Cooperative banks face challenges on compromise settlements, say experts

Executives from cooperative banks highlighted that at times they have to deal with dual regulation – by the state government and the RBI – and this can pose a challenge while outlining a framework on regulating borrowers.

The Framework for Compromise Settlements and Technical Write-offs introduced by the Reserve Bank of India may pose policy and regulatory challenges for some cooperative banks, mainly small urban cooperative banks (UCBs), because they lack the professional expertise, experts said.

A compromise settlement refers to an arrangement between a borrower and a bank, where a loan is cleared by paying a smaller amount than what is due.

“UCBs and mainly some small UCBs may have issues in dealing with the compromise settlements framework as they lack professional experience on the policy front when compared to bigger UCBs,” said NS Vishwanathan, former deputy governor of the RBI who also headed a committee on cooperative banks.

Dual regulation

Executives from cooperative banks highlighted that at times they have to deal with dual regulation – by the state government and the RBI – and this can pose a challenge while outlining a framework on regulating borrowers.

“Regulation of borrowers and wilful defaulters is very important but with dual regulation, it sometimes becomes difficult for banks to come up with policies,” an executive of a cooperative bank said on condition of anonymity.

What is the framework?

RBI governor Shaktikanta Das said on June 8 that the central bank will issue guidelines on technical write-offs for all regulated entities, including cooperative banks.

“The RBI proposes to issue comprehensive guidelines on compromise settlements and technical write-offs which will now be applicable to all regulated entities including cooperative banks,” Das said.

The new guidelines will include cooperative banks in the Prudential Framework for Resolution of Stressed Assets. At present, only scheduled commercial banks and non-banking financial companies function under this framework.

Vishwanathan said the decision may benefit the cooperative banking sector, which has been seeking options for the recovery of loans.

“The sector has been demanding recovery and has faced issues on this. The framework may help them recover something from the borrowers,” said Vishwanathan.

Also read: RBI may tighten grip on cooperative banks, say experts

Challenges persist

Cooperative banks have faced the RBI’s ire over other issues for some years. The apex bank cancelled the licences of eight cooperative banks and imposed monetary penalties 114 times on wrongdoers in FY23.

In 2022, the central bank cancelled the licences of 12 banks and a year earlier, the licences of three banks were cancelled. The reasons varied from inadequate capital to failure to comply with legal regulations and the lack of earning prospects.

But these banks have a bigger role to play in terms of widening financial inclusion, experts said.

Mudit Verma, director of the National Federation of Urban Cooperative Banks and Credit Societies, said cooperative banks are spread across the country and they need the RBI’s assistance in facing challenges.

“The regulator can support cooperative banks in facilitating how the operations and services can be worked on,” Verma said.

Also read: RBI MPC meeting: Central bank to issue guidelines on technical write-offs for all regulated entities

The executive of the cooperative bank said the path to a compromise settlement with wilful defaulters is not always clear.

“Other than issues concerning the regulation of borrowers, there are grey areas concerning cooperative banks as their reach goes to the depth of the country, which may bring in some influence of outside factors,” the executive said.