New India Cooperative Bank collapse and its ripple effect on UCBs across India

Following the regulatory action against New India Cooperative Bank, the urban cooperative banking space has returned to the limelight, with depositors in these banks turning anxious. Atmadip Ray presents a snapshot of the UCB sector, highlighting its strengths and weaknesses.

VITAL STATS:

• There are 1,472 Urban Cooperative Banks (UCBs) having Rs 5,55,469 crore deposits and Rs 3,46,903 crore advances at the end of March 2024.
• Of these, 49 are Scheduled UCBs.
• Two scheduled UCBs have critically low capital ratios (Capital to Risk Weighted Assets Ratio – CRAR) as of March 2024.
• Four banks have CRAR below 12% as of March 2024.
• The top 25% of cooperative banks had a CRAR of more than 12%.
• RBI has given a glide path for achieving the regulatory minimum CRAR of 12% by March 31, 2026.
• As of September 2024, the combined gross NPA ratio of all UCBs was 9.6%, compared to 10.9% a year ago.

CORRECTIVE STEPS:

• On July 26, 2024, the RBI introduced a prompt corrective action (PCA) framework for UCBs, replacing the supervisory action framework.
• The framework will be effective from April 1, 2025, and will apply to all UCBs under Tier II, III, and IV categories.
• The revised framework focuses on larger UCBs and will be subject to intense monitoring.
• Tier I UCBs, the smallest category, will not be covered under PCA but will be subject to enhanced monitoring under the existing supervisory approach.
• The framework requires financially weak UCBs to initiate measures to fix their financial health.

RISK THRESHOLDS FOR INITIATING CORRECTIVE ACTION:

• CRAR below 9.5%
• Net non-performing assets ratio above 6% but below 9%
• Net losses during two consecutive years

STRICT ACTIONS:

• During 2023-24, licenses of 24 UCBs were cancelled, raising the total number of cancellations to 70 since 2015-16.
• 94% of the cancellations were in the non-scheduled bank category.
• The consolidated assets of the cooperative banking sector, including rural banks, stood at Rs 22.9 lakh crore as of March-end 2023, accounting for around 9.5% of scheduled commercial banks’ assets.
• During 2023-24, the consolidated balance sheet of UCBs exhibited a muted growth of 4%, higher than 2.3% in the previous year.