Punjab & Maharashtra Co-operative Bank (PMC Bank) is the latest urban cooperative bank creating panic among small depositors. Many urban cooperative banks (UCB) have folded up or consolidated into stronger banks over the past 15 years. The number of UCBs has reduced by 375 to 1,551 since early 2000 when RBI started monitoring them closely. That happened after Madhavpura Mercantile Co-operative Bank got embroiled in the Ketan Parekh scam in 2001.
Do we need UCBs? The universe of UCBs is not very big. Total deposits of UCBs at Rs 4,56,500 crore is just 3.87 per cent of the entire banking system. Similarly, advances of Rs 2,80,500 crore is about 3.20 per cent of the commercial banking advances. These banks are also not serving any specific purpose or catering to any geography. Commercial banks have reached out to every corner of the country. In fact, the product profile of UCBs is similar to commercial banks in retail and business banking and MSMEs.
The problem is that UCBs are scattered all over. There are about 1,551 entities with only 54 under the scheduled bank category (following RBI guidelines) whereas 1,497 are unscheduled UCBs. The government has taken a good step of creating few large PSBs for better serving the market and monitoring them. Like public sector banks, UCBs also mirror each other. Most have a poor governance structure, lack of professional management, weak risk management system, lax credit appraisal system etc. They are surviving primarily due to the blessing of political parties.
The RBI has often faced issues in KYC violations, no proper fraud detection system, lack of anti-money laundering systems etc. In the case of Punjab & Maharashtra Cooperative Bank, there are reports of under-reporting of NPAs. Currently, the risk to the bank's portfolio comes from unsecured personal loans , business loans and MSMEs exposure. While RBI has allowed restructuring of MSME loans in the recent past, there are reports of stress in MSME loans.
So what is the way forward? Clearly, the RBI should force larger UCBs to convert into small finance banks. PMC for instance has a balance sheet of Rs 13,619 crore, which is quite big by UCB industry standards. A year ago, RBI allowed voluntary transition of UCBs into small finance banks. The objective was to allow them more opportunity as banks like window to accessing market through IPOs etc. But there was not much interest.
SFBs are the new banking models where RBI is open to giving licenses to NBFCs, MFIs and cooperative banks. In the first lot, RBI had doled out banking licenses to almost a dozen micro finance institutions (MFIs). SFB licenses are now available on tap. Now is the time to nudge urban cooperative banking.