What is the way forward for UCBs now? Step back and revisit RBI suggestions

PMC Bank Account Holders Protest Outside RBI BKC Office at Bandra in Mumbai - KAMLESH PEDNEKAR
It’s perfectly correct to say that the Reserve Bank of India (RBI) was caught snoozing at the wheel which led to the blowout at the Maharashtra and Punjab Co-operative Bank (PMC Bank). Yet, the central bank’s reading of the larger regulatory topography for urban co-operative bank (UCBs) cannot be quibbled with.

The R Gandhi (former deputy governor of the RBI) Committee’s report on UCBs (2015) was prescient, in particular, for the need to set up a board of management (BoM) in UCBs in addition to a board of directors, and thereby, seconding the view of the Y H Malegam Committee (2010) on the licensing of new entities. 

“The BoM filter is to tap-dance around the fact that the central bank does not have the power (unlike in the case of commercial banks) over UCBs”, said a banker. Operationally, the relationship between the board of directors and BoM is to be similar to the one between the supervisory board and the executive board.   

The board of directors will be responsible for laying down the broad contours of strategy while the BoM will be vested with the mandate to direct and control the day-to-day operations of the UCB within the limits set by the latter. 

The central bank, under the new thought process, it was felt, may have unfettered powers to control and regulate the functioning of the UCBs, their BoMs and the chief executive officer (CEOs) in exactly the same manner as it controls and regulates the functioning of the board of directors and the CEOs of commercial banks. 

 
It was felt that as these powers cannot be derived from existing statutes, these should be made a condition of the licence for new UCBs, which will have legal enforceability.

So, where are we now given the mess at PMC Bank? Well, we may have to peddle back in time and brush up on what the 31st Standing Advisory Committee on UCBs observed at its meeting held in October 2014.

A view was expressed that the vision document published by RBI in 2005 needs to be revisited, particularly with regard to facilitating further growth of the UCB sector. 

It was observed that large UCBs (think PMC Bank!) aspire to conduct businesses like commercial banks, without being subject to the same regulatory and supervisory framework. Given the limited legal powers and resolution options with RBI, there is a need to consider whether unrestricted growth of a UCB will be in the interests of depositors. It was also felt that the recommendations of the Malegam Committee needed further examination with regard to the appropriate time for issuing of licences and examining the modalities for taking them forward.



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