Context: Aiming to strengthen 1,514 urban co-operative banks, the Centre said the Reserve Bank has notified four key measures, including giving them two years more to meet the priority sector lending targets.

Four Key Measures

1) New Branches:  UCBs can now open new branches up to 10 percent (maximum 5 branches) of the number of branches in the previous financial year without prior approval of RBI in their approved area of operation.

• UCBs have to get the policy approved by their board and comply with the Financially Sound and Well Managed (FSWM) Norms.

2) One-Time Settlement: UCBs can also do One-Time Settlement at par with commercial banks.     

• The central bank has notified a framework governing this aspect for all regulated entities, including UCBs. Now co-operative banks through board-approved policies may provide a process for technical write-off as well as settlement with borrowers.

3) Priority Sector Lending: The RBI has decided to extend the timeline for UCBs to achieve Priority Sector Lending (PSL) targets by two years i.e. up to March 31, 2026.

• The deadline to achieve the PSL target of 60 percent, which was March 31, 2023, has also been extended to March 31, 2024. 

• The excess deposits, if any, after clearing the shortfall of PSL during FY 2022-23 will also be refunded to the UCB.

4) Nodal Officer: In order to meet the long pending demand of the cooperative sector for closer coordination and focused interaction, the RBI has recently notified a nodal officer as well.

What are Cooperative Banks?

• In India, co-operative banks are registered under the States Cooperative Societies Act. They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.

• It is an institution established on a cooperative basis to deal with the ordinary banking business. Like other banks, cooperative banks are founded by collecting funds through shares, accepting deposits, and granting loans.

Structure of co-operative banks in India

• Broadly, co-operative banks in India are divided into two categories - urban and rural.

• Rural cooperative credit institutions could either be short-term or long-term in nature. Further, short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.

• Meanwhile, the long-term institutions are either  State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).

• On the other hand, Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled. 

• Scheduled and non-scheduled UCBs are again of two kinds- multi-state and those operating in single state.

Urban Cooperative Banks

• UCBs refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes.

• These banks were traditionally centred around communities, localities workplace groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

• From its origins then to today, the thrust of UCBs, historically, has been to mobilise savings from the middle and low income urban groups and purvey credit to their members - many of which belonged to weaker sections.

• The Urban Cooperative Banks (\UCBs), the Primary Agricultural Credit Societies (PACS), the Regional Rural Banks (RRBs), and Local Area Banks (LABs) could be considered as differentiated banks as they operate in localized areas.

Significance

• Financial Inclusion: They have traditionally played an important role in mobilising resources from lower and middle-income groups and in providing direct finance to small entrepreneurs and traders.

• Low Cost: The key advantage that UCBs enjoy over commercial banks is derived from their cost structure. The labour costs of UCBs are considerably less than that of commercial banks and generally the operating costs are also minimal.

• Flexibility: The advantages of the local nature of the UCBs also manifest themselves in the flexibility that these banks can provide to their local clients. 

• Unlike their commercial counterparts, who need to adhere to national and global policies to change in order to alter their practices, UCBs can be far more responsive to the needs of the local community and the changes there. Once again, that provides a massive competitive advantage.

• Co-operatives have great potential to rejuvenate growth, formalise the economy, and reduce inequality besides improving the standard of living of the poor.

Challenges

• Structural Challanges: Most of them being single-branch banks, they have the problem of correlated asset risk which means the entire bank can come down if a local problem of significant scale affects the area. 

• The regulators are also concerned about their systemic risk. To the extent that UCBs often borrow and lend among themselves, the collapse of one UCB can actually destabilise others. 

• Capital Growth: But even here, the UCBs face a unique problem – restricted by their cooperative nature, they cannot issue fresh equity to shore up capital. The only capital growth they have, therefore, has to be in line with the growth of the business of their clientele. This remains a challenge for UCBs to struggle with.            

• Operational Challanges: There are major operational hurdles as well. Lack of professionalism is a common allegation hurled at UCBs from the mainstream banks. It is often viewed that while on one hand, hiring local people has helped keep the costs down and has enhanced the connectedness of these banks with the respective communities and groups, at times it has come at the cost of a professional work ethic. 

• Lack of Trained and Qualified Staff: Qualifications of the top management are another issue. Experience can scarcely be a substitute for domain knowledge in almost any field, particularly in the banking field. Attracting talent, even though not necessarily of the same gloss as that of private and foreign banks, is of critical importance. 

• Challenging Changes: The evolving changes in the financial sector combining and integrating micro finance, FinTech companies, payment gateways, social platforms, e-commerce companies and NBFCs challenge the continued presence of the UCBs, which are mostly small in size, lack professional management and have geographically less diversified operations.

• Frauds, COVID etc affected the asset quality: This, even, resulted in the decline of profitability of Urban Cooperative Banks.

• Lax corporate governance standards combined with political influence and interference was a prominent reason for the downfall of the sector.

Road Ahead

• The most important aspect of financial inclusion is financial literacy. There is a lack of awareness, especially amongst people, both rural and urban, about various schemes of FIs. 

• Increase in advertisement in local language, on radio and television, and in print media, with local icons and artistes as brand ambassadors of the campaign, could help in building public confidence

• In order to improve efficiency, increase transparency and promote fairness, the decision-making processes pertaining to staff administration, granting of credit and new membership should be clearly laid down.  

• If the UCBs can manage themselves efficiently, there will be increasing freedom for them.