Are recent steps taken by RBI on the co-operative sector front enough or does the Reserve bank needs to do more?

Published: December 6, 2019

In India, a co-operative bank is a financial entity which belongs to its members, who are the owners and also the customers of their bank at the same time. Such banks are registered under the ‘States Cooperative Societies Act.’ and are subject to dual regulation. While the Reserve Bank of India manages the banking-related functions under the Banking Regulations Act 1949 and by State Registrars of Co-operative Societies (RCS) if they operate in a single state, or Central Registrar of Co-operative Societies if they operate under multiple states. 

The Reserve Bank of India’s (RBI) move to impose curbs on lending and withdrawals in Punjab and Maharashtra Cooperative Bank reportedly due to under-reporting of bad loans turns the spotlight on regulation of cooperative banks. These have played a vital role in extending the reach of formal finance to the unbanked, but deemed too small to create any systemic harm, are relegated to the regulatory back burner. Cooperative banks are jointly regulated by RBI and the state government. This should cause no confusion. RBI should supervise the banking operations of urban cooperative banks (UCBs) just as it does for all banks. The same norms must apply. And state registrars should only oversee ownership and control. All UCBs must also adopt core banking solutions if they want to stay in business in the future.

While the Reserve Bank has taken certain steps to strengthen urban co-operative banks recently-

From now on UCBs with assets above Rs 500 crore have been asked to report on the Central Bank’s Central Repository of Information on Large Credits (CRILC), something their commercial banking counterparts already do. 

RBI will now prescribe a comprehensive cybersecurity framework for such banks, the framework will depend upon their digital reach, digital products offered by them and assessment of their cybersecurity risk by professionals. 

While the above steps are certainly helpful more needs to be done to strengthen this sector.  For starters, the recommendations of an RBI panel under R Gandhi can be implemented. 

Creation of an umbrella organisation for cooperative banks and instituting a board of management. 

Amendment of the Banking Regulation Act to give the Reserve Bank more powers over cooperative banks, empowering it to wind up and liquidate banks without involving other regulators, thus eliminating the problem of dual regulation in the sector. 

Financial awareness campaigns where the RBI raise awareness among the poor about the dangers of investing in co-operative banks so that they can make informed decisions of their own.

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