The Way forward for Regional Rural Banks

Supervisory action framework for primary Urban Cooperative Banks (UCB): In January 2020, the Reserve Bank of India revised its Supervisory Action Framework (SAF) for making the functioning of UCB more effective to make desired improvement in its functioning. This was against the financial scandal & crisis faced by Punjab & Maharashtra Cooperative Bank, Mumbai, where irregularities of serious nature were reported by the Bank's officials to RBI in Sept 2019. The trigger for the SAF could be said to be as a sequel to the public outcry of depositors of PMC bank where the moratorium of 10000/ as the limit for daily withdrawal by depositors (after raising it to ₹ 50000/) took place. Besides RBI both the Mumbai police & Enforcement Directorate had jumped into the fray; as it transpired that bank officials & certain groups of borrowers had connived & defrauded the bank of several thousand crores through bogus advances.

The scene is evolving with many businessmen & bankers behind the bar. Now against this background a look at the co-op bank, its supervision & control by RBI over the years needed a relook. Needless to emphasize, over the years steadily the urban co-op banks were brought under greater control by RBI. From 1991 when co-op banks could only lend for non-agricultural purposes to the year 1996 when the power to license, area of operations, interest rate, etc came to be regulated under the Banking Regulation Act are a reality. Many committees set up by RBI to look into its functioning & implementations of their reports have definitely led to UCBs playing their rightful role on par with commercial banks in the economic development of the country. Both the Govt & RBI hope that the improved framework will lead to better supervision & monitoring of the bank's health & prevent eruptions like in PMC bank.

What's in it? The new supervisory framework announced by RBI encompasses inter alia the following thrust areas for supervision.

Asset quality & monitoring the health of advances: If the net Non-performing Assets of a UCB is above 6% of net advances, RBI may intervene & call for a Board-approved action plan, direct the Board to review the progress on a monthly/quarterly basis, ask for a post review progress report & even place restrictions on further advances by the bank, if found necessary. In short, take active steps to maintain, monitor & improve the asset quality of the bank.

As in advances, the second thrust area pertains to the Profitability of the bank: If any UCB is incurring losses continuously for 2 financial years or has accumulated losses, it will intervene & direct the concerned UCB as under. Submit an action plan for making the bank into profit-making one within a year, review the same & submit a progress report, prohibit the bank from paying any dividend till its position improves, even restrict incurring any capital expenditure, besides advising the bank to cut costs, reducing various expenses. All this to ensure the viability of the bank, protect depositors' interest & boost the confidence of the public in the banking sector.

RBI has rightly targeted the Capital adequacy ratio as its thrust area: If any UCBs, capital adequacy falls below 9%, under the revised framework it proposes an action plan to raise the CAR to 12, %within 120 months during which time, the bank may be advised not to expand credit. In other words, the three pillars of the revised framework are intended to meet the following objectives.

Maintain Banks health

Improve profitability.

Increase the bank's capital 

Work with discipline & attain professional excellence.

In a fledging economy such as India, the health of the financial sector is crucial & banks are its backbone. It is hoped that the above measures will go a long way to improve the bank's health & protect the interests of all stakeholders. Besides this, it should help prevent irregularities that show up as bubbles in various banks like in PMC bank or Private sector bank like YES bank. The adage that prevention is better than cure is valid in all walks of life.

Author:

Prof. Gaurav Petkar

Professor, School of Economics

Dr. Vishwanath Karad MIT-WPU