Window opens to give urban cooperative banks an uplift

The success of National Urban Cooperative Finance and Development Corporation will revive public confidence in the sector and provide regulatory comfort

In many countries, cooperative credit societies – also known as credit unions – have established significant importance and presence. These entities often benefit from supportive umbrella structures connecting them and offering various financial solutions, both fund- and non-fund-based. Noteworthy global examples of umbrella entities include Rabobank group (The Netherlands), Crédit Agricole group (France), Raiffeisen Bank group (Austria) and similar networks operating in Australia, Canada, and the United States. However, no equivalent organisation exists in India for its nearly 1,500 urban cooperative banks (UCBs). This void might soon be filled by the newly formed National Urban Cooperative Finance and Development Corporation (NUCFDC) – initiated by the National Federation of Urban Cooperative Banks and Cooperative Societies (NAFCUB). NUCFDC was launched earlier this year by Union Cooperation Minister Amit Shah.

The concept of creating such an organisation gained traction due to the recommendations made by two working groups constituted by the Reserve Bank of India (RBI) in 2006 and 2009. It also resonated in the reports of various high-level committees of the RBI later. However, tangible action materialised only during 2019 with the RBI agreeing to NAFCUB’s proposal for formation of an umbrella organisation in the form of a non-banking financial company (NBFC). The success of NUCFDC is crucial as it addresses several challenges faced by UCBs and aims at enhancing their operational efficiency, upscaling use of technology, creating a cooperative brand through a stronger well-networked sector and improving governance.

According to the proposed framework, NUCFDC, will operate primarily as a specialised service provider tailored specifically for UCBs, addressing concerns related to temporary liquidity requirements, re-financing, re-capitalisation, holding deposits of member UCBs, and capacity-building duties. Being a public limited company, NUCFDC will be in a position to access the capital markets and provide capital support to its members. It will facilitate technological advancements via cutting-edge information technology (IT) infrastructure implementation, ensuring seamless integration and compatibility throughout their core banking systems. Besides, NUCFDC plans to introduce modern digital channels, such as online payments, electronic transfers, smartphone apps, and automated teller machines. Importantly, NUCFDC will also play the role of a self-regulatory organisation for UCBs.

To successfully execute its challenging mission, it is imperative that NUCFDC must be professionally managed. It should appoint competent professionals who are sensitive towards the needs of UCBs, particularly the small banks who require more handholding. They should be given functional autonomy but be effectively overseen and guided by a diverse and experienced board comprising a majority of professional independent directors, with fair representation for the sector.

The RBI could consider regulatory flexibility on certain non-critical aspects. For example, including NUCFDC membership as an additional qualifying criterion for opening of new branches and for providing services like mobile banking and net banking. This will incentivise UCBs to join the umbrella. Certain services to be extended to UCBs, such as providing payment gateways and clearing services would require special relaxations. While the RBI may not favour subscribing to NUCFDC’s equity, it could provide financial grants for IT infrastructure, essential for rolling out state-of-the-art platforms and services that the NUCFDC will be offering to its member-UCBs.

The success of NUCFDC relies heavily upon collaboration among parties concerned, most notably the active participation and endorsement from both the UCB community and regulators alike. This will yield great potential for fostering growth and prosperity for the UCB sector, revive public confidence in the sector and provide greater regulatory comfort too.

NUCFDC can be a catalyst to revolutionise UCBs. Through concerted efforts and sound organisational strategies, it can be a transformative force for the UCB sector, enhancing governance, efficiency and growth. The opportunity must not be missed.

The writer is a former executive director, RBI. Views expressed are personal