RBI urges urban cooperative banks to strengthen governance

Reserve Bank of India (RBI) governor Shaktikanta Das has urged the directors of urban cooperative banks to strengthen governance practices, especially the three supporting pillars of compliance, risk management, and internal audit.

Das stressed that the quality of governance was the most critical aspect in ensuring the stability of individual banks.

On the functioning of boards, the RBI governor emphasised five aspects - adequate skills and expertise of directors, constitution of a professional board of management, diversity and tenure of board members, transparent and participatory nature of board discussions, and effective functioning of board-level committees.

He also emphasised on a planned approach towards human resources in the urban cooperative banks to ensure adequate quality and right size of manpower in UCBs.

Das reinforced the need for board's involvement in upholding rigorous credit risk management including robust underwriting standards, effective post sanction monitoring, timely recognition and mitigation of incipient stress, rigorous follow up of large NPA (non-performing assets) borrowers for effective recovery, and maintaining adequate provisioning.

The RBI chief highlighted that the role of directors is very significant in ensuring the integrity and transparency of financial statements, and cautioned against use of “innovative accounting practices” to camouflage the actual financial position.

The central bank governor urged the boards to be more proactive in asset liability management and the necessity of managing liquidity risk in a more systematic manner. Das also stressed that the board's role is pivotal in establishing a robust IT and cybersecurity infrastructure and availability of requisite skills at the bank level. He stated that the management of the urban cooperative banks should enjoy the required autonomy in their functioning.

Recalling the objectives and strengths of UCBs in furthering financial inclusion and supporting economic development by providing last mile connectivity, the RBI governor acknowledged the role played by UCBs in these aspects. He noted that while the UCB sector has displayed improved financial performance at an aggregate level in recent times, concerns and vulnerabilities are seen for certain individual entities. He highlighted the need for the UCBs to strengthen their financial and operational resilience so as to contribute to the overall financial and banking sector stability.

Das concluded that boards of urban cooperative banks can play a pivotal role in navigating change by adapting their bank’s strategy and offerings as suited to the digital age, promoting innovation and embracing change, while retaining the essence of their cooperative culture.

Last year, the banking regulator adopted a four-tiered regulatory framework to make UCBs financially sound. Urban cooperative banks having deposits up to ₹100 crore were classified as tier-1 UCBs. The second tier incorporates co-operative banks with deposits more than ₹100 crore and up to ₹1,000 crore. Co-operative banks with deposits over ₹1,000 crore and up to ₹10,000 crore were categorised as tier-3. UCBs with deposits more than ₹10,000 crore form the fourth tier.