Urban Cooperative Banks (UCBs) are not systemically important due to their small size and turnover, said Reserve Bank of India (RBI) Deputy Governor Swaminathan J, countering the popular notion.
In his speech titled "Urban Co-operative Banks: Upholding Governance and Professionalism with Capacity Building and Technology Upgradation," delivered to South-based UCBs in Hyderabad last week, Swaminathan J highlighted the importance of governance standards among others to strengthen UCBs.
He pointed out that even though some may argue that UCBs are not systemically important, the interconnectedness between financial entities means that any vulnerable link has the potential to erode public trust and confidence. In an increasingly interwoven financial landscape, the ripples of even a seemingly small disturbance can resonate far beyond its initial impact. The failure of a Gujarat-based UCB in 2001 and more recently, a Mumbai-based UCB in 2019, attest to the contagion risks posed by even relatively smaller banks.
Urban Cooperative Banks (UCBs) form a critical layer of the financial system in the country. Despite their consistent 3 to 4 per cent presence in the overall banking business, their significance should not be underestimated. UCBs significantly outnumber commercial banks, with a count of around 1,500. They serve a broad spectrum of society, including common citizens, marginalised sections, small and medium-sized businesses, agriculture and allied activities.
Transparent decision-making, accountability, and adherence to best practices are paramount. Only Boards whose members meet the standard of fit and proper in terms of age, relevant qualifications, experience, and proven clean track record, along with the right aptitude, will be in a position to deliver the desired results.
The RBI deputy governor also urged UCBs to have a good vigilance system, effective internal audit, and fraud detection mechanisms in place. When frauds occur, the bank should promptly report to the regulator and other concerned authorities. Root causes should be suitably addressed. There should be zero tolerance towards acts of malfeasance, he said.
The deputy governor highlighted the importance of technology for UCBs. By embracing technology, UCBs can position themselves as modern and forward-thinking institutions, thereby attracting a broader customer base and retaining relevance in a digital age. UCBs will continue to rely on member loyalty, but this can diminish over time, generational changes, and competition. Therefore, the deputy governor advised that directors should be open to adopting the latest technology, but only after thorough due diligence and from credible suppliers.