Given the segment’s substantial variability, an RBI expert group on urban cooperative banks (UCB) has correctly urged a tiered regulatory framework and a more permissive approach to oversight and branch expansion for larger UCBs. UCBs accounted for 94 percent of all banking entities as of March 31, 2020, with 1,539 in total, primarily concentrated in the western region.
The UCBs’ percentage of bank deposits and advances, on the other hand, is in the low single digits. UCBs, on the other hand, offers a lot of potential in terms of providing inclusive banking services and credit access to the unbanked. And, instead of the previous dual regulatory system, which included both the states and the Centre (for multi-state UCBs), the recent Banking Regulation (Amendment) Act 2020 provides precise RBI regulatory control over UCBs.
According to the expert group, financial inclusion aided the organic growth of larger UCBs with asset levels ranging from Rs 5,000 to Rs 10,000 crore. For smaller UCBs, an umbrella organization (UO) as a non-banking financial company to be floated by RBI as a financial corporation that can act as a self-regulatory authority for the sub-segment is advocated. The aim is that the UO will supply smaller UCBs with cloud-based information technology and other standardized services, with asset bases as low as Rs 100 crore. The UO should extend branding and hand-holding experience and properly leverage channel networks so that smaller UCBs can offer mutual funds, insurance, and pension products.
The bottom line is that larger UCBs can provide more complex banking services with higher capital adequacy and competent management due to their proximity to the borrower and better awareness of local requirements.