3rd March 2025 (12 Topics)

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Urban Cooperative Banks (UCBs) in India

Context

The urban cooperative banking (UCB) sector in India has had a troubled history, with multiple instances of financial mismanagement, fraud, and regulatory lapses over the years. The recent Rs 122-crore scam at New India Cooperative Bank (NICB) in Mumbai is another blow to the sector, raising concerns over governance, regulatory oversight, and depositor safety.

Possible Resolutions for NICB

RBI has multiple options to deal with the crisis:

Finding a White Knight (Merger with a Stronger Institution): A strong financial entity (like an SFB or NBFC) could be asked to take over NICB. This strategy worked for PMC Bank but may not be feasible here since most NICB depositors will withdraw funds via deposit insurance, reducing the bank's attractiveness for takeover.
Liquidity Support from the National Urban Co-operative Finance and Development Corporation: The newly formed umbrella body for UCBs could provide temporary liquidity to stabilize the bank.
Allowing a Gradual Wind-Down: If no viable rescue plan emerges, RBI may liquidate NICB, ensuring small depositors (Rs 5 lakh insured limit) are compensated first.

The Larger Issue: Governance and Regulatory Failures in UCBs

NICB’s crisis highlights structural issues in cooperative banking:

Weak Governance & Political Interference: Many UCBs suffer from dynastic control and lack professional management.
Regulatory Gaps & Late Intervention: Despite amendments to the Banking Regulation (BR) Act in 2020, RBI still struggles to prevent frauds. Early warnings (including anonymous complaints) must be taken more seriously.
Impact on Depositors’ Trust: Cooperative banks serve urban middle-class and lower-income groups, making deposit safety crucial. The failure of NICB will further erode trust in UCBs, potentially driving customers to commercial banks.

Urban Co-operative Banks (UCBs) in India

Urban Co-operative Banks (UCBs) are primary cooperative banks that operate in urban and semi-urban areas, primarily catering to small borrowers and businesses.
They were initially regulated by State Governments under the Co-operative Societies Act, but since 1966, they have been brought under RBI’s supervision for better regulation.
Origins: The cooperative banking movement in India began in the late 19th century, inspired by Britain and Germany’s cooperative credit models.
Initially, UCBs could only provide non-agricultural loans, but their role has expanded significantly.
The Varde Committee (1963) introduced the minimum capital requirement and recommended setting up UCBs in urban centers with a population of 1 lakh or more.

PYQ

Q. With reference to ‘Urban Cooperative Banks’ in India, consider the following statements:

They are supervised and regulated by local boards set up by the State Governments.
They can issue equity shares and preference shares.
They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.

Which of the statements given above is/are correct?

1 only
2 and 3 only
1 and 3 only
1, 2 and 3

Solution: (b)

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GS Analyst: Daily Current Affairs

3rd March 2025 (12 Topics)

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Urban Cooperative Banks (UCBs) in India

Possible Resolutions for NICB

The Larger Issue: Governance and Regulatory Failures in UCBs

Urban Co-operative Banks (UCBs) in India

PYQ

Still Have Questions?

GS Analyst: Daily Current Affairs

Urban Cooperative Banks (UCBs) in India

Possible Resolutions for NICB

The Larger Issue: Governance and Regulatory Failures in UCBs

Urban Co-operative Banks (UCBs) in India

PYQ

Still Have Questions?

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