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Challenges before Urban Co-operative Banks
During the last 100 years, Co-operative system has played a
very important & significant role in all sectors of economy
& industry. UCBs, as an integral part of this system, has also
kept its pace of growth, faced challenges & in the process have
became an integral part of the banking industry, a part of the much
talked about payment system. Over a period a time, UCBs have shown a
remarkable growth in its size, working & functioning. But the
time has also changed. As the Co-operative movement in India enters
in a new millennium, it is faced with a host of new challenges,
emerging from the process of globalization, liberalization &
privatization, initiated a decade ago.
Earlier our financial system
was protected. But when our economy was opened up & economic
reforms were introduced by our Govt., it required some correction in
the Indian Banking system. Rapid growth of the Indian Banking
system, particularly after nationalization, without building up
strong fundamentals, led to several weaknesses in the system, which
necessitated corrective action.
With a view to have smooth transition, a number of committees were appointed
in last decade. The Narasimhan Committee, High Power Committee led by K. Madhavrao
for Co-operative Banks, Varma Committee, Khan Committee .....and so on......As a result
of which, Indian Banking industry was forced to move away from the protected environment
enter into liberalized global environment.
The High Power Committee led by K. Madhavrao observed that, 'Since UCBs perform
the same banking functions as commercial banks, they are exposed to similar risks in
their operations & hence all prudential norms should also be made applicable
to Co-operative Banks.
Secondly, the fallout of Madhavpura & few other few co-op. banks have resulted in
bringing more stringent norms for the entire Co-operative banking in the country.
The challenges before UCBs can be broadly divided into two kinds they are -
Internal External Challenges.
INTERNAL Challenges
1. CAMELS
Camels system has now been introduced, atleast for Scheduled Co-op. Banks in the
begining. CAMELS is a far more rigorous exercise in determining the status and class
of the bank. It is highly complex.
2. CRAR
Once the Basel II accord is implemented, the capital adequacy norms are going to be
tougher & this will have tremendous implications for NPAs, provisioning and all
other aspects of Management issues. Question is how from where the additional
money / capital will come ? The good banks - rather say banks with sound financial
footing will have no problem to raise the capital but the weak banks will certainly
have the problems of raising money. We cannot go public & borrow in market
like our fellow commercial banks.
3. Technology
Revolutionary changes in computing communication technology are taking place world
over at a bewildering speed & we cannot ignore this change, whether we like it or
not. Technological changes always affect the organisation the people working in and for
the organisation. It is therefore absolutely necessary to change the mindset of the people
working for the organisation. E-banking, E-commerce etc. are certainly bound to change
the face of Indian Banking vis-a-vis Co-operative Banking. This is no longer a matter of
choice. If you do not adopt new technological changes, you will not be able to do business
over the next few years. It is necessary to use the modern means of communication.
Upgrading technology has exorbitant costs. But we have no option.
4. Staff Training
Another constraint for co-operative banks is that of Human Resources Management (HRM).
In a computerised environment, output entirely depends on the quality of human resources i.e.
work force - staff. Today we protect the employees, and they have the job security. But
things will change in near future. Perform or Perish is a mantra for banks / institutions.
Same Mantra will be applicable to workforce. It is vital. And it is only a matter of time.
5. Impact of Competition
The rates of interest offered by UCBs on deposits advances are higher than those offered
by Public Private Sector Banks. This has resulted into increase in deposits without matching
demand for credit. The excess liquidity, we are forced to deploy in Govt. Securities, on which
yield is very low.
6. Market Risk
Due to adverse movement of interest rates, value of Govt.Securities held had deteriorated,
thereby requiring Banks to make huge provisioning. Due to very little prospects of earning
trading profits in the current year, it is now very difficult for Banks to show Net Profit for
Mar., 2005, unless the Market reverts drastically & immediately.
7. Customer satisfaction
The biggest challenge before UCBs is to retain their customers. Of late, mobility of
customers has gathered momentum. Reasons could be attributed to interest rates
on advances, customer service, technological superiority of our competitors,
decision making process etc. Hence the topmost priority in the list of challenges,
is to retain customer base customer confidence.
8. Internal Systems Procedure
Role of RBI is changing fast. After deregulation, RBI is taking on itself the role of
supervisory regulatory authority, which will affect the banks, not only UCBs, but banking
industry as a whole, also other financial institutions. UCBs will have to strengthen the
internal control, systems procedures - OSS return is latest example of this authority.
The age old system & not only mindset is required to be change.
9. ALM
In the volatile & turbulent banking scenario, management of interest rate risk could
only be possible by adopting sound ALM practices. Unfortunately UCBs have not implemented
ALM in its right earnest. It is now high time to adopt sound ALM practices. And last but not
the least, the Banks internal management issues, and problems which are directly related to the
management itself, are required to be looked into seriously by the Hon. Members of the
Board of Directors. If no improvement, there is no point in blaming the Regulatory
Authority.
EXTERNAL Challenges
1. Risk Management
It is an another issue. We UCBs operate locally not in an international market. But as a part
of financial system, it is now an international concern. Point is that, according to Govt. / RBI,
the world should have confidence in us. International standards are therefore important.
2. Corporate Governance expects UCBs to protect Stakeholders interest. UCBs in coming years, would
find it difficult to declare dividends to shareholders. One reason is, profitability would be
declining due to heavy provisioning norms on NPAs recently introduced, poor prospects
of trading profits, provisioning on G-Sec. etc. Second reason is, RBI has made stricter
rules for declaring dividends based on gradation of Banks. It is a dounting challenge to
win stake holders confidence. Transparency, disclosures, standard according to
practices. Now, Directors have to play a very important role in
policy formulation, keeping in mind the regulatory norms, and well
leaving the execution part thereof to the CEO.
3. The most important challenge before UCBs now is to 'Maintain its Good Image.
Many small instances of irregularity have been blown out of proportions by
Media. It has caused tremendous damage to UCBs image. We will have
to work very hard to improve our image in public. The deteriorating
image of UCBs shall affect growth in Deposits as also Advances.
Thereby profits of UCBs.
Seminar for Directors Officers for Urban Cooperative Banks
Recently a seminar was organized by Urban Banks Cell of Sahakar Bharati for Chairmans,
Directors and Officers of select co-operative banks in Maharashtra. The seminar was
organized on the 21st and 22nd July 2006 at BAIF, Pune. It was
attended by 73 Representatives of 32 banks. Urban banks are
undergoing a transformation. Reserve Bank has taken initiative to
accelerate this transformation. To achieve this goal it is amending
Vision Document Law, and undertaking other reforms.
It is observed that failing to meet the changes and challenges of the future, the
gap between existing urban bank sector and an expected urban bank
sector service is widening causing serious problems for urban banks.
Number of troubled urban banks is increasing at an alarming rate.
This seminar was organized to find a solution on this problem.
The seminar was inaugurated on the first day by lighting up lamp and
garlanding a photo. Hon.Shri Mukundrao Panshikar, (Regional
Pracharak, RSS), Dr.Avinash Acharya (National President, Sahakar
Bharati), Shri Surykant Talekar (All India Organizational Chief,
Sahakar Bharati), Shri Ratnakar Deole (ex-GM, RBI) and Shri
Vasantrao Deodhar ( Chief of Urban Banks Cell, Sahakar Bharati)
graced the dias. The seminar was compared and coordinated by Shri
Uday Joshi (General Secretary, Maharastra Region).
Shri. Deole elaborately discussed amalgamation and mergers. Shri. Sudhir
Paithankar a Chartered Accountant by profession spoke about Income
Tax on co-operative banks and answered questions asked by audience.
Shri. Paithankar said that income tax was applicable to co-operative
banks from this years (2006-07) budget provisions. It was therefore
essential for all senior officers in cooperative sector to update
about these changes and plan accordingly.
In the afternoon session, Shri. K.C. Mishra, an expert and experienced faculty at
Reserve Bank Training Institute, parted with valuable information about vision
document and MOU.
On the second day first session was open discussion on various problems.
Income tax was the main issue of concern. An action plan was developed for handling this
issue effectively according to which a meeting of bank representatives was
announced on the 21st August 2996 at Dombivali.
In the second session senior chartered accountant and a trusted guide Shri.
Mukaundrao Chitale shared his rich experience and experience about
up gradation of banks. He said that bank should operate more
professionally and not emotionally. Directors and officers should
take firm and right decisions in the interest of banks. Later,
Management Consultant Shri. Arvind Rege (Director, Rambhau Mhalgi
Prabodhini and Janseva Bank, Boriwali) guided the audience on
Information Technology and Urban Cooperative Banks. He said we must
understand our need, capacity and plan accordingly. Our policy
decisions should be based upon our own experience and not on lofty
nomenclature. Right training, participation of concerned people and
taking the stock of situation is very essential measure.
In his concluding speech, Shri Mukundrao Panshikar said that bank with
similar policies have helped accelerate and contributed heavily
towards fundamental thought culture. We must ensure that urban banks
don't face any problems in future and so also we must help banks in
problem recover fast. The banks that can not recover should consent
merger for larger good. Co-operative banks should 'co-operate' each
other to meet these tough times because survival of cooperative
school of thinking is need of hour.
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