Urban cooperative banks (UCBs) occupy a significant place in financial inclusion by serving urban and semi-urban communities. There are about 1,470 UCBs in India, down from 1,926 in 2004.

In FY23, the Reserve Bank of India (RBI) imposed 211 fines amounting to ₹40 crore on UCBs — far more than on other banking groups. Since 2014, licences of 78 UCBs have been revoked, citing unsafe operations to the interests of depositors and the general public, insufficient capital, and low earnings. These actions reveal vulnerabilities in the sector, highlighting the urgent need for strong regulation and oversight.

UCBs, particularly scheduled urban cooperative banks (SUCBs), must prioritise compliance, risk management, and internal audits. Strengthening internal controls can enhance resilience and reduce exposure to financial and reputational risks. Timely disclosure of financial statements, including asset quality, stressed assets, large loan exposures, and sector-wise advances, promotes transparency and trust. Reporting on non-performing assets (NPAs), provisioning, and exposure to the top 50 borrowers are essential for maintaining clarity in asset quality.

Regulation, oversight

To strengthen the sector, the RBI will implement the Prompt Corrective Action (PCA) Framework for UCBs starting April 1, 2025, replacing the current Supervisory Action Framework (SAF).

The PCA framework applies to UCBs in Tier 2 (deposits above ₹100 crore and up to ₹1,000 crore), Tier 3 (deposits more than ₹1,000 crore and up to ₹10,000 crore), and Tier 4 (deposits above ₹10,000 crore).

Tier 1 UCBs (deposits up to ₹100 crore) are excluded for now. The framework establishes risk thresholds for capital adequacy, asset quality, and profitability.

For capital adequacy, breaches are categorised based on the extent to which the levels fall below the regulatory minimum — by up to 250 basis points, between 250 and 400 basis points, or exceeding 400 basis points.

In terms of asset quality, thresholds are determined by the level of net non-performing assets (NNPAs), with categories set at 6 per cent or higher but below 9 per cent, between 9-12 per cent, and 12 per cent or higher.

A UCB may exit the PCA framework if it reports no breaches in risk parameters for four consecutive quarters.

Building resilience

To address compliance challenges, UCBs must implement the following measures:

Strict client due diligence practices and adherence to good credit and lending, thorough credit assessments, proper documentation, and compliance with legal and regulatory standards. Managing pledges, mortgages, hypothecation, liens, and collateral effectively, along with regular compliance checks, are essential for minimising risks.

A well-designed compliance programme with a dedicated chief compliance officer (CCO) can help UCBs to adhere to regulatory complexities and maintain operational stability.

UCBs should reinstate strong governance agendas, including risk management committees, to oversee activities related to credit and operational risks. Credit risk management should focus on identifying, assessing, and mitigating risks through efficient appraisal and monitoring systems.

PCA framework emphasises the need for UCBs to manage credit and concentration risks effectively. This involves diversifying loan portfolios, reducing exposure to risky sectors, and maintaining healthy asset quality.

Regular staff training on compliance and risk management, combined with efficient audits, will help meet regulatory standards and restore depositor confidence.

Yadav is Director; Dharmaraj is Assistant Professor VAMNICOM – Pune