Well before the advent of the corporate structure, trade and business was done by individual businessmen, traders and artisans. The financial intermediaries were also individuals, and lending in India was done by goldsmiths and sahukars.
With the coming of the colonial powers, banks were formed as joint stock companies to facilitate imports, and to ensure that exports that were flourishing for centuries were killed by choking finances by eliminating their financiers – the indigenous money lending firms.
With banks not lending to the common man, the financial intermediaries, in the form of cooperative credit institutions, came up. They were formalised in 1904 by an Act. Thus began the journey of the relationship between the cooperative credit system and informal/ unorganised sector.
Today, the unorganised sector is still a very important segment of the Indian economy, contributing almost 50 per cent of its GDP and accounting for 90 per cent of employment. Large commercial banks have a limited appetite to service this sector. The few new Small Finance Banks (SFBs) that have come into being are an experiment that is largely untested. Though meant to service small borrowers, they are nevertheless not local institutions and, to that extent, they have limitations in penetrating to grass roots levels effectively.
The USP of UCBs
In this context, the urban cooperative banks (UCBs) are largely localised financial service providers, and have been in existence for over a century. Their niche is in catering to the lower middle class and people of limited means, self-employed and micro enterprises. UCBs are most comfortable in dealing with these customers.
They hardly have big corporates as their customers. The market share of UCBs is very small (about 3 per cent) because over 90 per cent of their loan ticket size is less than ₹5 lakh, and historically they are well spread out only in a few States. The States where UCBs have a good presence are: Maharashtra, Gujarat, Karnataka, Tamil Nadu and Kerala. These States are economically better off, and the UCB sector has contributed to their growth. Since UCBs are a proven model to cater to the unorganised sector in all types of urban centres, they are ideally suited to be replicated in large numbers in all States.
It is unfortunate that the sector has, from time to time, been receiving uncharitable treatment both from regulatory/government and the media, for less of its own faults or weaknesses and for more of systemic bias of not receiving any government support like other segments of banks. It is very important that community-based local financial intermediaries are there in large numbers in small urban centres to cater to the localised small business.
The line of thinking that there are too many urban cooperative banks and that they should be consolidated is faulty. In recent times, cooperative banks, more particularly UCBs, have been in the limelight ever since the Punjab and Maharashtra Co-operative (PMC) Bank and Sri Guru Raghavendra Sahakara Bank imbroglios happened. The RBI and the Central government had to answer uncomfortable questions on this.
Post-PMC Bank episode, it surfaced that depositors’ interest could not be protected by the RBI as it was not given sufficient regulatory powers in the Banking Regulation (BR) Act.
Acting quickly, the government got the Act amended by Parliament, giving the RBI nearly identical powers to regulate cooperative banks the way it regulates commercial banks. An interesting sideshow is that the said amendment has been challenged and the Madras High Court is hearing the arguments. The BR Act, 1949, is an Act meant for banking companies.
More power for the RBI
The Act was amended in 1965 to bring cooperative banks under RBI regulation by insertion of a special section – Sec 56 (as applicable to cooperative societies). This enabled some select sections to be made applicable as they are to cooperative banks, while some others were made applicable with certain modifications, and a large number of sections were not made applicable at all.
The control of the RBI was partial and it shared the control with the registrar of cooperative societies of States, giving rise to the much-discussed dual control and the difficulties it posed to the central bank.
The recent Banking Regulation (Amendment) Act 2020 enables the RBI to get all the powers, including those hitherto exclusively with the registrar of cooperative societies. However, powers of registrar continue to be with him but the powers of RBI override those of registrar.
While the amendment gives the required powers to the RBI to take timely action and steps to prevent UCBs from failing so that depositors’ monies are protected, which was the main purpose of the amendment, it also enjoins upon the central bank to make regulations under BR Act without compromising on the cooperative nature and cooperative principles of the banks.
That the amendment was not meant to affect the cooperative nature of functioning of these banks was an assurance given by the Finance Minister to the House when presenting the Bill.
The RBI is also expected to interpret the Act’s provisions in a manner that they are not disruptive for the UCBs. It remains to be seen as to how the RBI implements them. The exclusive Ministry of Cooperation is an important milestone in the history of cooperative movement of our country.
The ministry will be successful if it thinks independent of the Finance Ministry, NITI Aayog and the RBI. Cooperation being in the State list in the Constitution, how the Ministry establishes a rapport and functions as a guide to the State governments will be an important deciding factor of its success. It is for the cooperative sector to rise above all other issues and compel the ministry to bring cooperatives to the forefront to be as important as the big corporates for the prosperity of the masses.
The immediate demand of the UCB sector with the Ministry should be to see that the reported move on consolidation in the sector by the NITI Aayog and Finance Ministry is halted. On the contrary, the Ministry needs to ensure the growth of UCBs and credit societies across all States in the years to come.
(The author is the former chief executive and advisor of the National Federation of Urban Co-operative Banks and Credit Societies)