02/07/2020 - Indian Economy

KEY POINTS

·         The recent ordinance gives regulatory oversight of these banks, essentially urban cooperative banks and multi-state cooperative banks, a push by putting in place a stronger RBI supervisory structure for them. The objective, as stated by the government, was to provide protection to the deposit-holders.

·         The Registrar of Cooperatives and RBI were both the regulators of these cooperative banks, and hence, the former does not lose its power which remains unchanged.

·         Since 2015, the SLR requirements of UCBs have been reduced progressively in line with the prescription applicable to SCBs. Furthermore, since UCBs are governed by Basel 1 regulatory norms, the liquidity coverage ratio (LCR) requirement is not applicable to them.

·         The deposits of UCBs have always been covered under the deposit guarantee scheme, and hence, nothing much will change as deposits upto Rs 5 lakh would be covered under the same.

·         These banks can, however, now have access to capital in the form of both debt and equity after taking permission from RBI. Hence, the due diligence process that has to be followed for raising either equity capital or bond will automatically ensure that they work towards maintaining a very good track record of performance, and, more importantly, governance.

·         The ordinance also gives RBI the power to allow for mergers or amalgamations, and hence, if it is observed that some of them are too weak to survive on their own, action can be taken.

·         The cooperative banks have a wide scope to expand their business, which is good for the financial system because this large pie of players has remained at the periphery for too long.

·         RBI can, in the public interest, supersede the management of a multi-state cooperative bank for up to five years and appoint an administrator. If the bank is registered with the Registrar of Cooperative Societies of a state, the regulator will have to consult the state government concerned before issuing an order to supersede the board.

·         Also, looking at the future of the cooperative banking system, one can visualise a change coming in over a period of time. This large number of banks may not be sustainable, especially as the larger ones do take on the expansion path and are able to further diversify their asset portfolio and get into new spaces.

·         This possibility cannot be ruled out and can lead to a wave of M&A activity as these banks seek to leverage synergies and grow their books. Presently, the approach has been to remain niche players, and there has been limited incentive to grow as the perimeter of activity has been defined, and the players work within these lines drawn.

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Recently, the Union Cabinet approved inclusion of co-operative banks under supervisory powers of the RBI to prevent a repeat of Punjab and Maharashtra Cooperative(PMC) Bank-like crisis. 

With this move in place, "nearly 1540 co-operative banks" will come under the purview of the RBI and RBI's powers as applied to scheduled commercial banks, will now be applied to these banks essentially urban cooperative banks and multi-state cooperative banks barring Primary Agricultural Credit Societies.

>>> Arguments in favour of the move :

- will give an assurance to "more than 8.6 crore depositors" in these banks that their money amounting to "Rs 4.84 lakh crore" will stay safe, even in crisis like situation. Thus, bring financial stability.

-  will help in doing away with the duality of regulatory control (Registrar of Cooperatives- appointed by the State govts and RBI) over co-operative banks, along with allowing them to raise capital from other avenues.

- Given the scams and frauds that have plagued these banks in the last few years, this move will "increase professionalism and improve corporate governance".

- RBI's control over management of co-operative banks will "strengthen regulatory system" and bring "transparency" in working, in such a manner that any potential sign of stress or fraud can be detected early.

>>> With all the points in favour, we can also say - a stronger RBI supervisory structure overhaul the effective functioning of cooperative banks :

- Auditing of co- op banks according to RBI rules and appointment of CEOs  with the prior approval from the central bank, will supersede the management of a these banks.

- These banks can, however, have access to capital in the form of both debt and equity only after taking permission from RBI.

- Under this new norms, the RBI has put certain checks and balances over coop banks that they would be required to more strictly meet capital norms - CAR(capital adequecy ratio).

>>> Conclusion : 

We can conclude, by saying- implementation of rules and regulations by RBI and the Cooperative Banks, and ensuring compliance will be an important task for the proper functioning of corporate governance, in such pandemic situation.

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