SPEECH
Future and new thoughts on co-operative banks
Sharing his thoughts on co-operative banks, Mr. R.
Gandhi highlighted their role in financial inclusion
and meeting the banking and credit needs of the
lower and middle strata of society, across India,
more specifically even in the remote villages. In spite
of a large number of co-operative banks,
considering the total asset size, their share in the
Indian banking sector is not more than 5%. The
reluctance of co-operatives to adopt new technology
and implement CBS system is one of the major
impediments to their growth.
As regards rural co-operatives, NABARD, as part of
its mandate of institutional development, launched
an attempt to bring the RCBs on CBS platform.
Second, the waning co-operative character of these
banks remains a concern. This is characterized by
low attendance in AGMs, restrictive practices in
admitting new members, low voting turnout for
election of new management, re-election of the same
management or their family members, unanimous
elections and lack of meaningful discussions in
AGMs. Weak corporate governance is another major
factor that is plaguing the sector and has led to bank
failures / unsatisfactory growth of the sector. To
address this problem, Malegam Committee
suggested a new organizational structure for UCBs
consisting of a Board of Management and Board of
Monthly Newsletter July 2015
Directors, with the idea of segregating ownership of
a UCB as a co-operative society from its functioning
as a bank. Pursuant to the recommendations of the
High Power Committee on UCBs constituted by the
RBI in 2001, presence of atleast two professional
directors on the board of UCBs was made
mandatory. However, it is observed that several
UCBs are still not having professional directors on
CCIL
(Shri R. Gandhi, Deputy Governor, Reserve Bank of India at the Silver Jubilee celebrations of
National Institute for Rural Banking (NIRB), Bengaluru on June 19, 2015.)
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their Board which has a negative bearing on their
overall performance and professional management
on the lines of commercial banks remains a far cry
in the current set-up.
Mr. Gandhi then highlighted current issues with
respect to the relevance of co-operative banks,
transition to niche or universal commercial banks,
and the increased competition from Small Finance
Banks (SFBs) and payment banks. As per RBI
guidelines, SFBs shall primarily undertake basic
banking activities of acceptance of deposits and
lending to unserved and underserved, distribution
of mutual fund units, insurance products, pension
products, operate as an AD Category II dealer, and
undertake annual branch expansion in compliance
with the stipulated requirements. In contrast to this,
UCBs can extend their area of operation with the
prior approval of RBI and are also permitted to open
specialized branches, undertake intra-day short
selling in secondary market transactions in
government securities, undertake ready forward
contracts in corporate debt securities, open currency
chests, access Liquidity Adjustment Facility (LAF),
membership to NDS-OM, engage the services of
Business Correspondents (BC)/Business Facilitators
(BF), act as PAN service agents and issuer of Pre-paid
payment instruments, trading facility to demat
account holders, mobile banking, access to
centralized payment systems like RTGS, and NEFT.
However, it would be interesting to see if UCBs
would continue as existing banks or convert
themselves to universal banks at a cost of tighter
supervision and compliance to more stringent Basel
II and III norms or give up their universal character
and offer only niche products by converting to SFBs.

The advantage that the co-operatives currently have
when compared to SFBs is their deep-rooted
connections with specific communities and people
of lower strata for mobilization of low cost deposits
and a wider customer base. However, SFBs and
payments banks with reliance on high-end
technology pose significant challenges to
cooperative banks as payments banks sponsored by
telecom companies can easily capture the
remittance business from these banks. In addition
to this, co-operative banks need to focus on
corporate governance and imbibe the current
distributive technology to offer low cost products in
order to successfully face competition from small
finance and payments banks.
The Reserve Bank of India initiated regulatory
action against unlicensed banks by prohibiting their
operations in the cooperative space beyond 31
March 2012. However, in pursuit of its
commitment to allow only licensed cooperative
banks to do banking business in India, it relaxed the
licensing parameters which enabled 290 cooperative
banks (StCBs / DCCBs) to get banking license from
RBI. Only 23 banks remained unlicensed as on date
in four States viz. (Uttar Pradesh -16, Jammu &
Kashmir - 3, Maharashtra - 3, and West Bengal - 1).
For the purpose of revival, a financial package had
been put in place and after getting NABARD's
recommendations that the bank has attained the
licensing norms, RBI would consider issuing of
license to the banks. Further, two licensed DCCBs
in Karnataka were having negative networth as on
March 31, 2014, and NABARD has taken up the
matter with the State Government / RCS to take
suitable measures for recapitalization of the banks
so as to ensure that the banks achieve a minimum
CRAR of at least 7% by March 31, 2015.
Considering the inherent challenges in the sector,
measures have to be out in place to strengthen the
SPEECH
framework to a level of regulatory comfort. In the
context of changing landscape, a view needs to be
taken whether a fresh round of co-operative bank
licensing is due and put in place a definite
migration path for FSWM co-operatives to make the
transition to SFBs/commercial banks and at the
same time continue efforts relating to governance
reforms. It is pertinent to examine the merit and
possibility of amending Cooperative Acts in states
to the effect the provisions requiring every borrower
having a voting share do not weaken the UCBs. The
possibility of acquiring shares by members at the
book value at the time of entry and divest the shares
at the book value at time of exit also needs to be
examined, in order to create appropriate incentives
so that members get the benefit or otherwise of the
reserves that are built during their membership.
Cooperative banks are unique in terms of their
structure, clientele and credit delivery. Despite their
inherent weaknesses in terms of low capital, poor
management and intrusive policies of State,
cooperative banks in India have successfully
weathered several challenges and continued to grow
in the competitive environment. RBI has initiated
several policy measures to strengthen the
cooperative banking sector by gradually
introducing the prudential norms and regulatory
prescriptions on par with commercial banks.
Cooperative banks have shown keen interest in
Monthly Newsletter July 2015
diversifying their business and broad-basing their
clientele. Changes in the existing legal framework,
supportive regulatory environment, adoption of
technology and re-orientation of business strategy
can act as enablers for cooperative banks to
contribute more meaningfully in the equitable
economic growth across regions through their
delivery model.
CCIL
Source: www.rbi.org.in
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