RBI Expresses Concern Over NPAs in Urban Co-Op Banks, Urges Lenders to Prioritize Governance

RBI Expresses Concern Over NPAs in Urban Co-Op Banks, Urges Lenders to Prioritize Governance

Mumbai, September 25: RBI Governor Shaktikanta Das expressed concern on Monday over the elevated gross non-performing assets (NPAs) ratio of 8.7 percent in urban cooperative banks (UCBs) and urged them to take measures to improve their financial stability.

Speaking to UCB directors at an RBI-organized conference in the financial capital, Das emphasized the need for enhanced governance standards, the avoidance of related-party transactions, and a focus on managing credit risks, among other priorities.

The UCB sector has faced numerous challenges and recent difficulties, including the collapse of the Punjab and Maharashtra Bank headquartered in the city.

Das reminded UCB directors that banks rely on depositors, emphasizing that safeguarding the hard-earned money deposited by the middle class, poor, and retirees is a sacred responsibility.

Although the overall picture appears positive, Das expressed dissatisfaction with the state of gross NPAs and capital adequacy, describing the 8.7 percent gross NPAs as an uncomfortable figure even at an aggregate level. In contrast, scheduled commercial banks had achieved a decade-best gross NPA level of 3.9 percent in March 2023, with further improvement anticipated.

To manage NPAs more effectively, Das recommended a focus on credit risk management and better underwriting. He also highlighted the need to avoid conflicts of interest and related-party transactions and mentioned that many top defaulters have the means to repay their debts.

Regarding capital adequacy, Das noted an improvement in ratios to 16.6 percent at the end of FY23, up from 15.5 percent a year earlier.

Das urged UCBs to enhance governance by emphasizing compliance, risk management, and internal audits. He stressed the importance of regular risk analysis reports to the board and encouraged directors, who are elected, to gain a deep understanding of the financial sector, credit risk, banking, information technology, and risk management.

The RBI has prescribed a board of management to provide professional support to elected board members in managing the bank effectively.

Das emphasized the importance of free and fair board discussions, discouraging dominance by one or two individuals. He also expressed discomfort with board committees related to functions like audit and risk not meeting regularly.

UCBs were advised to monitor asset-liability mismatches, follow transparent accounting practices, and recruit based on requirements and abilities.

Regarding technology, Das noted concerns with the quality of core banking solutions in some banks and highlighted the need to improve technology, given the growing competition from tech-savvy entities like digital lenders, fintechs, non-bank lenders, and micro-lenders.

Das concluded by affirming the overall success of the UCB sector and stating that the RBI is amenable to certain entities in the sector expanding significantly.