Renewing the cooperative promise

UCBs need to combine their cooperative values with contemporary capabilities

For many small depositors, salary earners, borrowers, pensioners, housing societies and local enterprises, an urban cooperative bank (UCB) is not just another bank. It is often the first or most practical point of access to formal finance. When such institutions are well-governed, professionally managed, and technologically prepared, their cooperative character becomes a strength that supports financial well-being.

 

This is the context in which Mission SAKSHAM, the Reserve Bank of India’s sector-wide capacity-building initiative for UCBs, recently launched by the Governor, assumes importance. Over the next 24 months, it seeks to deliver nationwide training programmes reaching over 140,000 participants from UCBs through in-person and online modules in more than a dozen Indian languages, in addition to English.

 

 

The training modules are customised for different target groups — board members, senior executives, and officers and employees in charge of assurance functions, including risk management, compliance and internal audit, IT systems, and cybersecurity.

 

“Saksham” means capable or competent. The name captures the direction in which UCBs must move, preserving their cooperative character while becoming better governed, better capitalised, better trained and better equipped for a digital financial ecosystem.

 

The cooperative promise: UCBs occupy a distinctive place in India’s financial architecture. Their share in the overall banking system may be modest, but their significance cannot be measured only by market share. They operate at the intersection of formal finance and local economies, often bridging gaps that larger institutions may not fully address. Their value lies in the segments they serve, the financial relationships they support, and the cooperative character they represent. In the rapidly evolving financial system, the question is how their cooperative promise can be renewed for contemporary banking.

 

Cooperative identity, banking responsibility: Cooperative orientation, however, by itself is not enough. Even when cooperative in character, a bank remains a custodian of public deposits. A UCB may be small in systemic terms, but for an individual depositor, it may hold a lifetime’s savings. Therefore, cooperative character must be matched by sound governance, prudent lending, effective controls, and strong customer protection.

 

When vulnerabilities weigh in: The strengths of the cooperative banking model, such as member ownership and democratic processes, are intended not only to provide a participative governance model but also to make institutions accountable to members.

 

In practice, governance can weaken when control repeatedly rests with a few individuals or when boards become involved in day-to-day management rather than oversight. This can affect decisions on credit, staffing, recovery, and internal controls.

 

Similarly, local anchoring and relationship-based finance help UCBs understand borrowers better but can also lead to excessive familiarity. Lending may be influenced by connections; exposures may arise to persons connected with those in control; and recovery efforts may become soft where borrowers are well-connected locally. Weak controls can also create space for fraud and operational irregularities.

 

Limited scale and professional capacity present another challenge. Many UCBs may not have the resources to attract specialised talent, invest adequately in technology, strengthen audit and compliance, or build modern risk management systems. This can make it difficult to keep pace with contemporary banking expectations.

 

Strengthening the foundations: The recent reform approach has, therefore, been to preserve and nurture the sector’s strengths while addressing its vulnerabilities. Important legislative changes initiated by the government have strengthened the regulatory framework, while the Reserve Bank’s regulatory, supervisory and capacity-building measures have sought to translate that framework into building stronger institutions.

 

Amendments to the Banking Regulation Act enhanced the Reserve Bank’s powers in areas such as management oversight, board standards, audit, capital raising and reconstruction. These changes were necessary because governance weaknesses in a bank ultimately affect depositors, members, and customers and can erode confidence in the cooperative banking system.

 

The regulatory approach has also become more proportionate. The UCB sector is highly diverse, with many small institutions operating in limited geographies and a smaller number of larger UCBs accounting for a significant share of the sector’s business. A one-size-fits-all framework would neither be fair nor effective. The four-tier regulatory framework adopted by the Reserve Bank recognises this heterogeneity and seeks to balance the spirit of mutuality in smaller banks with the growth ambitions and complexity of larger UCBs.

 

Recent measures have provided calibrated business flexibility, including in areas such as priority sector lending, branch authorisation, housing finance, small-value lending and unsecured lending, while retaining prudential caps and enhanced disclosure requirements. The message is that UCBs should be enabled to serve their natural customer base better, but within a framework that preserves depositor protection, transparency, and financial soundness.

 

Looking ahead: Modernisation also requires shared capacity. Many smaller UCBs may not individually have the scale to invest in technology, cybersecurity, risk management systems, treasury capacity or specialised training. The Reserve Bank has facilitated the establishment of the umbrella organisation for UCBs, but it is now for the sector to come forward and wholeheartedly support it so that it can achieve its intended role in creating shared capabilities, supporting technology adoption, providing training and promoting standard-setting.

 

The recent discussion paper on licensing of new UCBs also reflects the Reserve Bank’s calibrated approach in that direction. The objective is to examine whether well-governed, well-capitalised and professionally run institutions can be helped to grow further responsibly.

 

Renewing the promise: The future of UCBs lies in helping the sector grow with adequate safeguards and scrutiny. Well-run UCBs should be enabled to modernise and grow, while weaker institutions must be helped to improve or consolidate in an orderly manner. Boards must focus on oversight, assurance functions must be independent, and technology must be upgraded. India needs grassroots-level institutions that remain close to the people they serve. UCBs, therefore, need to become stronger banks that retain their cooperative orientation while meeting the standards of safe, modern and accountable financial intermediation.

 

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The author is Deputy Governor, Reserve Bank of India. The views are personal