RBI has decided not to allow urban co-operative banks (UCBs) with less than Rs 50 crore net worth to spread their operations outside their state of jurisdiction.The main risk exposure of UCBs was not credit risk but interest rate risk. As interest rates paid by these banks, particularly on deposits, were out of sync with the rest of the banking sector. The sheer number of weak UCBs, which is well over 200, is a cause for concern for the RBI.
Rehabilitation of these banks may involve strategies such as the registrars directing co-operative courts for speedy recovery process and execution of decrees, unviable branches being either relocated or closed down, exploring avenues for getting additional capital and merger with a well-managed bank.
RBI is in favour of ending dual control for UCBs. Therefore, demarcation of banking-related functions and those that warrant only state governments' action were required.
According to Mr Capoor the issue of dual control could be resolved in three ways:
The first approach is by bringing the subject of co-operation under the concurrent list so as to enable the Union government to legislate in matters pertaining to co-operative banking. But such a move will involve constitutional amendments.
The second approach would be for the states to enact progressive legislations thereby making the registrars confine their functions only to registration and acceptance of bylaws. This will lead to the dual command over UCBs ending automatically.
The last approach would be to demarcate the regulatory roles of state governments and RBI in the state acts, as suggested by the Madhava Rao committee. Mr Capoor favours the third approach.
Government is considering incorporating amendments to the Banking Regulations Act to empower the Reserve Bank of India to change the management and chief executive officer (CEO) of urban co-operative banks (UCBs).
Meanwhile, the RBI had mooted a proposal to set up a separate supervising and regulatory body for UCBs in its recent Credit Policy.
[Extract from Speech of Mr Jagdish Capoor, Deputy Governor, RBI]