What RBI needs to do for transition of urban co-operative banks into small finance banks
1 August 2018: Jalandhar’s Capital Local Area Bank (CLAB) received in the Punjabi marked a breakthrough for India’s financial inclusion initiatives that seek to take banking services to one of the world’s biggest unbanked communities.
For the central bank, serving the bottom of the pyramid is as much a preference as helping save about $165 billion stuck as bad loans in a stressed banking system. Institutions and some NBFCs to convert into small banks After allowing microfinance, the Reserve Bank of India (RBI) has now made public its intention to allow urban cooperative banks (UCBs) to turn into small finance banks, like CLAB from north-central Punjab. UCBs were originally set up as small banks that offered banking services to people of small means from the lower and middle classes: Now they are seen as another channel to deepen financial inclusion in the country. India is supposed to have one of the oldest community-banking initiatives in the world with UCBs beginning way back in 1889. But the actual growth happened only after 1966 when the sector was brought under the Banking Regulation Act. From 1,100 UCBs in 1966, their number reached up to 1,926 in March 2004.
After 2001 the sector got denying attention Madhavpura Mercantile Cooperative Bank scam became common. The scam took its damage on the credibility of cooperative banks.
The RBI found that nearly a third of the newly licensed UCBs became financially unstable within a short period. RBI said that it would grant issuance of new licenses only after a complete policy on UCBs, including a regulatory framework, was put in place.
UCBs was to examine a multitude of issues. Some of the banks have built a loyal customer base and are on a level with investment banks in their service quality, product offerings, and even technology adoption.
After several policy actions that calculated more regulatory power to the RBI and reduced intervention from states, the sector has maintained to recover some credibility.
Acting on the advice, the central bank made an announcement almost three years later in its June policy statement allowing UCBs to change into small finance banks.
“It has been determined to provide the spontaneous change of UCBs meeting the designated criteria into small finance banks. The complete scheme will be advertised separately,” the RBI said in its policy statement in June.