The RBI has bristled at the fact that urban cooperative banks are doling out huge loans to public sector undertakings. The apex bank has called upon the banks to shrink from doing so for they are primarily meant to help the low and middle income groups of people.
The apex bank is particularly irked by the fact that some of these banks are making PSUs their nominal members and giving them loans. The RBI says this is tantamount to subverting the goal of cooperation as well as nibbling away at the cooperative credentials of urban cooperative banks.
The Reserve Bank of India (RBI) on Wednesday asked urban cooperative banks (UCBs) to stop sanctioning large loans to state-run companies, saying such lending went against their original mandate of funding small borrowers.
“It has been observed that a few UCBs have been sanctioning high value loans to public sector undertakings (PSUs) by admitting them as nominal members or otherwise,” RBI said in a notification posted on its website.
“UCBs are advised, as a matter of principle, generally not to grant large value loans to public sector/government undertakings,” said RBI.
Co-operative banks have faced criticism in the past for their alleged nexus with local politicians. In recent years, RBI has taken a tough stance towards cooperative banks, asking them to cut bad loans, improve governance practices and build up a minimum capital base.
RBI has also cancelled the licences of several cooperative banks for breach of norms.
The primary function of cooperative banks is to help meet the credit needs of society by providing loans and advances to small borrowers, agriculture and small businesses, RBI said. This meant that granting high value loans to PSUs diluted the cooperative character of UCBs.
“This is an act of caution from the central bank to safeguard the interest of the depositors,” said Jayanta Sinha, an independent banking consultant and a former chief general manager at State Bank of India. Mr Sinha incidentally is son of Yashwant Sinha, former Union Finance Minister and a senior BJP leader.
“The cooperative banks have a mandate to lend to small borrowers. RBI may not be comfortable with them moving away from that original mandate,” said Sinha. Also, the pile of stressed assets in the books of some cooperative banks and possible concentration risk on their books following lending to specific entities too might have caused worry to the regulator, Sinha said.
Many cooperative banks having idle surplus funds do not have avenues for investment; the commercial banks-both nationalized and private can transfer surplus funds in one branch to some other branch either within the state or outside the state, where there is demand for credit. Coop.Urban banks, being mainly unit banks, cannot do so. Their area of operation is also extremely limited.
While large amounts of loans to individuals may be risky and considered violative of coop ethics, providing loans to public sector undertaking is advisable-because, these loans have the tacit guarantee of the Govt. and the PSUs are functioning in the larger interests of the community. Concern for the community is one among the newly formulated principles of coopn.
RBI should, therefore, leave it to the wisdom of the managements of the CUBs to provide credit to PSUs or not.