RBI has its hands full with Urban Cooperative Banks now unambiguously its responsibility

Last Wednesday (24 June 2020), government announced its decision to bring Urban Co-operative Banks (UCBs) and Multi-State Co-operative Banks totalling 1,482 and 58 respectively as on date, under the supervisory power of the Reserve Bank of India (RBI). This decision, in accordance with an announcement in the Budget speech earlier this year, ‘will give an assurance to more than 8.6 crore depositors in these banks that their money amounting to Rs 4.84 lakh crore will stay safe.’

Wonderful! Except that there’s one fly in the ointment! Rather, two! UCBs were always under RBI’s supervisory control and that has not prevented more than one UCB going up. Two, RBI’s supervisory track record has often fallen short in recent times.

According to the Bank’s website, RBI ‘regulates and supervises the banking functions of UCBs under the provisions of Banking regulation Act, 1949. Within the Reserve Bank, a separate department, viz. Urban Banks Department, has been entrusted with these functions. Urban Banks Department functions in close coordination with other regulators viz., Registrar of Cooperative Societies and Central Registrar of Cooperative Societies.

Further, RBI has been ‘vested powers to issues licence to UCBs under Section 22 and 23 Banking Regulation Act, 1949 to carry on banking business and to open new places of business (branches, extension counters, etc.) respectively. As a regulator, Reserve Bank prescribes ‘prudential norms in various areas, e.g. capital adequacy, income recognition, asset classification and provisioning, exposure to single/group borrowers, exposures to sensitive sectors, loans and advances, investments, liquidity requirements, etc. It carries out on-site inspections and off-site surveillance of UCBs. It also issues directions and operational instructions to UCBs, wherever necessary to streamline the functioning and to protect the interests of the depositors (emphasis added)’.

In fact, RBI’s supervisory framework for UCBs has undergone three iterations since the collapse of Madhavpura Cooperative Bank in 2001. In March 2009, the central bank introduced what it called a revised supervisory rating model for UCBs based on CAMELS (Capital Adequacy, Asset classification, Management, Earnings appraisal, Liquidity) framework in the place of the then existing Grading System.

This was followed by a revised Supervisory Action Framework (SAF) in March 2012 that envisaged self-corrective action by the management of the UCB itself in the initial stage of deterioration in the financial position followed by supervisory action by the Reserve Bank in case the financial position of the bank did not improve. The related circular contained a key clause to the effect that SAF did not preclude RBI from taking any action as it deemed necessary, including cancelling the licence of a bank, at any stage of the SAF.

Not content with that, in January 2020 it again revised (or should that read re-re-revised?) its supervisory framework for UCBs in terms of which a UCB could be placed under a SAF framework when its net NPAs exceeded 6% of its net advances, its CRAR fell below 9%, when it incurred losses for two consecutive financial years or had accumulated losses on its balance sheet. The type of action, RBI warned, would depend on the severity of stress.

Despite this, for a variety of reasons, not all of which can be laid at the door of dual control by RBI and State Governments under whom the Registrars of Cooperative Societies function, many UCBs have failed. And are likely to do so in future as well; unless RBI beefs up its supervisory machinery which has long been the Bank’s Achilles heel.

In fact, way back in 2012, the Report of the High-level Steering Committee for Review of Supervisory Processes of Commercial Banks, headed by then RBI Dy Governor, K. C. Chakrabarty, had pointed to glaring inadequacies in RBI’s supervisory skillsets. Saying ‘the need to create a knowledge pool of specialists is rather urgent and pressing for the RBI’, it ‘noted the inherent limitations in up-dation of skill sets of the RBI’s internal supervisory staff’.

Going by the dramatic collapse of Punjab & Maharashtra Cooperative Bank, especially the skeletons that came tumbling out of the cupboard – notably how an unscrupulous real estate company, founded, conveniently, by the Chairman of PMC, was able to borrow almost half the bank’s deposits, clearly, not enough has been done on this front.

This point has been brought home, repeatedly, by unsavoury developments, bordering in some cases on outright fraud, in a host of non-bank finance companies and private sector banks including the crème de la crème like ICICI Bank, Yes Bank and Axis Bank. NBFCs and private sector banks are not the only ones. The AQR (asset quality review) of public sector banks, initiated under former governor, Raghuram Rajan, showed not only bank managements, but also RBI inspectors in poor light as the latter had clearly been in agreement with earlier estimates made by banks of their non-performing assets.

To be sure, the fact that administrative powers are likely to remain with the Registrar of Cooperative Societies and State governments are unlikely to fall in line willingly (the Centre’s remit is restricted to multi-state cooperative banks), means RBI might still find the going tough. Remember, there has traditionally been a close nexus between the political class and cooperative societies, and this queers the pitch in many ways when it comes to UCBs.

The bottom line is, RBI really does not have the supervisory bandwidth to do justice to its steadily growing mandate; not unless its supervisory machinery is beefed up. Hugely! Merely because it has formally been given more teeth (an ordinance is expected shortly) doesn’t mean it will use them any better!

• NR Bhusnurmath is Adjunct Professor (Finance and Banking), IMT, Ghaziabad. Views expressed are the author’s own.