RBI to get more powers to regulate urban co-operative banks; but what about rural ones with bigger pie of deposits?

The Union cabinet’s decision on Wednesday to give more teeth to the Reserve Bank of India to regulate cooperative banks through an amendment in the Banking regulation Act is welcome.

It marks the beginning of an important chapter in the history of Indian banking sector as larger cooperative banks will now be regulated like  commercial banks . With this amendment, the RBI will have more power to audit the books of urban co-operate banks, appoint Chief Executive Officers and audit co-operative banks.

 On 20 January, Moneycontrol had done a story on how dual regulation between the RBI and Registrar of Co-operative Society (RCS) was worsening the mess at India’s opaquely run co-operative banks. The government has finally woken upto the problem and has addressed this issue following the collapse of Maharashtra-based Punjab and Maharashtra Co-operative bank (PMC). In last year, the multi-state urban co-operative bank faced a major crisis following major financial irregularities and financial fraud. The RBI, in September, superseded the board of the PMC bank.

So far, it looks like the proposed changes in the Banking regulation Act will cover only the urban cooperative banks and not the rural co-operatives.

Regulation of UCBs is split between RBI and the Registrar of Co-operative Societies, while that of smaller co-operative banks is divided between National Bank for Agriculture and Rural Development (Nabard) and RCS. RCS reports to the central government. With the changes in the Banking Regulation Act, the RBI will finally get more power over UCBs.

While this is good news for UCBs, question arises why rural co-operative banks have been left out of the regulatory overhaul. In fact, the problem of misgovernance and frauds are more in smaller co-operative banks since these entities are largely run by local politicians. Often, these banks don’t follow processes and engage in dubious transactions.

According to the latest available data on RBI site, India has 1,551 urban co-operative banks (UCBs) at end-March 2018. These banks managed Rs 4.5 lakh crore deposits at end March, 2018. In rural, there are three types of cooperative banks--primary credit co-operative banks, district level cooperative banks and state-level cooperative banks. As on end March, 2017, there were about 33 state co-operative banks with Rs1.2 lakh crore deposits and , 370 district central co-operative banks (Rs3.3 lakh crore deposits) and 95,595 Primary Agricultural Credit Societies (Rs1.15 lakh crore deposits).

In other words, if one looks at the quantum of deposits, the combined figure of rural co-operative banks is higher than that of UCBs. While rural co-operatives have a combined deposit base of Rs 5.65 lakh crore, UCBs have about Rs 4.45 lakh crore as per latest available data on RBI site.

It is important that the government provides enough power to the RBI to govern rural co-operative banks as well to ensure stricter scrutiny and good governance.