Last month, Reserve Bank of India (RBI) released the report of the Expert Committee on Urban Co-operative Banks (Chair: Mr. N. S. Vishwanathan).  In this blog, we discuss some broader issues with the functioning and regulation of urban co-operative banks (UCBs), and some of the suggestions to address these as highlighted by the committee in its report.

Need for Urban Co-operative Banks

The history of UCBs in India can be traced to the 19th century when such societies were set up drawing inspiration from the success of the co-operative movement in Britain and the co-operative credit movement in Germany.  Urban co-operative credit societies, were organised on a community basis to meet the consumption-oriented credit needs of their members.  UCBs are primary cooperative banks in urban and semi-urban areas.  They are co-operative societies that undertake banking business.  Co-operative banks accept deposits from the public and lend to their members.  Co-operative banks are different from other co-operatives as they mobilise resources for lending and investment from the wider public rather than only their members.

Concerns regarding the professionalism of urban cooperative banks gave rise to the view that they should be better regulated.  Large cooperative banks with paid-up share capital and reserves of one lakh rupees were brought under the scope of the Banking Regulation Act, 1949 with effect from March 1, 1966.  Prior to this, such banks were regulated under the scope of state-specific cooperative laws.  The revised framework brought them under the ambit of supervision of the RBI.  Till 1996, these banks could lend money only for non-agricultural purposes.  However, this distinction does not apply today.  

The Expert Committee noted that UCBs play a key role in financial inclusion.  It further observed that the focus area for UCBs has traditionally been communities and localities including workplace groups.  They play an important role in the delivery of last-mile credit, even more so for those sections of the population who are not integrated into the mainstream banking framework.  UCBs primarily lend to wage earners, small entrepreneurs, and businesses in urban and semi-urban areas.  UCBs can be more responsive than formal banking channels to the needs of the local people.

Over the years, concerns have been raised about non-professional management in UCBs and that this can lead to weaker governance and risk management in these entities.  RBI has also taken regulatory action on several UCBs.  For instance, in September 2019, RBI placed Punjab and Maharashtra Co-operative Bank under restrictions on allegations of serious underreporting of non-performing assets.  The bank could not grant loans, make investments or accept deposits without prior approval from RBI.  While these restrictions were originally put in place for six months, the time frame was extended several times and has now been extended till December 31, 2021.  In addition, low capital base, poor credit management and diversion of funds have also been issues in the sector.

Shrinking share in the banking sector

There were 1,539 UCBs in the country as of March 31, 2020, with deposits worth Rs 5,01,180 crore and advances worth Rs 3,05,370 crore.   Even though 94% of the entities in the banking sector were UCBs their market share in the banking sector has been low and declining and stands at around 3%.  UCBs accounted for 3.24% of the deposits and 2.69% of the advances in the banking sector.  The Committee noted that state-of-the-art technology adopted by new players, such as small finance banks and fintech entities, along with commercial banks can disrupt the niche customer segment of the UCBs.

Figure 1:  Growth in deposits of UCBs (in Rs crore)
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Source: Report of the Expert Committee on Urban Co-operative Banks; PRS.

Figure 2:     Growth in advances of UCBs (in Rs crore)
 
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Source:  Report of the Expert Committee on Urban Co-operative Banks; PRS.

Burden of non-performing assets

UCBs had the highest net non-performing asset (NNPA) ratio (5.26%) and gross non-performing asset (GNPA) ratio (10.96%) across the banking sector as of March 2020.  These levels correspond to around twice that of private sector banks, and around five times that of small finance banks.  The Committee noted that, as of March 2020, UCBs have the lowest level of net interest margin (difference between interest earned and interest spent relative to total interest generating assets held by the bank) and negative return on assets and return on equity. 

Figure 3: Asset quality across banks (in percentage)

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Sources:   Report of the Expert Committee on Urban Co-operative Banks; PRS.

Supervisory Action Framework (SAF):  SAF envisages corrective action by UCB and/or supervisory action by RBI on breach of financial thresholds related to asset quality, profitability and level of capital as measured by Capital to Risk-weighted Asset Ratio (CRAR).  The Committee recommended that SAF should consider only asset quality (based on net non-performing asset ratio) and CRAR with an emphasis on reducing the time spent by a UCB under SAF.  The RBI should begin the mandatory resolution process including reconstruction or compulsory merger as soon as a UCB reaches the third stage under SAF (CRAR less than 4.5% and/or net non-performing asset ratio above 12%).

Constraints in raising capital

The Committee also observed that UCBs are constrained in raising capital which restricts their ability to expand the business.  According to co-operative principles, share capital is to be issued and refunded only at face value.  Thus, investment in UCBs is less attractive as it does not lead to an increase in its value.   Also, the principle of one member, one vote means that an interested investor cannot acquire a controlling stake in UCBs.  It was earlier recommended that UCBs should be allowed to issue fresh capital at a premium based on the net worth of the entity at the end of the preceding year.

Listing of securities:  The Committee recommended making suitable amendments to the Banking Regulation Act, 1949 to enable RBI to notify certain securities issued by any co-operative bank or class of co-operative banks to be covered under the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.  This will enable their listing and trading on a recognised stock exchange.   Until such amendments are made, the Committee recommended that banks can be allowed to have a system on their websites to buy/sell securities at book value subject to the condition that the bank should ensure that the prospective buyer is eligible to be admitted as a member.   

Conflict between Banking Regulation Act, 1949 and co-operative laws 

The fundamental difference between banking companies and co-operative banks is in the voting rights of shareholders.  In banking companies, each share has a corresponding vote.  But in the case of co-operative banks, each shareholder has only one vote irrespective of the number of shares held.  Despite RBI being the regulator of the banking sector, the regulation of co-operative banks by RBI was restricted to functions related directly to banking.  This gave rise to dual regulation with governance, audit, and winding-up related functions regulated by state governments and central government for single-state banks and multi-state banks, respectively.  

2020 Amendments to the Banking Regulation Act: In September 2020, the Banking Regulation Act, 1949 was amended to increase RBI’s powers  over the regulation of co-operative banks including qualifications of management of these banks and supersession of board of directors.  The Committee noted that due to the amendment of the Act, certain conflicts have arisen with various co-operative laws.  For instance, the Act allows co-operative banks to issue shares at a premium, but it is silent on their redemption.  It noted that if any co-operative societies’ legislation provides for redemption of shares only at par, then, while a co-operative bank incorporated under that legislation can issue shares at a premium, it can redeem them only at par.   

Note that on September 3, 2021, the Madhya Pradesh High Court stayed a circular released by the RBI on appointment of managing director/whole-time director in UCBs.  The circular provided for eligibility and propriety criteria for the appointment of such personnel in UCBs.  The petitioner, Mahanagar Nagrik Sahakari Bank Maryadit, argued that the service conditions of the managing director and chief executive officer of co-operative banks are governed by bye-laws framed under the M.P. State Cooperative Societies Act, 1960.  The petition noted that co-operative as a subject falls under the state list and hence the power to legislate in the field of co-operative societies falls under the domain of the states and not the central government.


Umbrella Organisation

Over the years, several committees have looked at the feasibility to set up an Umbrella Organisation (UO) for UCBs.  It is an apex body of federating UCBs.  In 2011, an expert committee on licensing of new UCBs recommended that there should be two separate UOs for the sector.  In June 2019, RBI granted an in-principle approval to National Federation of Urban Co-operative Banks and Credit Societies Ltd to set up a UO in the form of a non-deposit taking non-banking finance company.  The UO is expected to provide information technology and financial support to its federating members along with value-added services linked to treasury, foreign exchange and international remittances.   It is envisaged to provide scale through network to smaller UCBs.  The report of the current Committee recommended that the minimum capital of the UO should be Rs 300 crore.  Once stabilised, the UO can explore the possibility of becoming a universal bank.  It can also take up the role of a self-regulatory organisation for its member UCBs.  The Committee also suggested that the membership of the UO can be opened-up to both financial and non-financial co-operatives who can make contributions through share capital in the UO.

Comments on the report of the Expert Committee are invited until September 30, 2021.

As of May 22, 2020, there are 1,18,447 confirmed cases of COVID-19 in India, which is 76% higher than the cases on May 11, 2020 (67,152). Out of total confirmed cases, there are 66,330 active cases, 48,354 patients have been cured/discharged and 3,583 have died (Figure 1). As the spread of COVID-19 has increased across India, the central government has continued to announce several policy decisions to contain the spread, and support citizens and businesses who are being affected by the pandemic.  In this blog post, we summarise some of the key measures taken by the central government in this regard between May 11 and May 22, 2020.

Figure 1: Number of day wise COVID 19 cases as on May 22, 2020

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Aatma Nirbhar Bharat Abhiyaan

On May 12, the Prime Minister, Mr. Narendra Modi, announced a special economic package of Rs 20 lakh crore (equivalent to 10% of India’s GDP) aimed towards making the country ready for the tough competition in the global supply chain and empowering the poor, labourers, migrants who have been adversely affected by COVID-19.   Following this announcement, the Finance Minister, Ms. Nirmala Sitharaman, in five press conferences, announced the detailed measures under the economic package.  The economic package includes earlier measures taken by the government to support the citizens and businesses of India.  A break-up of the package is presented in Table 1.

Table 1: Break-up of stimulus from Aatma Nirbhar Bharat Abhiyaan package

Item

Key Topics covered

Amount (in Rs crore)

Stimulus from earlier measures

 Pradhan Mantri Garib Kalyan Yojana, Tax Concessions, and the Prime Minister's announcement for health sector

1,92,800

Part 1

Business including Micro, Small and Medium Enterprises (MSMEs)

5,94,550

Part 2

Poor people including migrants and farmers.

3,10,000

Part 3

Agriculture and allied sectors.

1,50,000

Part 4 and Part 5

Part 4: Coal and mineral sectors, defence sector, civil Aviation, airports and aircraft Maintenance, Repair and Overhaul (MRO), power sector, social infrastructures, space, atomic energy.

Part 5: Government reforms and other provisions including public health and education, additional allocation to MGNREGS

48,100

Sub Total

 

1,295,400

RBI Measures (Actual)

Reduction in Cash Reserve Ratio (CRR), Special Liquidity Facility (SLF) for mutual funds, Special refinance facilities for NABARD, SIDBI and NHB at policy repo rate

8,01,603

Grand Total

 

20,97,053

Note: Part 1, 2, 3, 4, 5 in the table above represents the five press conferences conducted by the Finance Minister to announce the details of the economic package.

Source:   Presentation made by Union Finance & Corporate Affairs Minister Smt. Nirmala Sitharaman under Aatmanirbhar Bharat Abhiyaan to support Indian economy in fight against COVID-19, Ministry of Finance, May 13, 2020, PRS.

For more information on the details of the announcements made under Aatma Nirbhar Bharat Abhiyaan, please see here.

Finance

Following the Prime Minister’s and Finance Minister’s announcements, further announcements were also made. 

  • Cabinet approved the additional funding of Rs three lakh crore to eligible MSMEs and interested MUDRA borrowers under the Emergency Credit Line Guarantee Scheme.  The funding will be covered under 100% guarantee coverage by the National Credit Guarantee Trustee Company Limited in the form of a Guaranteed Emergency Credit Line facility.
     
  • Cabinet also approved the special liquidity scheme for Non-Banking Finance Companies (NBFCs)/Housing Finance Companies (HFCs).  The details of the scheme were shared by the Finance Minister in May 2020 under the Aatma Nirbhar Bharat Abhiyaan.
     
  • Securities and Exchange Board of India (SEBI) revised the post-default curing period for credit rating agencies (CRAs) in their circular dated May 21, 2020.  Now, once the default is cured and payments are regularised, CRAs will upgrade the rating from default to non-investment grade after a period of 90 days based on the satisfactory performance by the company during the period.  As of now, after the entity corrects the default, the CRAs upgrade the rating from default to speculative grade in 90 days and from default to investment grade in 365 days.
     
  • On May 22, the Monetary Policy Committee of Reserve Bank of India (RBI), reduced the policy repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4% from 4.4%.  The marginal standing facility (MSF) and the bank rate have been reduced to 4.25% from 4.65%.  The reverse repo rate has been also reduced from 3.75% to 3.35%.
     
  • The Reserve bank of India (RBI) issued a statement with various development and regulatory policies.  The policies specify details on measures (i) to improve the functioning of market; (ii) to support exports and imports; (iii) to ease financial stress; (iv) for debt management.  The cash reserve ratio (CRR) of all banks will be reduced by 100 basis points to 3%, which will provide a liquidity support of Rs 1,37,000 crore across the banking system. The policy extends the moratorium on payment of instalments of all type of loans as on March 1, 2020 by another three months (up to August 2020).   This is applicable to loans from all commercial banks including Non-Banking Finance Companies (NBFCs) and co-operative banks.   

Lockdown 4.0

The Ministry of Home Affairs (MHA) passed an order extending the lockdown till May 31, 2020. This lockdown will have more relaxations compared to earlier lockdowns.

Zoning of areas

The new guidelines have authorised states/union territories (UTs) to define the red, green and orange zones based on the parameters prescribed by the Health Ministry.  The states/UTs can define a district, or a municipal corporation/ municipality or even smaller administrative units such as sub-divisions, etc. as a red or green or orange zone.

  • Red and Orange Zones: Within red and orange zones, the local authorities will identify containment and buffer zones based on the guidelines from the Health Ministry.  Buffer zones are areas adjacent to containment zones which have a high probability of cases.
     
  • Containment Zones: Movement of individuals will not be allowed in containment zones to ensure strict perimeter control except for medical emergencies and supply of essential goods and services.

The prohibition of certain activities or restrictions in various zones within a state will be at the discretion of the state/union territory as deemed necessary.

Prohibited Activities

Some activities will continue to remain prohibited throughout the country.  These include:

  • all international air travel of passengers, except for domestic medical services, domestic air ambulance and for security purposes or purposes as permitted by MHA;
     
  • metro rail services;
     
  • running of schools, colleges, educational and training/coaching institutions;
     
  • hotels, restaurants and other hospitality services, except for the running of canteens in bus depots, railway stations and airports;
     
  • places of large public gatherings such as cinemas, shopping malls, and gymnasiums entertainment parks;
     
  • social, political, cultural, and similar gatherings and other large congregations; and access to religious places/places of worship for the public. 

Online/ distance learning is encouraged and permitted; and, restaurants will be allowed to operate kitchens for home delivery of food items.

National Directives for COVID Management

The Ministry of Home Affairs issued the National Directives for COVID Management, which apply to public places and work places. As per these guidelines:

  • wearing of face covers is compulsory; 
     
  • spitting will be punishable with fine as may be prescribed in accordance with its laws, rules or regulations by the State/ UT local authority; 
     
  • social distancing is to be followed by all persons in public places and in transport;  
     
  • marriage related gathering has been limited to 50 guests;  
     
  • for funerals/ last rites, the maximum number of persons allowed is 20;  
     
  • consumption of liquor, paan, gutkha and tobacco etc., is not allowed in public places.  

Guidelines for workplaces include:

  • employers will encourage practice of work from home to the extent possible; 
     
  • staggering of work hours will be adopted in respect of all offices and other establishments.  
     
  • there will be provision for thermal scanning, hand wash and sanitizers at all entry and exit points and common areas;
     
  • all work places and other sensitive locations are to be sanitized regularly.  
     
  • social distancing will have to be ensured through adequate distance between workers, adequate gaps between shifts, staggering the lunch break of staff and so on.

Aarogya Setu

The District authorities will ensure installation of the Aarogya Setu application on compatible mobile phones of all individuals and will have to regularly update their health status on the app.

Aarogya Setu Data access and knowledge sharing protocol, 2020

The Ministry of Electronics and Information Technology, Government of India issued a notification on the data access and knowledge sharing protocol, 2020 in reference to the Aarogya Setu mobile application.  The protocol will: (i) ensure secure collection of data by the mobile application, (ii) protect the personal data of individuals, and (iii) ensure efficient use and sharing of personal or non-personal data of the application users.  The protocol provides principles for: (i) collection and processing of response data, (ii) sharing of response data, (iii) obligations of entities with whom the data will be shared, and (iv) sharing of data for research purpose.  A sunset clause is applicable to the protocol subjecting it to a review after 6 months unless there is any extension of sunset clause in wake of the pandemic.

Travel and Movement

  • The Ministry of Railways announced to run Shramik special trains from all districts connected by railways in the country.  The ministry is awaiting details on migrants from each district to operationalise the trains.
     
  • The Ministry of Home Affairs (MHA) has written to Chief Secretaries of all states allowing them to arrange special buses to carry people from railway stations to their home.  This provision is applicable, with condition of maintaining proper social distancing norms, only at places where public or personal transport is not available.
     
  • On May 11, 2020, MHA passed an order permitting movement of individuals by trains.   Following the order, 15 pair of trains are being run   connecting New Delhi to Dibrugarh, Agartala, Howrah, Patna, Bilaspur, Ranchi, Bhubaneswar, Secunderabad, Bengaluru, Chennai, Thiruvananthapuram, Madgaon, Mumbai Central, Ahmedabad and Jammu Tawi.
     
  • The Ministry of Railways in consultation with the MHA and the Ministry of Health & Family Welfare, issued guidelines on partial restoration of train services (other than the Shramik trains) from June 1, 2020.  200 passenger trains with AC, Non-AC and general classes will be operationalised.   Booking for these trains commenced on May 21, 2020.  The guidelines contain detailed information on (i) booking of tickets and charting, (ii) quota permitted, (iii) catering, and (iv) linen and blankets.  All passengers will have to download and use the Aarogya Setu mobile application.
     
  • On May 19, 2020, MHA issued a Standard operating Procedure (SOP) for movement of stranded workers by trains.   As per the SOP, the Ministry of Railways will permit the movement of stranded workers by trains in consultation with MHA.  The Ministry of Railways will finalise the schedules for trains including the stoppages and destinations and will communicated it to state/UTs.  On arrival at the destination, the travelling passengers will have to adhere to the health protocols as prescribed by the destination state/UT.  The inter-state movement of stranded persons by bus and vehicles will be allowed subject to mutual consent of the concerned States/UTs.  The intra-state movement of vehicles will be at the discretion of the states/UTs.
     
  • The MHA amended the order on Lockdown 4.0 to facilitate domestic air travel for stranded persons.  Following the amendment, the Ministry of Civil Aviation issued the order for commencement of domestic air travel of passengers from May 25, 2020.  The passengers will have to show a self-declaration, using the Aarogya Setu mobile application, that they are free of COVID-19 symptoms and those with Red status will not be allowed to travel.  The order contains three annexures with (i) general instructions for commencement of domestic air travel, (ii) the detailed guidelines to be followed by air passengers, and (iii) specific operating guidelines for major stakeholders.

Health

  • The Ministry of Health and Family Welfare issued: (i) updated containment plan on COVID-19, and (ii) updated containment plan for large outbreaks of COVID 19.   These plans provide information on various scenarios of COVID-19 and strategies to control the spread of the disease including definitions, action plans and specific details on (i) identification of containment zones and buffer zones; (ii) perimeter control; (iii) support from various stakeholders such as testing laboratories and hospitals; (iv) pharamaceutical and non-pharmaceutical interventions; and (v) risk communication.

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.