As at March-end 2024, there were 1,472 UCBs. Is there a need for setting up more banks?

What I have learnt from the construction industry is that a few thousand new urban centres are coming up across the country. Also, the Ministry of Housing and Urban Affairs has received 26 proposals from 21 states to develop new cities.

But we have people, both in rural and urban areas, with limited resources.

Who will reach out to the people at the bottom of the pyramid? They really need to be supported. It is only the co-operative institutions, including UCBs, which can do that. These banks are needed for furthering financial inclusion, offering loans to micro and small enterprises, for children’s education, personal consumption, etc, to the underprivileged segments of the population. This has to be done.

Local people, local support, local resources are missing. That is why urban banks are relevant. A start can be made by licensing 100 banks in as many urban centres.

If large cooperative credit societies meet the entry point norms, IRAC (income recognition, asset classification and provisioning) norms and other regulatory prescriptions, they should be allowed to convert into UCBs... because it is in the public interest. Their depositors need to be safeguarded.

Some of these societies are bigger than many UCBs. There are some 200 large co-operative credit societies, which can be converted into banks. And this should be voluntary. If the process is started, the societies will come forward.

The UCB sector has been undergoing consolidation since 2004-05. What further possibilities do you see in this space?

If a large co-operative credit society, which complies with RBI norms, takes over a small and weak UCB, the licence of the bank could be transferred to the society. As a result the society will become an UCB. There are large co-operative credit societies that are keen to take over UCBs.

The RBI can put in place regulatory prescriptions to give UCBs enough operational room to grow, and allow time to consolidate.

Roughly, today there are 1,420 banks in the UCB sector. Of this almost 50 per cent are Tier-I banks (having deposits below ₹100 crore).

Now, these Tier-1 banks are facing huge challenges. They are good banks, not financially weak, but they are small, their area of operation is also small. And the challenge they are facing is that banking is becoming more and more complex, technology-driven.

After the passage of the Banking Regulation (Amendment) Act, 2020, the co-operative banking sector is increasingly getting integrated with mainstream banking.

These factors are posing challenges to the entire sector. The smaller UCBs have limited capital/ own funds, have staff who are not necessarily trained/ experienced to handle technology. And these banks need a lot of expertise to draft a policy (relating to credit, interest rate, liquidity, operations, etc) and keep on tweaking it as things change.

Some of the UCB top brass, who recognise these challenges, feel it is high time a few banks voluntarily came together to form a bigger bank.

This is one thinking in the sector, though nothing much has happened. The other line of thinking favours the “merger of a smaller UCB with a bigger UCB. So the interest of stakeholders, including depositors, staff, and borrowers, is protected”.

This way these banks can retain their identity as co-operative banks and continue to serve the common man.

Besides consolidation, is there any other way smaller banks can survive?

In our (UCB sector’s) submissions to the expert committee on UCBs (2021), we had proposed the concept of “cluster banks”, whereby small UCBs come together, work in close coordination. While they will have distinct identities, broadly the policies and everything else will be similar.

These banks will cooperate amongst themselves, so that they will have scale as well as identity. There is a need for thinking outside the box. Otherwise, personally, I feel that over a period of 10 years, 50 per cent of these banks will be gone.

The RBI was nudging large UCBs to convert into small finance banks (SFB) some time ago. Except for one — Shivalik Mercantile Co-operative Bank — none have shown interest in converting. What is the reason for this?

Before the amendment to the Banking Regulation (Amendment) Act, 2020, the UCB sector was facing the issue of dual control, whereby the Registrar of Co-operative Societies (RCS) and Central Registrar of Co-operative Societies (CRCS) were empowered to oversee their incorporation, management, audit, recovery, supersession of board of directors, etc, even as the RBI had limited regulatory and supervisory powers.

So, till about five years back, the RBI had inadequate powers for the resolution of troubled UCBs. It had to always act through the RCS/ CRCS.

This was an inhibiting factor and the RBI could not take timely steps. So, if large UCBs convert into SFBs, the RBI would get a better handle on them.

But now there is no need to nudge UCBs to convert into SFBs, as the RBI has adequate powers under the Banking Regulation (Amendment) Act, 2020, to regulate and supervise them.