URBAN COOPERATIVE BANKS
1. Context
The Reserve Bank of India (RBI) has imposed monetary penalties on two urban cooperative banks in Gujarat — Vadodara-based Shree Chhani Nagrik Sahakari Bank and Jamnagar People’s Cooperative Bank
2. Urban Cooperative Bank
- Urban Cooperative Banks (UCBs) are financial institutions that operate in the urban and semi-urban areas of India.
- These banks are essentially cooperative credit societies that provide financial services to their members, who are both customers and owners of the bank.
- Urban Cooperative Banks are regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, of UCBs are an integral part of the cooperative credit structure in India, working alongside other cooperative institutions like Primary Agricultural Credit Societies (PACS) and District Central Cooperative Banks (DCCBs).1949.
- RBI issues guidelines and regulations to ensure the sound functioning of UCBs and to protect the interests of depositors
- There are two main types of UCBs: Scheduled UCBs and Non-Scheduled UCBs. Scheduled UCBs are those included in the Second Schedule of the Reserve Bank of India Act, 1934.
- Scheduled UCBs are eligible for facilities provided by RBI, such as borrowing from the central bank, among others
3.Urban Cooperative Banks History
The history of Urban Cooperative Banks (UCBs) in India traces back to the cooperative movement that gained momentum during the early 20th century. The cooperative banking sector, including UCBs, played a crucial role in meeting the financial needs of urban and semi-urban communities. Here's a brief overview of the history of Urban Cooperative Banks in India:
Early 20th Century:
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- The cooperative movement in India, inspired by the ideas of leaders like Raiffeisen and Schulze-Delitzsch, gained prominence in the early 20th century.
- The primary objective was to address the financial needs of small farmers and urban communities by promoting the concept of self-help and mutual cooperation.
Cooperative Societies Act, 1912:
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- The Cooperative Societies Act, 1912, laid the legal foundation for the formation and functioning of cooperative societies, including cooperative credit societies and banks.
- The Act provided a framework for the registration, management, and operation of cooperative societies.
Formation of Urban Cooperative Banks:
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- Urban Cooperative Banks emerged as a specific category of cooperative banks catering to the financial requirements of urban and semi-urban areas.
- These banks were typically formed by groups of individuals, traders, and businesses in urban localities who came together to address their banking needs through mutual cooperation.
Growth and Expansion:
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- Over the decades, Urban Cooperative Banks witnessed growth and expansion, serving as important financial intermediaries for local businesses and residents.
- Many UCBs were formed to support specific communities, trade groups, or industrial sectors within urban areas.
Regulation and Supervision:
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- The Reserve Bank of India (RBI) started regulating and supervising cooperative banks, including Urban Cooperative Banks, to ensure stability and protect the interests of depositors.
- UCBs were brought under the purview of the Banking Regulation Act, 1949.
Scheduled Urban Cooperative Banks:
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- Some well-managed and financially sound Urban Cooperative Banks were granted scheduled status, making them eligible for certain privileges and facilities provided by the RBI.
4. Differences between Urban Cooperative bank and Commercial bank
| Feature | Urban Cooperative Bank | Commercial Bank |
|---|---|---|
| Ownership Structure | Cooperative (Owned by members) | Shareholders (Owned by investors) |
| Formation | Formed by local communities, often with a specific focus or community affiliation | Incorporated as public or private companies for profit |
| Operational Area | Primarily operates in urban and semi-urban areas | Operates in diverse locations, including urban, semi-urban, and rural areas |
| Governance | Governed by cooperative principles with democratic control, each member has one vote | Governed by a Board of Directors, elected by shareholders based on the number of shares held |
| Regulatory Authority | Regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949 | Regulated by the RBI for scheduled banks and other financial regulators (e.g., SEBI, IRDAI) |
| Membership | Open to individuals and cooperative societies within specified localities | Open to the general public and corporate entities, with no geographical restrictions |
| Deposit Insurance | Covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a certain limit | Covered by DICGC or similar insurance up to a certain limit |
| Borrowing Facilities | May have restrictions on borrowing from the RBI and other financial institutions | Eligible for various borrowing facilities from the RBI and interbank markets |
| Nature of Activities | Focus on meeting the credit needs of local communities, especially small businesses and individuals | Diverse range of financial services, including retail and corporate banking, investment services, etc. |
| Profit Distribution | Profits are shared among members in proportion to their transactions with the bank | Profits are distributed among shareholders in proportion to the number of shares held |
| Scheduled Status | Some well-managed UCBs may achieve scheduled status, making them eligible for certain privileges | Commercial banks are typically scheduled banks by default, with access to RBI facilities |
| Purpose | Emphasis on financial inclusion, community development, and supporting local businesses | Primarily focused on profitability, shareholder value, and serving a wide range of customers |
| Examples | Cosmos Cooperative Bank, Saraswat Cooperative Bank | State Bank of India, HDFC Bank, ICICI Bank |
5. Challenges faced by Urban Cooperative banks
Urban Cooperative Banks (UCBs) in India, like other financial institutions, face various challenges that can impact their operations, financial health, and ability to serve their members.
The following are the challenges faced by UCB:
- Many UCBs grapple with governance and management challenges, including issues related to transparency, accountability, and efficiency.
- Weak governance structures can lead to poor decision-making and operational inefficiencies
- Non-performing assets (NPAs) can be a significant challenge for UCBs. Inadequate credit risk management practices may result in a higher proportion of bad loans.
- Economic downturns or changes in local economic conditions can impact the asset quality of UCBs
- Maintaining adequate capital to support lending activities and absorb potential losses is crucial for UCBs.
- Financial instability can arise if there is a mismatch between assets and liabilities or if the bank faces a sudden surge in withdrawal requests
- Adherence to regulatory norms and compliance requirements, as set by the Reserve Bank of India (RBI), is a challenge for UCBs.
- Failure to meet regulatory standards can lead to penalties, restrictions on operations, or even regulatory interventions
- UCBs, especially smaller ones, may face challenges in adopting and integrating modern banking technologies. This can impact their efficiency, customer service, and competitiveness.
- Cybersecurity threats pose a risk, and UCBs need to invest in robust IT infrastructure to safeguard customer data
- Some UCBs may be heavily dependent on specific sectors or communities, leading to limited diversification.
- Lack of diversification can expose UCBs to concentration risk, especially if the local economy is adversely affected.
- UCBs face competition from larger commercial banks and other financial institutions, which may have more extensive resources and capabilities.
- Staying competitive in terms of interest rates, customer service, and product offerings is a constant challenge
6. Way forward
Urban Cooperative Banks is intertwined with the broader cooperative movement in India and has been shaped by legislative changes and regulatory interventions over the years. The sector has played a vital role in providing banking services to urban and semi-urban communities and contributing to financial inclusion.
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Previous Year Questions
1.With reference to ‘Urban Cooperative Banks’ in India, consider the following statements: (UPSC CSE 2021)
Which of the statements given above is/are correct? (a) 1 only Answer: (b) |
Source: Indianexpress
