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Beginning till March , UCBs have undergone mergers, with Maharashtra accounting for over half of them, closely followed by Gujarat. UCB in 4 tiers: It has suggested a four-tiered structure to regulate them, based on size of deposits.
Governance: The Umbrella Organisation should be financially strong and be well governed by a professional board and senior management, both of which are fit and proper.
The panel suggested that they should be allowed to open more branches if they meet all regulatory requirements. Capital to risk weighted asset ratio: The committee has suggested that the minimum capital to risk-weighted assets ratio CRAR for them could vary from 9 per cent to 15 percent and for Tier-4 UCBs the Basel III prescribed norms would apply.
Acquisition: The committee advocated that the smaller banks, which are more rooted in co-operative principles, should be allowed to acquire scale through the network of the umbrella organisation, while the larger ones should have scale on a stand-alone basis. Capital raising from market: The umbrella organisation, structured as an NBFC, will be able to raise capital from the market and also on-lend it to member UCBs.
The umbrella organisation UO , at a later stage, can consider converting into a universal bank owned by member banks.
Globally Accepted System: As an alternative to mandatory consolidation, the Committee preferred smaller banks acquiring scale via the network of the UO, which is one of the successful models of a strong financial cooperative system globally.
RBIs role in consolidation and otherwise: On consolidation of UCBs, the panel said the RBI should be largely neutral to voluntary on consolidation except where it is suggested as a supervisory action. The new norms also push strongly for converting the credible credit society into urban cooperative banks. Main recommendations. UCBs play a useful role and there is need for a greater presence of UCBs in unbanked districts and in centers having population less than 5 lakh.
It is necessary to encourage new entrants to open banks and branches in States and Districts which are unbanked or inadequately banked. It is equally necessary to discourage new entrants from opening branches in Districts and population centers which are already adequately banked.
There should be segregation of the ownership of the UCB as a co-operative society from its functioning as a bank. The new organization structure shall consist of a Board of Management in addition to the Board of Directors. The BoD will establish a Board of Management BoM , consisting of persons with professional skills, which shall be entrusted with the responsibility for the control and direction of the affairs of the Bank assisted by a CEO who shall have the responsibility for the management of the Bank.
Specifically, we need to debate the needed legal framework that will facilitate conversion of cooperatives into joint stock companies, conversion of deposit holders into shareholders etc. The other alternative could be to allow the UCBs to grow and sustain themselves in the existing set-up.
In that event, the obvious question that comes to mind is what are the existing restrictions that can be liberalised and what further measures can be envisaged for the smooth non - disruptive growth of the sector?
I hope the delegates will deliberate on these issues and suggest possible measures. Since the theme of the Seminar is "Next-Gen Co-operative Banks" let me now briefly dwell on the subject. To begin with let us analyse some of the best global practices in cooperative banking and their implications for next-gen cooperative banks in India, before moving forward to what is our expectation from these banks.
As you may be aware, the co-operative banking sector contributes significantly to the growth, stability and competitiveness of the European banking industry at a local and regional level.
As a result, they have a direct say in the business and are involved in the governance, strategy and risk management processes. The core business of co-operative banks is value creation for their members and a long term relationship of trust, opposed to the profit maximization approach of mainstream banks. It is worth mentioning that their performance is a result of their central focus on retail banking, solid capitalisation and their high-quality credit portfolios.
They are able to face the challenges of the new post crisis environment because their business model responds to the present needs and expectations. With their roots in the Europe, the Rabobank Group, DZ Bank Group, Credit Agricole Group, etc have grown in recent decades into an international financial services provider that has activities in the field of banking, asset management, leasing, insurance and real estate.
The strong points of the cooperative structure became evident during the financial crises of recent years. They did not have to ask for state aid and were able to keep financial results well up to standard.
Measured according to Tier 1 capital, these Groups are the world's largest financial institutions. All rating agencies continue to give them high ratings. Their cooperative identity stems back to the early twentieth century. The local member cooperatives continue to be the collective owner of these groups to this day.
The groups support the member cooperatives and oversee the subsidiaries and affiliated companies. The members not only benefit from banking and non-banking advantages, they also have the opportunity to join in the discussion and co-decide on the bank's course.
Local member banks serve millions of retail and wholesale customers with a comprehensive range of financial services. The groups are leaders in nearly all customer and product segments, from youth to start-ups and from mortgages to corporate enterprises. I feel Indian cooperative banks can gain from the business matrix of their European counterparts to cope up with the competition and pressure from bigger commercial banks and maximize value creation while not undermining the importance of solid capitalization and high-quality credit portfolio.
If we look eastward, we observe a considerably large presence of co-operatives in Asia Pacific also. In Asia-Pacific alone there were 22, credit unions in which were more than double of the 10, figure of North America and Europe put together. In terms of the underlining focus also, it is observed that the co-operatives in Asia were basically formed to bring about socio-economic development, particularly with respect to agriculture and rural development.
In Asia itself, there have been many success stories to emulate. The CDA in association with the US Agency for International Development and another technology partner developed this web-based database of co-operatives, to be accessed in real-time at any of the CDA's extension counters. The information on each cooperative's annual organizational and financial status through the Co-operative Annual Performance Report is also integrated with this database, thereby providing a platform for the co-operatives to exchange information readily.
Further and more importantly, the main aim of the system is to help the Government in creating performance standards, policies, regulations and development programmes for the overall benefit of the sector. Perhaps, the creation of such technology information system will also help our cooperative sector by providing a platform to them to exchange information readily for performance oriented and integrated development. Cooperatives also need cooperation among themselves to support and promote their growth and expansion.
As you might be aware, the V. Das Working Group constituted by RBI to study these umbrella organization of cooperative banks internationally found that there are two broad approaches in this regard. In European countries, the Umbrella Organization is generally in the form of a strong apex level entity. All the local cooperative banks are generally members of the apex entity. Each member exercises its voting rights under the "one member one vote" principle. The apex entity supports and advises the individual member banks in areas such as customer services, ALM, IT, Mutual Funds, product development, etc.
In the case of Australia, USA and, Canada, the Umbrella Organization is not part of any group, but is a distinct entity where the credit unions are its members. The Umbrella Organization in US provides extensive investment, liquidity, and cash-management products and services; risk-management and analytic capabilities; settlement, funds transfer and payment services; and safekeeping and custody services.
However, in Australia the emphasis has been on payment clearing services and emergency liquidity support. These organizations are serving the sector well and have not only resulted in greater efficiency of operations of their members at the grassroots, but have also contributed significantly in augmenting financial stability and safeguarding depositors' interests. This has given comfort to the regulators. It is in this context I will like to touch upon the need for an umbrella organization for the UCB sector in India that will be the beginning of the next part of my address, viz.
UCB sector in India needs to have the benefit of an Umbrella Organization of its own customized to the legal framework in India and the challenges of the sector. There is also a need to provide the management, IT and training and other services which the UCB sector needs. For our UCB sector, the V S Das Group had recommended the requirements of the provision of payment and settlement services; the provision of other services, which are mainly in the region of management or outsourced services; the provision of liquidity support through state level schemes; and the provision of solvency support through state level schemes.
The Group further recommended that there should be two separate Umbrella Organizations. First one is a national level organization which provides payment and settlement services and other services as also liquidity support to its members.
The second could be state level organizations or outside agencies, which provide the management, IT and training and other services. The proposals are being examined by RBI in consultation with urban bank federations and other stake holders. It is heartening to note that leveraging on technology is being taken up for discussion in this Conference. In today's technology driven world, one cannot ignore the role of technology in providing competitive banking services and all UCBs must exhibit the keenness to adopt technology in a time-bound framework.
Delay in adopting technology has resulted in UCBs losing their customers to commercial banks. They also become vulnerable to frauds due to use of applications that are outdated or lacking security features, etc. Also manual book-keeping system has led to arrears in reconciliation of accounts and made them vulnerable to frauds. In future, Reserve Bank will definitely look forward to more technology-savvy UCBs competing with commercial banks for customer spaces.
Apart from the cooperativeness among cooperative banks, the next issue to ponder over is the cooperativeness inside a cooperative bank. We observe that over the years, many UCBs have lost their cooperative character and have been reduced to almost family run institutions. Some large multi-state UCBs have aligned their business models and goals with those of commercial banks while availing the concessions to the sector.
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