With turnaround in economic activity, cooperative banks are likely to build on their resilience and leverage on recent financial improvements to increases their reach going ahead, the Reserve bank of India said in its report. The cooperative banking segment—both urban and rural—remained robust throughout the COVID-19 stress, the Report on Trend and Progress of Banking in India 2020-21 released on Tuesday said.
“Going forward, with a turnaround in economic activity, it is expected that the sector may build on its resilience and leverage on recent financial improvements to expand its footprint in order to reach finance to grassroot levels,” the report said.Although the balance sheet growth of urban co-operatives banks (UCBs) in 2020-21 was driven by deposits on the liabilities side, subdued credit growth prompted acceleration in investments on the assets side, the report said.
The financial indicators of UCBs, including their capital position and profitability, improved.Among the short-term rural cooperatives, the profitability of state cooperative banks and district central co-operative banks improved, while their asset quality deteriorated, the report said.Going ahead, structural reforms that address deep-seated fault lines are expected to catalyse change in operations of co-operative banks, it said.
The RBI report said that matters of inadequate governance at these lenders are being addressed through regulatory as well as enforcement actions.The co-operative banking sector, especially the rural co-operatives, emerged relatively unscathed from the first wave of the pandemic in 2020-21.“Yet, structural impediments emanating from regulatory overlaps, high levels of loan delinquencies and erosion of depositor confidence due to frauds continue to beset the sector,” the report said adding that in 2020-21, RBI and the government set out to address these issues.The Banking Regulation (Amendment) Act, 2020 gave RBI additional powers to regulate this sector.
The report said the enhancement in deposit insurance from Rs 1 lakh to Rs 5 lakh augmented the share of co-operative depositors’ coverage from 42.7 per cent at end March 2019 to 69.4 per cent at end-March 2021.Even the creation of Ministry of Co-operation in July 2021 is intended to provide a separate administrative, legal and policy framework for enabling the development of multi-state cooperatives, it said.
The report said that concerns over the financial soundness of UCBs have risen in recent years with an increasing number of UCBs being placed under the Supervisory Action Framework (SAF) by the RBI.Instances of penalty imposition increased to 43 during 2020-21, up from nine in the previous year.Also, claims settled by the Deposit Insurance and Credit Guarantee Corporation (DICGC) during the year pertained entirely to cooperative banks, the report said.It said that during 2015-16 to 2018-19, scheduled commercial banks (SCBs) had higher delinquency rates than UCBs.
The position reversed during the last two years as SCBs’ gross non-performing assets (GNPA) ratio fell, while for UCBs, it has been on a rising trajectory right up to 2020-21.Within the sector, both scheduled UCBs (SUCBs) and non-scheduled UCBs faced increasing GNPA ratios, with the latter experiencing sharply higher slippages, the report said.In January 2020, the SAF for UCBs was revised, making a net NPA ratio greater than 6 per cent a trigger for initiation of corrective action.With rising slippage, this has prompted an increase in provisioning, the report said.
During 2020-21, 25 per cent of UCBs’ total funded loans and 32 per cent of their NPAs originated from large borrowal accounts as against 51 per cent of loans and 66 per cent of NPAs, respectively, for SCBs, the report said.