Technology, talent and governance issues top challenges for urban cooperative banks, say experts

Proposals by a Reserve Bank of India panel on urban cooperative banks are a step in the right direction, but key challenges remain for the sector, experts said.

Cooperative banks need to strengthen their use of technology in an environment where lenders are adopting digitalisation to cater to tech-savvy customers, according to the experts.

Technology and the lack of skilled and knowledge-driven resources are two major weakness of urban cooperative banks, according to Satish Utekar, former CEO of TJSB Bank, a multi-state cooperative bank.

A panel suggested that urban cooperative banks be classified into four categories, based on the size of their deposits. The Expert Committee on Urban Cooperative Banks headed by former RBI deputy governor NS Vishwanathan also set out capital adequacy and regulatory standards for such banks.

The RBI has been cracking down on erring cooperative banks over the past two years, cancelling the permits of at least six banks and initiating punitive action against others. Most of the penalties imposed by the regulator were over poor governance standards.

RBI governor Shaktikanta Das announced the setting up of the expert committee on February 5 to provide a medium-term road map to strengthen the sector, enable faster rehabilitation/resolution of UCBs, as well as to examine other critical aspects related to these entities.

The panel observed that the present level of technology adoption in UCBs, particularly the medium and smaller UCBs, is low and does not reflect the fast-changing banking technology landscape.

According to Utekar, the strength of UCBs is their personal touch and the loyalty of customers, which helps bankers to understand their requirements. Currently, UCBs are managing with whatever infrastructure they have.

The way forward is to create a better technology infrastructure for UCBs, said Utekar.

A former MD at a large cooperative bank echoed this view, declining to be identified.

Human resource challenges

The expert committee highlighted that smaller UCBs found it difficult to attract talent, resulting in poorer quality of human resources in relation to their peers in the banking industry. It added that a majority of UCBs tended to recruit staff through a non-standardised process, resulting in lower skill levels.

Boards of UCBs do not fundamentally understand the importance of technology adoption and hiring skilled talent, which leads to poor governance standards and high levels of bad loans, the CEO of a top urban cooperative bank said on condition of anonymity. The boards of such banks need to include domain experts and professionals, he added.

Some UCBs may have the funds need to adopt the best platforms, but they lack the people to drive the tech – it doesn’t serve any purpose. If there is no talent in the organisation to drive the technology and understand the banking business, where will the growth come from, Utekar asked.

Governance and competency

The expert committee highlighted how credit unions globally have focused on building retail franchises and small and medium finance businesses.

Utekar said every cooperative bank must identify its core competency and focus primarily on building a strong retail business franchise. This can be done only by adopting the best underwriting practices, backed by emerging technologies, and servicing customers on a real-time basis, he said.

To formalise credit for a large population and small businesses, UCBs can play a larger role. The focus should be on building a sustainable model with strong risk management and governance framework, said Ponkshe, formerly with Cosmos Bank.