RBI may tighten grip on cooperative banks, say experts

The central bank announced two measures for cooperative banks on June 8 – setting guidelines on compromise settlements and technical write-offs for them and extending deadlines to meet priority sector lending targets.

The Reserve Bank of India (RBI) may increase scrutiny of cooperative banks and introduce additional measures to better regulate them, experts said, after the central bank included them in the framework for resolution of stressed assets and extended some of their priority sector lending deadlines.

These measures suggest the RBI is looking at the operations and overall functioning of cooperative banks, which have a strong influence in rural areas, experts said. Going ahead, the RBI’s regulatory watch over the cooperative banking space will widen and additional measures can be introduced, they said.

At the Monetary Policy Committee (MPC) meeting on June 8, the central bank brought in two measures for the cooperative banking sector – extending priority sector lending target deadlines, and including them in the framework for resolution of stressed assets.

“They have announced these measures for cooperative banks as the banks have been looked at by the apex bank quite closely,” said Arijit Basu, chairman of the banking and finance committee at the Indian Merchants’ Chamber (IMC). “Going ahead, we can expect the RBI to work on additional measures for the cooperative banking sector.”

Mudit Verma, director of the National Federation of Urban Cooperative Banks and Credit Societies, said the central bank’s regulations and measures will only work in favour of cooperative banks. “The way we see the RBI’s approach is that it is becoming more alert and the measures will help the cooperative banks work more smoothly,” said Verma.

Measures by RBI

RBI governor Shaktikanta Das, in his statement on keeping the repo rate unchanged at 6.5 percent, announced eight developmental and regulatory policy measures related to the financial markets, regulation, and payment systems, of which two were for cooperative banks also.

Firstly, Das said the RBI will propose guidelines on settlements as a resolution mechanism in respect of non-performing assets and technical write-offs for all regulated entities, including cooperative banks.

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Previously, the framework was applicable to scheduled commercial banks and select non-banking financial companies (NBFCs).

Secondly, RBI decided to extend the priority sector lending target timelines for urban cooperative banks (UBCs) by two years to March 2026. The extension, Das said, was granted to ease implementation challenges faced by some urban cooperative banks in meeting the targets.

The timing

Cooperative banks, which play a critical role in extending financial services in villages and semi-rural areas, have been dealing with a range of issues from dual regulation, and weak finances, to interference by local politicians.

In FY23, RBI cancelled licences of eight cooperative banks and imposed monetary penalties 114 times on wrongdoers. The watchful eye of the central bank was triggered by the Punjab and Maharashtra Co-operative (PMC) Bank crisis in 2019.

Nandkishor Desai, a former banker with the State Bank of India (SBI), said cooperative banks have a bigger role to play in boosting financial inclusion in rural and semi-rural areas. “These banks have faced several issues. But there are some good examples of cooperative banks which are working fine. India is an underfinanced country and these banks have an important role to play,” said Desai.

A senior executive of a cooperative bank said on condition of anonymity that cooperative banks are trying to explore avenues for more services and wider area coverage. “We have seen that cooperative banks are working smoothly and ensuring innovation in their operations. The concerns raised by the central bank from time to time work as a reminder for some banks to keep a check on their operations,” said the executive.