Why Urban Co-operative Banks (UCBs) failing often?
Introduction: The UCBs are playing an important role in providing basic banking services to the general public across the country. There are around 1550 UCBs operating in India with a deposit base of `4.60 lakh crore and credit portfolio of `2.80 lakh crore. Majority of the depositors of these banks are middle class people and senior citizens who are attracted by the higher interest rate compared to Public Sector Banks. Present Reference: The Punjab & Maharashtra Cooperative Bank Ltd (PMC), a multi-state cooperative bank with a network of 137 branches spread in six states with total business of `20000 crore (Dep `12000 crore & Adv `8000 crore) failed to meet the commitments to the customers in September 2019. Another Bangalore based bank, Guru Raghavendra Sahakara Bank joined in the fray in January 2020 and RBI imposed restrictions on the Bank. The major reasons for fallout of UCBs are: Small Capital Base - The capital required for opening of a UCB is `25 lakhs compared to `100 crore for small finance banks. These guidelines enabled many unscrupulous elements to enter in to this sector easily. Vested Interests – UCBs are susceptible for external influences and sanction huge amounts without valid purpose. Majority of these loans are not backed by collateral securities. The promoters are misusing their official position and siphoning funds. Undue exposure to Real Estate Companies is also one of the reasons for failure of UCBs. Lack of Supervision – UCBs are operating under dual control viz., RBI and Registrar of co-operatives. RBI’s supervision is not as stringent as that of commercial banks and the regular audit by the respective state governments is not effective. Recent Developments: In order to protect the interests of the small depositors of Urban Co-operative Banks, RBI initiated the following measures: The exposure limits are revised - Single borrower from 15% to 10% and a Group of connected borrowers from 40% to 25% of Tier-1 capital. The priority sector targets increased from 40% to 75% of ANBC by 31st March 2023 with a stipulation that minimum 50% of credit should comprise with `25 lakh and below credit limits. The said measures are expected to reduce the credit concentration risk of the UCBs. The CRILC guidelines are now applicable to all UCBs and they need to share information of borrowers having aggregate exposure (fund ad nonfund) of `5 crore and above to CRILC. RBI advised all UCBs with deposits of over `100 crore to constitute a Board of Management (BoM) comprising experts to oversee their functioning with an objective to improve the corporate governance in UCBs.
Introduction: The UCBs are playing an important role in providing basic banking services to the general public across the country. There are around 1550 UCBs operating in India with a deposit base of `4.60 lakh crore and credit portfolio of `2.80 lakh crore. Majority of the depositors of these banks are middle class people and senior citizens who are attracted by the higher interest rate compared to Public Sector Banks. Present Reference: The Punjab & Maharashtra Cooperative Bank Ltd (PMC), a multi-state cooperative bank with a network of 137 branches spread in six states with total business of `20000 crore (Dep `12000 crore & Adv `8000 crore) failed to meet the commitments to the customers in September 2019. Another Bangalore based bank, Guru Raghavendra Sahakara Bank joined in the fray in January 2020 and RBI imposed restrictions on the Bank. The major reasons for fallout of UCBs are: Small Capital Base - The capital required for opening of a UCB is `25 lakhs compared to `100 crore for small finance banks. These guidelines enabled many unscrupulous elements to enter in to this sector easily. Vested Interests – UCBs are susceptible for external influences and sanction huge amounts without valid purpose. Majority of these loans are not backed by collateral securities. The promoters are misusing their official position and siphoning funds. Undue exposure to Real Estate Companies is also one of the reasons for failure of UCBs. Lack of Supervision – UCBs are operating under dual control viz., RBI and Registrar of co-operatives. RBI’s supervision is not as stringent as that of commercial banks and the regular audit by the respective state governments is not effective. Recent Developments: In order to protect the interests of the small depositors of Urban Co-operative Banks, RBI initiated the following measures: The exposure limits are revised - Single borrower from 15% to 10% and a Group of connected borrowers from 40% to 25% of Tier-1 capital. The priority sector targets increased from 40% to 75% of ANBC by 31st March 2023 with a stipulation that minimum 50% of credit should comprise with `25 lakh and below credit limits. The said measures are expected to reduce the credit concentration risk of the UCBs. The CRILC guidelines are now applicable to all UCBs and they need to share information of borrowers having aggregate exposure (fund ad nonfund) of `5 crore and above to CRILC. RBI advised all UCBs with deposits of over `100 crore to constitute a Board of Management (BoM) comprising experts to oversee their functioning with an objective to improve the corporate governance in UCBs.
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