INTEREST SUBVENTION SCHEME TO RBI SUPERVISORY ACTION FRAMEWORK AND PERFORMANCE OF COOPERATIVE BANKS

Abstract: The recent mega fraud of Punjab and Maharastra Bank has shaken the confidence in Urban Cooperative Banks (UCBs). For revival of these banks, constant monitoring of financial health of these banks by the RBI is a must for which Supervisory Action Framework (SAF) is an effective tool. Under SAF, monitoring of the financial health of UCBs is done through three trigger points namely, CRAR, Asset Quality and Profitability. This SAF is in existence since 2012. The present article studies of financial performance of UCBs since the introduction of SAF which reveals several concerns. While SAF seems to be an effective supervisory tool of the RBI, its benefits are yet to be derived. For this purpose, it calls for more seriousness on the part UCBs to improve their overall financial performance by ensuring the participation bank staff at all level.

- Dr V S Kaveri

Introduction:

Reserve Bank of India (RBI) introduced Prompt Corrective Action (PCA) for the first time in December 2002 when public sector banks were witnessing a high and increasing level of non-performing assets (NPAs) and weakness in their overall financial performance. RBI imposes the PCA if a commercial bank's financial condition worsens for which it specifies a 'trigger point' or 'risk threshold' of each of specified areas of financial health of banks. When any trigger point/risk threshold is brought to the notice of RBI, it intervenes with corrective actions/restrictions.

A bank would be placed under the PCA framework depending upon the audited annual financial results and RBI's supervisory assessment. Once the bank comes under the PCA, the periodical submission of reports by the bank to the RBI and its meetings with the supervisory authority are compulsory. RBI revised PCA guidelines from time to time. It is happy to state that there has been encouraging response to PCA by public sector banks which is evident that few banks are slowly coming out of PCA due to their overall improvement if financial health1. Encouraged from the success of PCA, RBI made this supervisory tool called as Supervisory Action Framework (SAF), to Urban Cooperative Banks (UCBs). Since SAF is in the larger interest of UCBs, it becomes necessary to create awareness of the recent revised SAF introduced in January 2020. Towards this end, the present article shares the relevant information. To begin with, let us examine features of SAF.

Features of SAF: