Divergence of non-performing assets (NPAs) is not restricted to commercial banks alone, co-operative banks are also under the Reserve Bank of India's (RBI) radar for the same reason.
The culprits are mainly non-scheduled urban co-operative banks. Among those under RBI's radar, three are from Maharashtra -- Shreeji Bhatia Cooperative Bank, Mansingh Cooperative Bank and Shri Anand Cooperative Bank. Maharashtra accounts for the largest number of UCBs in India, while the remaining two UCBs -- Udaipur Mahila Urban Cooperative Bank and United Cooperative Bank based -- are from Gujarat and Rajasthan.
The disclosure pertains to the financial year 2017-18 as the inspection details of 2018-19 are not out yet. The unscheduled urban co-operative banks dominate the UCB space with 1,490 banks, while scheduled UCBs are only 47 in number. The unscheduled banks follow the RBI rules as specified in the second schedule of the Act, while non-schedule banks are not mandatorily required to follow such guidelines.
While the UCBs have dual regulators like the state and the NABARD, the RBI shoulders overall responsibility of supervision, especially asset classification, provisioning, capital adequacy, liquidity, group exposure, etc. This week, the RBI has tightened the supervisory framework for UCBs for detecting a weak bank by keeping a threshold limit for NPAs, capital adequacy and profitability. If the financials of a UCB deteriorate and hit the threshold limits, the bank will be classified for corrective action. This kind of framework is already in place for commercial banks.
As per the RBI data, the gross NPAs of non-scheduled UCBs are at 7.7 per cent in 2018-19 as against 6.4 per cent reported by the scheduled UCBs. Similarly, the net NPAs are at 2.5 per cent and 2.6 per cent, respectively.
All UCBs seem better placed than commercial banks as the NPAs of commercial banks are over 9 per cent. Experts suggest that the asset quality review of the commercial banks resulted in higher NPAs whereas the UCB sector might have hidden bad loans. A case in point is the Punjab and Maharashtra Cooperative Bank, wherein a large number of loans to bankrupt HDIL didn't reflect in its books. Clearly, there is a need for a thorough inspection of the UCBs' books, especially the scheduled ones.
But there's also an issue of devoting resources to a segment in the financial system, which is not very big. In terms of assets, the scheduled UCBs are much bigger. For instance, while the total share of 47 scheduled UCBs is about 47 per cent, the 1,490 non-scheduled banks account for 53 per cent of total UCB assets. The PMC Bank was a scheduled co-operative bank.
As per the RBI data, the non-scheduled UCBs earned a total income of Rs 28,744 crore and profits of Rs 2,111 crore in 2018-19 as compared to the total income of Rs 30,200 crore and profits of Rs 2,637 crore in the previous year. The UCBs don't pose any systemic threat to the financial system, as their collective share in loans, deposits and assets is less than 3-4 per cent of the entire banking system.