Just the first step

Business Standard     26th June 2020     Save    
QEP Pocket Notes

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