The Reserve Bank of India (RBI) has cancelled the licenses of 12 crisis-ridden cooperative banks in 2022 and imposed penalties around 110 times on wrongdoers, according to a Moneycontrol analysis.
The banks whose permits have been cancelled by the RBI include Independence Cooperative Bank Limited, Mantha Urban Cooperative Bank Ltd, People’s Cooperative Bank Limited, Mudhol Cooperative Bank Limited, Millath Cooperative Bank Limited and others.
This was in line with the trends seen in previous years. The central bank has been clamping down on errant cooperative banks in the last few years. Cooperative banks, which have played a critical role in extending banking services in the villages, have been confronting a range of issues, including dual regulation, weak finances and interference by local politicians.
Among these banks, urban cooperative banks (UCBs), which are fewer in number than rural cooperative banks but bigger in scale, have seen a sharper decline in their overall business in recent years.
Data with the RBI shows that Gross Non-Performing Assets (GNPAs) of urban cooperative banks rose to Rs 36,500 crores in 2021 from Rs 32,300 crores in 2020.
Growth in deposits, which constituted 80.3 percent of their business in 2020, remained flat in 2021.
At the same time, the liabilities and provisions of these banks increased from 11.3 percent to 11.5 percent in the same period. Business of cooperative banks in loan and advances fell to 47.5 percent in 2021 from 48.9 percent in 2020.
Experts said a widening trust-deficit was the primary point of concern for cooperative banks due to which they have seen a sharp erosion in business in recent years.
“There is a need for more oversight, auditory measures and examinations in the case of cooperative banks. These banks serve an important role in a section of society,” said Ashwin Parikh, an analyst at EY.
RBI on July 19, 2022 revised the regulatory framework for UCBs, prescribing a minimum net worth of Rs 2 crore for Tier-1 banks and Rs 5 crore for all other banks.
RBI said UCBs, which currently do not meet the minimum net worth requirement, shall achieve the minimum net worth of Rs 2 crore or Rs 5 crore in a phased manner and meet at least 50 percent of the applicable minimum net worth on or before March 31, 2026, and the entire stipulated minimum net worth on or before March 31, 2028.
Stronger regulatory impact
Experts suggested that stronger regulation limits the business efficiency of banks and restricts the growth of cooperative banks, but also leaves space for internal corrections.
“Cooperative banks suffer from dual regulations, where RBI and the State/Central governments have authority over them. On one hand, regulations curb the possibility of inefficiency in the audit and other processes but they also impact, to a certain extent, the business functioning of these banks,” Nandkishor Desai, a retired banker, said.
In recent years, as UCBs faced competition from other niche players like Small Finance Banks (SFBs) and Non-Banking Financial Companies (NBFCs), and also had to reaffirm their credibility to depositors, their balance sheet growth has moderated, the RBI said in its Report of the Expert Committee on Urban Co-operative Banks in August 2021.
SFBs offer higher interest rates and better technology to customers which cooperative banks cannot match.
RBI data said India has a total of 105,074 cooperative banks out of which 15,14 are urban cooperative banks and 103,560 are rural cooperative banks.
Over a period of time, the relative size and, consequently, the influence of cooperative banks has been shrinking. The aggregate balance sheet size of the cooperative banking sector, at Rs 18.8 lakh crore as of March 2020, was close to 10 percent of the scheduled commercial banks’ (SCBs’) consolidated balance sheet.
Since 2017-18, the decline in deposits in UCBs was bigger than in SCBs, pointing to the difficulties faced by the former in raising resources. Deposits decelerated in 2019-20 after a revival in the previous year.
Rising competition
Experts said that rising competition from SFBs and payments banks in semi-urban areas had affected cooperative banks' working.
“Within cities and semi-urban areas, you’ll find some competition for cooperative banks from SFBs and payments banks due to their sound service options,” Desai said.
But some experts also said these rivals did not pose so much of a competition to cooperative banks because the latter have many exclusive sectors in which only they can explore business opportunities.
“Competition for cooperative banks from SFBs is not much because both these financial institutions have different natures of the operation. Cooperative banks’ major business happens in sectors which are exclusive to them
For instance, cooperative societies would only open their accounts with cooperative banks. The same is the case for agri companies which rely on these banks for banking facilities,” said Jindal Haria, an analyst at Fitch Ratings.
What next?
With 2022 bringing tough regulatory action for cooperative banks and competition from other financial institutions, experts say there is scope for cooperative banks to thrive with some changes in their fundamentals.
Desai explained: “There are plenty of examples of how cooperative banks are functioning ably with better corporate governance and work processes. The cooperative banks are playing a big role in development and economic progress of rural and semi-rural areas.”
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