Just the first step

Context: The recent decision of the Cabinet giving more powers to the Reserve Bank of India to supervise cooperative banks is a welcome step, but a large number of issues still prevail.

Impact of Cabinet’s Decision:

• Application of supervisory norms in an urban cooperative and multi-state cooperative banks, similar to commercial banks
• RBI to now decide the eligibility criteria for board members and approve the appointment to the chief executive officer.

Prevailing Issues

• Incapability of RBI: 

• Punjab and Maharashtra Cooperative (PMC)-like crisis could not be predicted. Additional powers could make things more difficult for RBI.
• It is often blamed for not being able to prevent the accumulation of Non-Performing Assets.
• As a regulator, it failed to intercept problems in YES Bank.
• Failed to handle serious issues in the non-banking financial companies, IL&FS being the prime example.

• Cooperative bank as the weak link in the financial architecture: 

• Limited source of capital: 

• Many of them are just single branch entities. (Urban cooperative banks account for less than 4% of the assets of commercial banks)
• They cannot raise capital through public issues affecting capital adequacy.

• Limited scale of operations: They are neither able to invest in technology nor attract talent to manage operations.
• Disrupted by technology: The use of technology and the emergence of new-age banks like small finance banks have reduced their importance.

Way Forward: Besides supervision, need intervention at multiple levels to avoid disruption and ensure the safety of deposits

• Capacity Enlargement of the regulator: RBI would need to substantially increase the capacity to improve oversight.
• Evaluate the utility of cooperative banks: 

• Their small asset base can be serviced by commercial banks.
• Merging of weak urban cooperative banks to gain scale.
• Some may be converted into small finance banks, depending on the quality of the books.

• Infused liquidity into the system: to aid the functioning of the bond market.