RBI expresses concern on elevated NPAs of urban cooperative banks

The Reserve Bank has voiced its concern over elevated levels of gross non performing assets (NPAs) in urban cooperative banks though profitability indicators have improved. It has called for a further strengthening of governance standards and risk management practices among other things in its assessment of the sector in the latest `Trend and Progress in Banking’ released by the central bank on Wednesday.

The Reserve Bank is asking the co-operative banks to adopt global best practices of supervision. “ A further strengthening of the quality of governance, based on the three pillars of compliance, risk management, and internal audit, warrants priority” it said in the assessment of the developments in the cooperative banking sector.

During the year under review -20222-23, efforts were made to bring the regulation of the co-operative banking sector at par with other regulated entities (REs), including the prudential framework for stressed assets.

Regulated REs within the co-operative banking sector were allowed to enter into outsourcing arrangements with lending service providers (LSPs) and digital lending platforms to imbue more flexibility into their business operations.

The consolidated assets of the cooperative banking sector at end-March 2022 were Rs 21.6 lakh crore, around 10 per cent of that of scheduled commercial banks . Rural co-operatives comprise more than two-thirds of the sector.

For urban cooperative banks, key indicators of profitability – return on assets (RoA), return on equity (RoE) and net interest margin (NIM) – improved during financial year 2022-23 despite an increase in provisions and contingencies. During April-June 2023-24, UCBs’ profitability improved further, RBI said in the report.The report acknowledged the sustained reduction in their gross NPA ratio, but warned that it remains elevated.Among the regulatory measures that could help give a boost to this sector is introduction of the four-tiered regulatory framework besides the flexibility allowed to financially sound and well managed UCBs in opening branches.

Among rural credit co-operatives, state co-operative banks reported better performance during 2021-22 on improved asset quality and profitability. The financial health of other segments of the rural credit co operatives, however, needs improvement, the Reserve Bank said.

Going forward, robust internal governance practices and continuous technological upgradation and innovations will help co-operative banks to expand their operations and improve their financial health.