UCBs need to address weak governance, slow tech adoption, says RBI report

The Reserve Bank of India (RBI) has said urban cooperative banks (UCBs) need to break out of drags like  a low capital base, weak corporate governance, inability to prevent fraud and inadequate systems of checks and balances.

Recently, the unearthing of irregularities at Punjab Maharashtra Coop Bank has brought to the forefront issues relating to capital adequacy, governance and slow adoption 
of new technology.

The highest priority needs to be assigned to the establishment of a uniform regulatory and supervisory structure and an umbrella organisation in the architecture. This entity will provide liquidity and capital support, and galvanise the spread of and leveraging on information technology infrastructure and other capacity and skill building, according to RBI’s report on 'Trends and progress of banking in India 2018-19'. 

The sector faces increasing competition from not only scheduled commercial banks (SCBs) but also from small finance banks and payments banks. Second, they are exposed to vulnerability stemming from internal weaknesses, including a seeming inability to prevent fraud, it says. 

The sector, it notes, has a predominantly domestic orientation, with its massive financial inclusion quotient and sheer presence across the country, especially in towns and villages. In view of this important role, there is a need to undertake reforms aimed at upgrading corporate governance and strengthening their financials, RBI added.

The year 2018-19 was one of consolidation and expansion in balance sheets at UCBs, with improvement in asset quality and provisioning coverage ratio (PCR). This was driven by various measures from the government and the central bank. 

While UCBs had a higher non-performing assets (NPA) ratio than SCBs till 2014-15, this has since reversed on account of two  factors. First, the RBI-driven Asset Quality Review, which resulted in better asset recognition of SCBs, led to their reported NPA ratio rising to the true level. Second, the asset quality of UCBs has been gradually improving. There was a larger increase in provisions for gross NPA, aiding an improvement in the latter's PCR. 

UCBs recorded a decline in net profit after taxes in 2018-19. Interest expenses declined for a consecutive year, despite revival in deposit growth. The decline in interest income and interest expenses of all UCBs was driven by the non-scheduled ones. 

The non-interest income decline reflected a fall in revenue from a host of fee-earning activities and loss on sale and trading of securities.

Under Basel-I norms, UCBs are required to maintain a minimum statutory capital to risk weighted assets ratio (CRAR) of 9 per cent. RBI does not prescribe additional requirements like a capital conservation buffer and high common equity tier-1 (CET-1) capital ratio on UCBs.. As of end-March, around 96 per cent of UCBs maintained a CRAR of 9 per cent and above.

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