After being caught on the wrong foot by the discovery of financial irregularities on a grand scale at Punjab and Maharashtra Co-operative Bank, the Reserve Bank of India has hastened to tighten regulations for urban co-operative banks (UCBs). This past week, it announced three key sets of regulatory changes.

The RBI has now made it mandatory for UCBs with deposits of ₹100 crore and above to seek its approval for the appointment of their CEOs. This is welcome as it may help the RBI nix the appointment of individuals with blatant conflicts of interest — namely friends and relatives of borrowers — in top management roles at UCBs. As financial woes at many co-operative banks seem to stem from concentrated lending to cronies, it has now mandated an independent Board of Management to ‘assist’ UCBs’ board of directors on loan sanctions, liquidity management, internal audit, technology adoption and NPA management. While Boards of Management, if they act independently, can play a useful role in instituting checks and balances at UCBs, their composition is critical to achieve this. But the new rules aren’t watertight, with half the Board of Management members allowed to be drawn from a UCB’s existing board of directors. The RBI’s move to drastically refashion UCBs’ loan books by sharply reducing single-borrower and group exposure limits, enforcing more small-ticket lending and setting a 75 per cent priority sector lending target are designed to de-risk UCBs and ensure they meet their inclusion mandate. But given the current composition of loan books, many UCBs will find it a tall order to manage this transition by the March 31, 2023, deadline. If they don’t, it is unclear what the RBI will do.

The RBI has also tightened its Supervisory Action Framework, which, akin to the Prompt Corrective Action framework for commercial banks, empowers it to slap a host of restrictions on UCBs if their net NPAs exceed 6 per cent, they make losses or report capital adequacy below 9 per cent. These include curbs on dividend payouts, loan exposures, expenses and deposit-taking. While this framework may serve to warn depositors of brewing troubles, they do not provide any roadmap for resolution of financial stress. Finally, the RBI’s insistence on writing a host of new ground-rules for UCBs also ignores the fact that crises such as those at PMC Bank unfolded not because of the lack of regulations per se , but because of the banks’ ability to flout them with impunity for years. On this count, the RBI needs to address the yawning gaps in its own supervisory framework for UCBs.