RBI panel suggests umbrella body for helping smaller UCBs scale up

Says large UCBs that cannot function fully as a bank be treated like SFBs

An expert committee constituted by the Reserve Bank of India (RBI) has suggested an umbrella organisation for small urban cooperative banks (UCBs), which will allow them access to scale forming a network. The larger UCBs are allowed to operate on a standalone basis with regulations similar to those of banks. 

The RBI must help with grants to set up the umbrella organisation, and once it stabilises, “it may explore the possibilities of converting into a universal bank and offer value-added services on behalf of its member banks,” the committee report said.

“With suitable structural flexibility to operate as a bank, the umbrella organisation can be owned by the co-operative institutions even if it is a joint stock company, which may encourage the smaller UCBs to become an extended arm of such a bank,” the panel, headed by former RBI deputy governor NS Vishwanathan said.

With the amendment to the Banking Regulation Act, the RBI has adequate power in regulating the UCBs, it said, and that should bring about a tiered regulatory structure for the UCBs, commensurate with their sizes. Before the amendment, the central bank was regulating only the ‘banking’ aspect of the cooperative banks, while the governance, audit, and winding-up related functions were driven by the state (for single state cooperative) and the central government (multi-state cooperative).  

The dual control has still not been eliminated by the amendment, but “a well-coordinated regulatory approach will, however, go a long way in ensuring a financially sound and well-managed UCB sector,” the committee noted. 

The expert committee suggested that given the heterogeneity in the sector, “a tiered regulatory framework with more than two tiers is required to balance the spirit of mutuality and co-operation more prevalent in banks of smaller sizes and those with a limited area of operation vis-à-vis the growth ambitions of the large-sized UCBs to spread their area of operation and undertake more complex business activities on par with commercial banks”.  The committee proposed a “liberal regulatory approach” for UCBs that meet a certain minimum level of capital and reserves (net worth) and CRAR requirements. 

It said there can be four tiers of regulation for UCBs. The topmost of it would be large UCBs that should have the operational freedom to decide on their branch expansion in the same fashion as banks. Therefore, they should also have a similar compulsion to open 25 per cent of their branches in unbanked areas.

These UCBs, which would function on par with commercial banks, must also be regulated similarly to banks.  

Other large UCBs that cannot function fully as a bank should be treated similarly to small finance banks (SFBs), with a similar structure of obligations and regulations, the committee suggested. 

The smallest UCBs, instead of merging between themselves, can acquire scale through the network of the umbrella organisation, “which is one of the successful models of a strong financial cooperative system globally,” it said. 

“Membership of the umbrella organisation might also provide an extra comfort to the regulator as the smaller UCBs would benefit from the products and services provided by it,” it said.  This umbrella organisation should provide “cross liquidity and capital support to the UCBs when needed, as also the cloud services for facilitating IT-enabled operations by the member banks.” 

The committee preferred the use of Cloud services as it will standardise the information technology platform across all member UCBs and would eliminate the need to have the skills or hire services to maintain IT infrastructure.  Due to the aggregation being done by the UO, “it will provide to all member banks the benefit of innovation on an ongoing basis, including the advantages from emerging advancements on the IT front at lower cost”.

The committee preferred maintaining the status quo on net worth and capital adequacy ratio.

However, it said the existing regulatory approach of prescribing sectoral limits for UCBs in terms of monetary ceilings should be dispensed with, especially in the case of large UCBs. Instead, such sectoral limits should be set as a percentage of Tier-I capital of the bank, while the board can decide on the monetary ceiling. 

However, a monetary ceiling for smaller UCBs, having inadequate risk management and risk-bearing capacity, can continue to be proposed by the regulator.