It may be trite to point out that a chain is only as strong as its weakest link. But when that weakest link is the Indian co-operative banking system, with deposits of over Rs 100,000 crore, and when the chain is the Indian financial system, then even the most banal metaphor has huge significance. | |
| Given the intractable nature of the problem, the recent steps taken to put the finances of urban co-operative banks on a sounder footing are very welcome. |
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| As part of its strategy of implementing its vision statement for urban co-operative banks, the Reserve Bank of India has signed a memorandum of understanding with the Gujarat and Andhra Pradesh state governments, which account for a significant proportion (around 21 per cent) of the total number of urban co-operative banks in the country. |
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| It's important that states such as Maharashtra, which accounts for 27 per cent of the total number of UCBs, sign on the dotted line without further delay. |
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| In essence, the vision document seeks to address some of the main defects of the co-operative banking system. It attempts, through the mechanism of the MoU with the state government, to get around the structure of dual control of these banks. |
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| Since the RBI is not authorised to take action against the management of UCBs, the MoU ensures that state governments will take action on behalf of the RBI for superseding the board of directors, appointing liquidators, putting in place minimum fit and proper criteria for seeking election for directors, institute special audits, and so on. |
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| In other words, the idea is to bind the state governments to act on behalf of the RBI. Each state government is also required to set up a Task Force on Co-operative Urban Banks (TAFCUB) to identify the weaker banks, recapitalise them if they are viable or, alternatively, merge them with stronger banks. |
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| The RBI has already laid down the guidelines for such mergers, aimed at improving the health of the co-operative banking system as a whole via consolidation. |
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| Furthermore, the RBI has now added a carrot to those states that have signed the MoU, by allowing their UCBs to apply the 180-day delinquency norm till March 31, 2006, for identifying non-performing assets in gold loans and small loans up to Rs 1 lakh. |
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| It has also permitted single-branch banks and multi-branch banks operating within a single district having deposits up to Rs 100 crore to classify non-performing assets based on the 180-day delinquency norm instead of the extant norm of 90 days, and this relaxation will be in force till March 2007. |
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| But while these carrots may be necessary to get the co-operative banks to agree to the MoU, surely there should be a penalty for non-compliance with the MoUs. |
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| Putting it simply, if there are carrots, where's the stick? That question is important because, in the final analysis, it is political interference in the working of the co-operative sector that is primarily responsible for its ills. |
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| It's true that change in the co-operative banking sector cannot be achieved without the co-operation of the state governments. But, at the very least, there needs to be a mechanism for linking co-operative bank reform with a system of incentives and penalties. |
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