Bankers oppose two-tier system for co-ops

RBI plans to treat Tier II co-ops on par with commercial banks

The co-operative banks of the state have expressed their opposition to the Reserve Bank of India (RBI) proposal to create a two-tier system for the urban co-operative banks (UCBs). The central bank proposed the system in its draft vision document.

The bankers say that such a system will have an adverse effect on the co-operative banking sector. "The RBI has proposed to categorise urban co-operative banks into two tiers.

Tier I will comprise the single unit UCBs having deposits of up to Rs 50 crore, while all other UCBs would be Tier II banks," Dilip Gajjar, chairman, Surat Peoples Co-operative Bank told Business Standard.

"The RBI has proposed to treat Tier II banks at par with commercial banks, but it has ignored various facts," he said.

"The boards of commercial banks are authorised to frame regulations for One Time Settlement (OTS) schemes, while the boards of UCBs are not. The commercial banks can accept NRI deposits, operate foreign currency chests, and raise capital from the market. The UCBs are not permitted to do any of these," he added.

"The UCBs are barred from lending money to the builders and sharebrokers, but there are no such restrictions on commercial banks. When UCBs do not have several facilities which are provided to commercial banks, how can RBI treat them at par and apply similar regulations on them," Gajjar questioned.

"The co-operative banking sector is passing through a critical phase. The RBI proposals, if implemented, would create more problems for the sector. The federation has written to the RBI and urged it to reconsider the proposals," said, Jagdishchandra Mehta, the former chairman of the Surat Peoples Bank and a board member of National Federation of Urban Co-operative Banks (NAFCUB).

The federation has recommended a three-tier system for UCBs. "We have proposed that all single unit banks and single district multi-branch banks, with deposits of up to Rs 100 crore be categorised as Tier I banks.

"All other non-scheduled UCBs be categorised as Tier II banks, while scheduled UCBs be categorised as Tier III banks. We have also recommended certain provisioning norms, which are far more balanced than the ones proposed by RBI," he added.

Sources say that the committee set up by the RBI to categorise UCB's have originally recommended a four-tier system. But the apex bank overlooked the recommendation and has proposed a two-tier system.