Tough times for urban cooperative banks as bad loans build, ranking dips

Lenders that hold more than Rs 5 trillion in deposits are weaker after the pandemic

Urban cooperative banks in India, set up after the success of similar initiatives in Europe, trace their history to the 19th century.

The last few years have not been great for the segment, which holds more than Rs 5 trillion in deposits, shows a Business Standard analysis of Reserve Bank of India (RBI) data released as part of its ‘Primary (Urban) Co-operative Banks’ Outlook 2022-23’.

Cooperative banks are popular because they often give higher interest than other banks but many of them are financially weaker after the pandemic. The RBI rates banks on the basis of factors like capital adequacy, asset quality, management, earning, liquidity and system and controls. Around 22 per cent of urban cooperative banks were put in the lowest two categories in 2018-19. The number increased to 35 per cent in 2022-23 (chart 1).
 

The share of bad loans in their portfolio (gross non-performing assets, or NPAs) was 5.7 per cent in 2013-14. It increased to 8.8 per cent in 2022-23. The proportion of bad loans – after accounting for provisions (net NPAs) – was 2.1 per cent in 2022-23, or roughly where it was a decade ago (chart 2). The gross NPA ratio of scheduled commercial banks, the larger peers of urban cooperatives, was 3.9 per cent, and their net NPA ratio was 1 per cent in 2022-23.

The RBI governor in September 2023 expressed concern over the bad loans of urban cooperative banks. Earlier that year, the central bank notified measures to strengthen such banks.

The value of loans they have given is up 65 per cent since 2013-14 at Rs 3.3 trillion. The value of deposits has grown slightly faster, at 68 per cent, to Rs 5.3 trillion (chart 3).
 

From 2020, deposits are insured up to Rs 5 lakh after the failure of Punjab and Maharashtra Co-operative Bank (PMC) the year before.

Deposits have grown since then. The percentage of deposits insured in urban cooperative banks has dropped from 71.2 per cent in 2021-22 to 69.5 per cent in 2022-23.