The term Urban Co-operative Banks (UCBs) refers to primary cooperative banks located in urban and semi-urban areas. Until 1996, these banks were only permitted to lend money for non-agricultural purposes. This distinction is no longer valid today. Traditionally, these banks were centred on communities, localities, and workplace groups. They primarily gave loans to small borrowers and businesses. Their scope of operations has expanded significantly since then.

What is an Urban Co-operative Bank?

• The term "Urban Co-operative Banks" refers to primary cooperative banks in urban and semi-urban areas.
• These banks primarily lent to small borrowers and businesses centred on communities, neighbourhoods, and workplace groups.
• They primarily finance entrepreneurs, small businesses, industries, and self-employment in urban areas, as well as home purchases and educational loans.
• Primary credit societies (PCSs) in urban areas that meet certain criteria may apply to the RBI for a banking licence in order to operate as urban co-operative banks (UCBs).
• They are registered and governed by the respective states' cooperative societies acts, as well as the Banking Regulation Act of 1949, and thus are subject to dual regulatory control.
• The RBI only partially regulates UCBs. Their banking operations are governed by the RBI, which establishes capital adequacy, risk management, and lending standards.
• However, their management and resolution in the event of a crisis are governed by the Registrar of Co-operative Societies, who works for either the state or the federal government.
• Primary UCBs with deposits of more than Rs. 50 crore are also permitted to operate in more than one state, subject to certain conditions.
• They have certain rights and obligations because they are covered by the RBI Act, 1934 (2nd Schedule) – rights to obtain refinance and loans from the RBI and obligations such as maintaining cash reserves, submitting returns to the RBI, and so on.
• The Shivalik Mercantile Co-operative Bank Limited is the first Urban Co-operative Bank (UCB) to be granted 'in-principle' permission by the Reserve Bank of India to convert into a Small Finance Bank (SFB).
• The move comes after the RBI announced in September 2018 a scheme for voluntary conversion of UCBs to SFBs.

Urban Cooperative Banks – Historical Perspective

• The origins of the urban cooperative banking movement in India can be traced back to the late nineteenth century, when such societies were established in India, inspired by the success of experiments related to the cooperative movement in Britain and Germany.
• Cooperative societies are founded on the principles of mutual aid, democratic decision-making, and open membership.
• Cooperatives represented a new and different approach to organisation in comparison to the dominant forms of commercial organisation, which were proprietary firms, partnership firms, and joint-stock companies.
• The first known mutual aid society in India was most likely the "Anyonya Sahakari Mandali," which was founded in 1889 in the erstwhile princely state of Baroda under the leadership of Vithal Laxman, also known as Bhausaheb Kavthekar.
• In their early stages, urban co-operative credit societies were formed on a community basis to meet the demand for consumption-oriented credit.
• Salary earners' societies that instilled thrift and self-help habits played a significant role in popularising the movement, particularly among the middle class and organised labour.
• The passage of the Cooperative Credit Societies Act in 1904, on the other hand, provided the real impetus to the movement.
• In October 1904, the first urban cooperative credit society was established in Canjeevaram (Kanjivaram), in the then-Madras province.
• The Bombay Urban Co-operative Credit Society, founded on January 23, 1906, by Vithaldas Thackersey and Lallubhai Samaldas, was the most prominent of the early credit societies.
• The Cooperative Credit Societies Act of 1904 was amended in 1912 to allow for the formation of non-credit societies.
• The Maclagan Committee, formed in 1915, was tasked with reviewing their performance and recommending ways to improve it.

Urban Cooperative Banks – Significance

• • Urban cooperative banks are primarily localised financial service providers that have been in operation for more than a century. Their speciality is catering to the lower middle class and people with limited resources, as well as self-employed and micro-enterprises.
  • Urban cooperative banks play an important role in mobilising deposits and financing the small-borrower sector, which includes small-scale industries, professionals, retailers, and so on.
  • Cooperative banks have been instrumental in providing financial assistance to the rural sector.

• Since UCBs are a tried and tested model for catering to the unorganised sector in all types of urban centres, they are well suited to be replicated in large numbers across all states.

Urban Cooperative Banks – Challenges

• For the past few years, cooperative banks in India have struggled to survive.
  • The issue gained prominence following the Punjab and Maharashtra Cooperative (PMC) Bank debacle, which resulted in frantic depositors visiting the branches in an attempt to withdraw their hard-earned money.
• The evolving changes in the financial sector, which combine and integrate microfinance, FinTech companies, payment gateways, social platforms, e-commerce companies, and NBFCs, pose a threat to the continued presence of UCBs, which are mostly small in size, lack professional management, and have geographically less diverse operations.
• Loans and deposits are both declining at a faster rate.
• Rural cooperatives account for a sizable proportion of total cooperative size which is around65 per cent of total cooperatives.
• Reduced share of agricultural lending.
  • Despite this critical role, the sector's share of total agricultural lending has declined significantly over the years, from as high as 64 per cent in 1992-93 to just 11.3 per cent in 2019-20.
• Following the liberalisation of licencing policy in 1993, nearly one-third of newly licenced businesses became financially unsound within a short period of time.
• For years, despite failures and frauds, such banks have escaped scrutiny due to dual regulation by the state registrar of societies and the RBI.
  • An amendment was introduced in 2020 to bring UCBs under the supervision of the RBI.
  • As a result, the RBI was given direct supervision over 1482 urban cooperatives and 58 multi-state cooperative banks.
  • This gave the central bank enough power to control the cooperatives.
• Frauds, COVID, and other factors impacted asset quality, resulting in a decline in profitability for urban cooperative banks.
• Lax corporate governance standards, combined with political influence and interference, were major contributors to the sector's demise.

Current Developments

• The RBI revised the Supervisory Action Framework (SAF) for UCBs in January 2020.
• The Central Government approved an Ordinance in June 2020 that will bring all urban and multi-state cooperative banks under the direct supervision of the RBI.
• A committee led by former RBI Deputy Governor NS Vishwanathan has recently proposed the following findings for Urban Cooperative Banks (UCBs).

Conclusion

From its inception to the present day, the thrust of UCBs has been to mobilise savings from middle and low-income urban groups and to provide credit to their members, many of whom belonged to the weaker sections.