Just the first step

Business Standard 26th June 2020 Save

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 the 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:

It could not stop a Punjab and Maharashtra Cooperative (PMC)-like crisis. 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)

Cooperative bank as the weak link in the financial architecture:

The limited source of capital:

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

The limited scale of operations: They are neither able to invest in technology nor attract talent to manage operations.
Disrupted by technology: 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.