managed cooperative credit societies with a minimal trackrecord of 5 years which meet the regulatory prescriptions established by RBI as licensing conditions

It also proposed a BoM in addition to a BoD as one of the mandatory licensing conditions for licensing of fresh UCBsand expansion of current ones

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PROBLEMS AND POTENTIAL SETBACKS

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Duality ofControl

Weakgovernance

Restrictionon capital

raising

PrioritySector

Lending

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BOARD OF MANAGEMENT

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RBI has proposed a new Board of Management that needs to be set up by all the UCBs

UCBs with more than INR 100 Crores of deposits should set up a committee within 1 year and others have to do itwithin 2 years

BoM should consist of 3-12 members with sound financial knowledge and are not have any business relationshipwith the bank

It will consider loan proposals, recommend action for recovery of bad loans, implement sound internal controls andoversee compliances

The recommendations of the BoM will be implemented by BoD

NEWS

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