In the news

• The Union Home Minister and Minister of Cooperation officially inaugurated the National Urban Cooperative Finance and Development Corporation Limited (NUCFDC), marking a significant milestone in the development of urban cooperative banking.

About NUCFDC

• Regulatory Approval: NUCFDC has obtained approval from the RBI, authorizing it to function as a Non-Banking Finance Company (NBFC) and serve as the apex body for the urban cooperative banking sector.
• Self-Regulatory Status: Additionally, NUCFDC has been granted the status of a Self-Regulatory Organisation (SRO) for the sector, empowering it to oversee and regulate various aspects of urban cooperative banking operations.
• Capital Enhancement: NUCFDC aims to augment its capital base, with ambitions to achieve a capitalization level of Rs. 300 crores, facilitating its mission to support and strengthen Urban Cooperative Banks (UCBs).

Functions of NUCFDC

• Utilization of Funds: The organization intends to deploy its capital resources towards bolstering the financial capabilities of UCBs, including the development of a shared technology infrastructure to enhance service delivery and reduce operational costs.
• Comprehensive Support: Apart from providing financial liquidity and capital assistance, NUCFDC will establish a collaborative technology platform accessible to all UCBs, enabling them to expand their service offerings efficiently and affordably.
• Advisory Services: NUCFDC will also extend advisory and consultancy services to UCBs, assisting them in areas such as fund management, regulatory compliance, and strategic planning.

About Urban Cooperative Banks (UCBs)

• Origins: UCBs trace their roots to cooperative credit societies, offering financial services to members within specific community groups.
• Regulations: Regulated by the RBI under the Banking Regulation Act of 1949, UCBs adhere to stringent prudential norms and guidelines to ensure financial stability.
• Operational Classification: UCBs are categorized into urban and rural cooperative banks based on their geographic scope. They operate under the governance of State Registrars of Cooperative Societies (RCS) or the Central Registrar of Cooperative Societies (CRCS) and the RBI.
• Historical Evolution: The journey of UCBs dates back to the establishment of the first Cooperative Credit Society of Haryana in 1904, evolving over time with regulatory amendments and institutional reforms.

Reforming the UCBs

• Narasimham Committee Report (1998): It suggest subsequent regulatory interventions aimed at enhancing the governance, capitalization, and operational efficiency of UCBs.
• Structural Recommendations Committee (2021): The formation of a 4-tier structure for UCBs, proposed by a committee appointed by the RBI in 2021, seeks to streamline their operations and ensure effective regulatory oversight based on deposit size tiers:

1. Tier 1 with all unit UCBs and salary earner’s UCBs (irrespective of deposit size) and all other UCBs having deposits up to Rs 100 crore.
2. Tier 2 with UCBs of deposits between Rs 100 crore and Rs 1,000 crore,
3. Tier 3 with UCBs of deposits between Rs 1,000 crore and Rs 10,000 crore, and
4. Tier 4 with UCBs of deposits more than Rs 10,000 crore.

Challenges Faced by UCBs

• Capital Constraints: UCBs encounter limitations in capital mobilization due to regulatory restrictions on dividend payouts and limited avenues for raising external funds.
• Diversification Hurdles: The lack of operational diversification and dependence on member contributions for capital infusion pose challenges to UCBs’ financial resilience and expansion prospects.
• Funding Alternatives: Access to alternative funding sources remains constrained for UCBs, necessitating innovative approaches to address liquidity requirements.
• Profit Distribution Dynamics: Incentives for profit distribution are subdued in UCBs, impacting their attractiveness to investors and hindering their growth trajectory.
• Solvency Pressures: Expansion initiatives and acquisitions can strain UCBs’ solvency and liquidity positions, necessitating prudent risk management practices and strategic planning.

Try this PYQ from CSP 2021:

With reference to ‘Urban Cooperative Banks’ in India, consider the following statements:

1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

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