A meeting between the Reserve Bank of India’s (RBI) governor and directors of Mumbai-based urban cooperative banks (UCBs) brought the elevated bad loan ratio in these institutions into sharp focus. Despite a decrease in the cumulative non-performing assets (NPA) ratio to 8.7%, the governor expressed concern over its persistence, particularly in comparison to the banking sector’s gross NPA which reached a ten-year low of 3.9% at the end of March.
In a bid to address these concerns, the RBI has outlined an eight-point charter aimed at improving UCBs’ governance standards and focusing on bad loan recovery. A significant part of this recovery strategy involves the top 20 defaulters who account for 60% of total overdue payments. The governor emphasized that loan recovery from these defaulters, many of whom run successful businesses, would considerably improve the sector’s asset quality profile.
The protection of depositors’ money was another key point stressed by the RBI governor during Tuesday’s interaction. He referred to it as a “sacred duty” of every bank and highlighted the importance of democratic board discussions, warning against domination by one or two members.
The RBI’s charter also calls for improvements in governance standards within UCBs. This includes enhancing board functionality, credit risk management, accounting transparency, liquidity management, and manpower optimization. Additionally, it requires improvements in IT systems and successful change management.
While acknowledging that some banks have performed well in these areas, the central bank insists on sector-wide improvements. The governor reminded UCBs that financial sector stability is intrinsically linked to the performance of all banking institutions.
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