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Q&A: Y H Malegam, Chairman, RBI panel

'We've given a solution to the co-op bank dual control problem'

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Y H Malegam, chairman of the Reserve Bank of India’s panel on the licensing of new banks in the urban co-operative sector, in conversation with Abhijit Lele, gives his assessment of changes in the sector. Edited excerpts:

The panel has suggested allowing setting up of new urban banks in the co-operative sector. What issues impacting their working?
There is the issue of dual control. Action against the management, etc, can only be taken by the (RoC). That registrar is often subject to political and other pressures. RBI, which is responsible for banking supervision, makes an inspection, finds problems but is not able to enforce discipline because it has to always go through the registrar. The situation has improved after RBI and state governments formed a (Tafcub) to coordinate work on improving the financial health and management of urban banks.

Tafcub panels have been operating for four-five years. Is their work satisfactory? Can we allow new banks?
There has been significant improvement in the health of urban banks but the process is still time-consuming. What we have said is when you look upon a co-operative bank, conceptually you say it is a co-operative which owns the bank. Therefore, you can get out of the problem of dual control if you recognise this factor. As the co-op regulator is RoC, the bank regulator is RBI. Make it a condition that in addition to having a board of directors (BoD) under the Co-operative Act, you have a board of management. The latter is appointed by the BoD, but it has all the characteristics of the board of a commercial bank. That means it has people with professional qualifications and a chief executive officer. It is subject to RBI discipline. We make this a condition of the licence.

Would this arrangement limit or minimise the room for interference of political or other interests in the working of the board of management?
It will reduce the interference because they (political elements) have no role to play on the board of management. They have a role to play in the board of directors. The directors are not going to run the bank; BoM is going to do so. So, RBI has the power to remove people from the BoM and to approve the appointment of a chief executive officer. The same powers as in the case of a commercial bank.

You have recommended that co-operative societies working in urban areas need to be given preference in setting up a new urban bank. What is the rationale?
Look at it in a different context. First, there was the proposition problem of dual control. This is solved by having a board of management. Second, our statistics showed the geographical distribution of urban banks is not even. There are certain states like Maharashtra, Andhra Pradesh and Gujarat where there are a lot of UCBs. There are other states with a few urban banks.

We do not know whether people starting these new banks will in fact run these well. But you already have credit societies, which are large and running like banks. So, we said, if we have an existing credit society, well run and meeting all parameters, then give it preference in becoming a bank.

Some of the existing primary credit societies are in a controversy and face political interference at a local level.
They will be subject to the same organisation structure. When they become a bank, they must have a board of management and corporate governance and all the specified conditions. If these are not fulfilled, their licence will be cancelled.

Do you expect RBI to do some ground work to improve the quality of oversight capability, to improve regulation?
RBI has a very large urban co-operative bank department. It does a tremendous amount of inspection. In the past two-three years, the licences of more than 100 urban banks have been cancelled. So, the health has improved significantly. It is not as if we have not identified what needs to be done. It was always a problem of dual control. With this being solved, we hope it will not be a problem for the new banks. From the start itself, they will be monitored and work well. The problem is of existing banks. Therefore, we have suggested Tafcub be persuaded to adopt this model (for existing banks).

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