RBI gives Urban Cooperative Banks new lease of life | Explained
The Reserve Bank of India has decided to resume issuing licenses to Urban Cooperative Banks after a two-decade hiatus. This move aims to revitalize the sector, which serves as a bridge between community finance and formal banking.
Why it matters
Re-licensing these banks could improve financial inclusion in India, provided that the new governance standards prevent the systemic failures seen in the past.
When urban cooperative banks (UCBs) — built on community trust — enter the public discourse, unfortunately, the first image to surface is that of Madhavpura Mercantile Cooperative Bank (MMCB) and Punjab and Maharashtra Cooperative (PMC) Bank.
Poor governance, political interference, dual regulation, concentrated lending, weak capital structure and technology deficiency sum up for the failure of several UCBs, forcing the Reserve Bank of India (RBI) to cancel licenses and also stop issuing fresh ones from 2004.
Lessons learned from the past, together with its belief that expansion without sound governance could multiply risks, led the banking regulator to rethink UCBs, and the RBI recently decided to resume issuing licenses to them after more than two decades.
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