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Prudential norms expected for co-operative banks

BS Banking Bureau

Along with moderate inflation, high forex reserve and tardy credit offtake, the tainted Madhavpura Mercantile Cooperative Bank scam has also become part of the backdrop for the forthcoming credit policy.

It is widely expected that the Reserve Bank of India will come out with prudential norms for the co-operative banking sector, which is subjected to dual regulations-- by the central bank as well as the registrar of co-operative societies.

Even though the new norms are unlikely to be on par with those of commercial banks, at least a beginning will be made, feel industry experts. An internal RBI committee, headed by deputy governor Jagdish Capoor, is closely looking into the issue.

The apex bank, which in 1991-92 introduced capital adequacy norms for commercial banks but left out co-operative ones from the purview, is likely to prescribe norms towards this end with a view to strengthening their capital base. It may also bring in income recognition and asset classification norms for the co-operative banking sector.

"Even though the co-operative banking sector is subject to dual regulations-- RBI as well as registrar of co-operative societies-- if one follows the doctrine of occupied field, once a co-operative bank gets a banking licence, it should come under the total control of the RBI," points out a source.

The central bank is likely to implement some of the suggestions of the Madhava Rao Committee that reviewed the performance of urban co-operative banks. The committee, inter alia, recommended that scheduled UCBs should have a capital-to-risk weighted assets ratio on par with that of commercial banks by 2003. In the case of non-scheduled commercial banks, the committee suggested a CRAR of 6 per cent by March-end 2001, 7 per cent by 2002 and 9 per cent by 2003.

Higher entry point norms are likely to be prescribed for UCBs as the present barriers to entry are very low, causing weaknesses in the co-operative banking system. The RBI had in 1998 prescribed EPNs based on the category (population) of the centre, which ranged from Rs 6 million for an 'A' grade centre to Rs 600,000 for a 'D' grade centre.

In the light of the Madhavarao committee recommendations, the EPNs will be upped. The EPN for an A grade centre is likely to be Rs 50 million, B grade centre Rs 25 million, C grade centre Rs 20 million and D grade Rs 10 million.

These high barriers of entry will ensure that seed-capital is adequate to meet infrastructure cost and to provide a cushion against the erosion of the banks' assets.

The industry also expects the RBI to prescribe that a chartered accountant should audit the accounts of the co-operative banks, as the registrar of co-operatives societies does not have the wherewithal to carry out the task.

Bankers in the co-operative sector strongly feel that regulation of the UCBs with respect to investments, prudential norms, branch licensing, remission of debt, change of management should solely be the preserve of the RBI. They feel the RCS should confine itself to registration, approval and amendments to bye-laws, election of management committees, protection of members' rights and supersession of management committees.

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