RBI Governor Expresses Dissatisfaction With NPA's In Urban Cooperative Banks

The Reserve Bank of India (RBI) has raised concerns over the high bad loan ratio in urban cooperative banks (UCBs) and highlighted certain methods that can be adopted for their improvement.

According to a PTI report, RBI governor Shaktikanta Das said that even as UCBs have their cumulative non-performing assets ratio improved to 8.7%, this is "not a comfortable number". The banking sector's gross NPA eased to a decadal low of 3.9% at the end of March. Das urged that such lenders should improve the governance standards, avoid related-party transactions, and focus on credit risks, among others.

It is worth mentioning that the UCB sector has been fraught with several challenges and also experienced difficult times in the recent past, like the implosion of the city-headquartered Punjab and Maharashtra Bank. In a reminder to the directors of the UCBs, Das said that banks run on depositors adding that that protection of the hard-earned money pooled in from different sections including the middle class, poor, and retirees is far more sacred than going to a temple or a gurdwara.

Das said that the situation on GNPAs and capital adequacy is "not at all satisfactory." He said the overall GNPAs have improved to 8.7%, which is "not a good number. According to him it is not a comfortable number even at an aggregate level". Scheduled commercial banks' GNPAs stood at a decadal best level of 3.9% in March 2023 and are widely estimated to improve further.

To manage the scourge of NPAs better, Das suggested that the emphasis should be on credit risk management with better underwriting. He said that the central Bank has come across instances of conflicts of interest or related party transactions, which need to be avoided. Similarly, there have been instances of many of the top defaulters being individuals or businesses having the ability to pay, Das said.

Measures recommended by RBI Governor to improve NPAs in urban Cooperative banks

• The top 20 defaulters account for over 60% of the loan overdue, and focusing on this segment can help improve the overall NPAs, Das said.
• Das exhorted the UCBs to focus on the quality of governance by paying attention to compliance, risk management, and internal audit.
• Focus on internal audit function.
• The governor asked bank management to present a risk analysis report to the board on a quarterly basis, instead of making it into an annual effort.
• Need for the directors - elected and not appointed based on their skill sets, unlike the SCBs - to understand the financial sector, credit risk, banking, information technology and risk management. Das said that the RBI has prescribed a board of management to help the elected board members with professional help in running a bank, and the same should not be seen as an impediment.
• UCBs should monitor asset-liability mismatches, follow transparent accounting practices, and recruit people based on requirements and ability to spend.