The Rajamannar Committee, also known as the High-Powered Committee on Urban Cooperative Banks (UCBs), was formed in 2019 by the Reserve Bank of India (RBI). The committee was set up to examine the issues faced by UCBs and to provide recommendations for their better functioning. In this article, we will discuss the background of UCBs, the formation of the Rajamannar Committee, its key recommendations, and their impact on the UCB sector.
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Background of Urban Cooperative Banks
Urban Cooperative Banks (UCBs) are financial institutions that are owned and operated by their members. They are registered under the Cooperative Societies Act of the respective states where they are located. UCBs primarily serve the banking needs of small and medium-sized businesses, traders, self-employed professionals, and low-income households. UCBs play a significant role in the financial inclusion of these sections of society by providing them access to credit, deposits, and other financial services.
However, UCBs have been facing several issues that have affected their financial health and operations. These issues include inadequate capitalization, weak governance structures, non-performing assets (NPAs), lack of transparency, and regulatory gaps. The RBI has been taking several measures to address these issues, including the formation of the Rajamannar Committee.
Formation of the Rajamannar Committee
In September 2019, the RBI constituted the Rajamannar Committee to examine the issues faced by UCBs and to provide recommendations for their better functioning. The committee was chaired by N.S. Vishwanathan, former Deputy Governor of RBI, and had eight other members, including Nandan Nilekani, co-founder of Infosys, and R. Gandhi, former Deputy Governor of RBI.
Key Recommendations of the Rajamannar Committee
The Rajamannar Committee submitted its report to the RBI in September 2020. The report contained several recommendations aimed at improving the financial health and operations of UCBs. Some of the key recommendations are discussed below:
Capital Adequacy
The committee recommended that UCBs should maintain a minimum capital adequacy ratio (CAR) of 9% by March 2023. This is in line with the Basel III norms for banks. The committee also recommended that UCBs should maintain a leverage ratio of 4.5%.
Governance
The committee recommended that the board of UCBs should have at least one-third independent directors, including a chairperson who is not a member of the bank. The committee also recommended that the board should have a separate audit committee and risk management committee.
Licensing and Regulation
The committee recommended that the licensing and regulation of UCBs should be strengthened. The committee suggested that the RBI should consider introducing a ‘fit and proper’ criteria for directors and CEOs of UCBs. The committee also recommended that the RBI should set up a separate regulatory and supervisory division for UCBs.
Resolution of Stressed Assets
The committee recommended that UCBs should have a board-approved policy for the resolution of stressed assets. The committee suggested that UCBs should be allowed to participate in the inter-creditor agreement (ICA) framework for the resolution of stressed assets. The committee also recommended that the RBI should introduce a framework for the merger and consolidation of UCBs.
Impact of the Rajamannar Committee Recommendations
The recommendations of the Rajamannar Committee are expected to have a significant impact on the UCB sector. The committee’s recommendations, if implemented, will improve the financial health and operations of UCBs, which will benefit their customers and stakeholders. The key impacts of the recommendations are discussed below
Improved Capital Adequacy
The recommendation to maintain a minimum CAR of 9% by March 2023 is expected to improve the financial health of UCBs. This will enable UCBs to absorb losses and operate in a more sustainable manner. UCBs will need to raise additional capital to meet the CAR requirement, which may involve dilution of ownership or raising funds from external sources.
Better Governance
The recommendation to have independent directors on the board and separate committees for audit and risk management is expected to improve the governance structure of UCBs. This will help to enhance transparency, accountability, and risk management practices in UCBs. The recommendation to have a chairperson who is not a member of the bank is expected to bring in fresh perspectives and reduce conflicts of interest.
Strengthened Licensing and Regulation
The recommendation to introduce a ‘fit and proper’ criteria for directors and CEOs of UCBs is expected to improve the quality of management in UCBs. The recommendation to set up a separate regulatory and supervisory division for UCBs is expected to enhance the regulatory oversight of UCBs. The strengthening of licensing and regulation is expected to improve the confidence of depositors and investors in UCBs.
Resolution of Stressed Assets
The recommendation to have a board-approved policy for the resolution of stressed assets is expected to help UCBs to manage their non-performing assets (NPAs) better. The recommendation to participate in the inter-creditor agreement (ICA) framework for the resolution of stressed assets is expected to enhance the effectiveness of the resolution process. The recommendation to introduce a framework for the merger and consolidation of UCBs is expected to improve the efficiency and viability of UCBs.
Conclusion
The Rajamannar Committee has provided several recommendations aimed at improving the financial health and operations of UCBs. These recommendations, if implemented, will have a significant impact on the UCB sector. The recommendations are expected to improve the capital adequacy, governance, licensing and regulation, and resolution of stressed assets in UCBs. The RBI and UCBs will need to work together to implement the recommendations and ensure the long-term sustainability of UCBs.
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