RBI wants role for depositors in management of urban co-ops

The Reserve Bank of India wants depositors' influence to act as a counter-balance to borrowers' in the management of urban co-operative banks.
To promote better governance and management, the central bank, in its financial stability report, has emphasised that the involvement of depositors in the management of co-operative banks needs to be enhanced by encouraging membership of depositors on par with borrowers.
The banking regulator's concern regarding corporate governance and management in co-operative banks stems from the fact that borrowers have a significant say in the management of these banks. Borrowers end up wielding influence on UCB (urban co-operative bank) managements as the former are required to subscribe to the banks' shares at the time of sanctioning of loans.
If one has to borrow from a co-operative bank, he/ she has to become a member by subscribing to the bank's shares to the extent of 2.5 per cent of the loan amount in the case of a secured loan and 5 per cent in the case of an unsecured loan.
Co-operative banks, in line with their Articles of Association, prescribe a cap on individual borrower's shareholding (in value terms). For example, in Maharashtra, many urban co-operative banks prescribe Rs 5 lakh as the cap.
The RBI has highlighted that as board members of co-operative banks are elected by borrowers, their policies are not always in congruence with the interests of depositors.
“In view of the propensity of these (co-operative) banks to pursue borrower-oriented policies, rather than policies that should be in favour of protecting depositors' interests, the involvement of depositors in the management of these banks needs to be enhanced by encouraging membership of depositors on par with borrowers,” said the report.
Asset quality
On the asset quality front, the UCBs fare poorly as compared to scheduled commercial banks (SCBs). As of March-end 2009, the gross NPAs to gross advances ratio of UCBs stood at 13.3 per cent compared to 2.3 per cent for SCBs.
According to Mr Satish Marathe, President, Sahakar Bharati (an all India institution promoting co-operatives in various fields), the influence of borrowers can be effectively checked by throwing open the membership of co-operative banks to depositors.
Another reason for impairment of governance in the cooperative banking structure, according to the report, is the interference in matters related to appointment of directors on the basis of political affiliations rather than on merit. This manifests itself in a lack of professional expertise at the board level and interference in decision-making, particularly in respect of loan sanctions which can adversely impact the banks' financial health.
As of March-end 2009, there were 1,721 urban co-operative banks in India. They had deposits and advances aggregating Rs 1,58,733 crore and Rs 97,918 crore, respectively.

courtesy :
K Ram Kumar
Mumbai, April 4  /  The Hindu Business Line