A Business Roadmap for Cooperative Banks in the Economic & Regulatory Scenario

As India strides to ensure a robust banking system as evident with the consolidation of various state-run banks, there is also a need for regulatory course correction.

The recent developments, including the failure of Punjab & Maharashtra Cooperative Bank (PMC Bank), has dented public confidence in banking channels especially in co-operative banks.

The case of PMC Bank has not been an isolated one and urban cooperative banks have had various financial discrepancies over the years. On the flip side, UCBs have played a significant role in bringing banking benefits to un-banked and under banked masses in semi urban and rural areas.

With the government aiming for a $5 trillion economy by 2024-25, there is a need to tighten the loose ends of the banking sector including UCBs. Here is the high-level economic and regulatory scenario and the future business roadmap for cooperative banks in the country:

Financial vulnerability and management structure of UCBs

Unlike regular banks, urban cooperative banks are registered as cooperative societies. They are regulated by the Reserve Bank of India only from a financial perspective. This means management supervision of such banks is done by state and central governments. Owing to this dual control, cooperative banks have often been devoid of effective regulation. Unlike traditional banks, UCBs cannot tap the financial markets to raise fresh capital making is difficult for these banks to sustain growth with rising defaults and competition.

Why cooperative banks remain significant