In a move to give the Reserve Bank of India more muscle to regulate urban co-operative banks and multi-State co-operative societies, the Centre passed an ordinance last week amending the Banking Regulation Act giving it powers to supersede boards, restructure managements and formulate resolution plans for such banks. The change will subject 1,544 co-operative banks to greater RBI supervision and partly address the problem of dual regulation by registrars of co-operative societies, frequently cited as the reason for the string of co-operative bank failures. While the Centre has expressed the hope that this decision would reassure the 8.6 crore depositors in these banks about the safety of their money, this may be a bit of wishful thinking. The RBI already has its hands full in monitoring regulatory compliance by the 86 scheduled commercial banks, 10 small finance banks, 53 regional rural banks and thousands of NBFCs under its watch (housing finance companies have recently been added). The addition of over 1,500 new constituents is unlikely to make its task easier.

While UCBs were originally conceptualised to further financial inclusion, it is a moot point if they are faithfully fulfilling this mandate. A study undertaken by the R Gandhi committee constituted in 2014 found that while smaller, unscheduled UCBs were indeed focussed on sub-₹10-lakh loans, the larger scheduled UCBs, which make up for the bulk of the deposit and asset base of the co-operative banking sector, had strayed quite far from their original mandates and were actively vying with commercial banks in extending non-priority sector loans to commercial borrowers, while availing themselves of numerous regulatory concessions. While UCBs do cater to smaller depositors ignored by commercial banks, the failure of players such as PMC Bank shows that their lax lending practices can put depositors’ money at risk. With banking correspondents, Mudra loans and Jan Dhan accounts, apart from microfinance NBFCs and small finance banks, entering the landscape, UCBs seem less relevant. There are better alternatives to balance macro financial inclusion objectives with depositor interests.

It is perhaps for this reason that the RBI has refrained from granting new UCB licences in recent years and instead tried to implement the committee’s recommendation that UCBs be actively encouraged to convert into small finance banks, so that the regulatory arbitrage can be bridged. Since the PMC Bank failure, the RBI has ushered in several new rules to tighten governance structures at UCBs, seeking more disclosures of loan books and constituting new boards of management. Given the entrenched issues at many UCBs, though, it is doubtful if they will be able to manage the transition.

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