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RBI sets terms for urban co-op expansion

BS Banking Bureau

The Reserve Bank of India has decided not to allow urban co-operative banks with less than Rs 500 million net worth to spread their operations outside their state of jurisdiction, Jagdish Capoor, deputy governor, RBI, said on Thursday.

This new criteria for these banks for launching multi-state operations is in line with the recommendations of the RBI-appointed Madhava Rao committee on reforms in the UCB sector.

This minimum net worth requirement for the UCBs is 50 per cent of the minimum requirement for a new private sector bank. Capoor, who addressed a seminar organised by the Federation of Indian Chambers of Commerce and Industry at Delhi on UCBs on Thursday, said the main risk exposure of UCBs was not credit risk but interest rate risk. He pointed out that interest rates paid by these banks, particularly on deposits, were out of sync with the rest of the banking sector.

"In this backdrop, observance of risk and asset liability management guidelines assumes importance," the deputy governor said and added that a report from a working group constituted by the RBI to evolve guidelines in this regard, keeping in view the specifics of the UCB sector, is expected soon.

Though the RBI, in 1995, had accepted the recommendations of an expert panel on reforming the audit system for the UCBs and advised states to initiate measures, many state governments had not yet responded positively despite five years of persistent persuasion by the apex bank.

The sheer number of weak UCBs, which is well over 200, was a cause for concern for the RBI. Rehabilitation of these banks may involve strategies such as the registrars directing co-operative courts for speedy recovery process and execution of decrees, unviable branches being either relocated or closed down, exploring avenues for getting additional capital and merger with a well-managed bank, Capoor said. He emphasised that forcible merger, however, should be strictly avoided.

On dual regulatory control of the UCBs, he said, most of the issues emanating out of this scenario were due to the overlapping jurisdiction of the apex bank and state governments.

Therefore, demarcation of banking-related functions and those that warrant only state governments' action were required.

Capoor said the issue of dual control could be resolved in three ways. The first approach is by bringing the subject of co-operation under the concurrent list so as to enable the Union government to legislate in matters pertaining to co-operative banking. But such a move will involve constitutional amendments.

The second approach would be for the states to enact progressive legislations thereby making the registrars confine their functions only to registration and acceptance of bylaws. This will lead to the dual command over UCBs ending automatically.

The last approach would be to demarcate the regulatory roles of state governments and RBI in the state acts, as suggested by the Madhava Rao committee. The deputy governor said he favoured the third approach.

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