In its annual report for the fiscal year 2022-23, the Reserve Bank of India (RBI) offered insights into the urban cooperative banking sector, acknowledging the progress made but highlighting persistent challenges.
The central bank underscored the importance of aligning urban cooperative banks (UCBs) with the Banking Regulation Act (BR Act) by discouraging prolonged director tenures. This measure aims to prevent undue influence on board functioning, ensuring a dynamic infusion of fresh ideas through the inclusion of new directors.
The RBI flagged a critical issue in the lack of a comprehensive risk management policy among certain UCBs, leaving them vulnerable to both external and internal risks. It also identified a deficiency in compliance culture within some UCBs, resulting in irregularities across various functional areas.
Additionally, UCBs grapple with a shortage of skilled personnel for managing core banking solutions (CBS), critical information technology (IT), and database functions. Consequently, these functions are often outsourced, exposing the banks to outsourcing risks and making them susceptible to cyber-attacks.
The RBI expressed concern about the non-integration of modules such as treasury, letter of credit, forex, and anti-money laundering solutions with CBS, stressing the need for a comprehensive review in this regard.
Contrary to the RBI’s recommendation for reduced director tenures, leaders in the UCB sector, including the National Federation of Urban Cooperative Banks and Credit Societies (Nafcub), oppose the idea. In an interview, Navnit Chimanlal Patel, Chairman of Gujarat’s largest UCB, Kalupur Commercial Cooperative Bank, expressed his disagreement with the amended Banking Regulation Act of 2020, which stipulates reduced tenures for directors.
Section 10 (2A) (i) of the Banking Regulation Act, as amended in September 2020, limits directors, excluding the chairman or whole-time director, to serve continuously for a period not exceeding eight years.
Patel argued that the provision is not in conformity with cooperative laws or the 97th Amendment of the Constitution of India. He emphasized the importance of directors with a deep understanding of banking affairs for maintaining the credibility of the bank and instilling confidence in depositors.
Patel acknowledged the challenges posed by the eight-year director tenure provision, expressing concern that new entrants might take time to understand the intricacies of banking affairs.
Patel also highlighted the competitive future of the Urban Cooperative Banking sector, advocating for a shift towards retail loans and contributing Rs 10 crore towards the umbrella organization for urban cooperative banks to facilitate the adoption of the latest technology and support weaker banks.
