The National Federation of Urban Cooperative Banks and Credit Societies Ltd. (NAFCUB) has been given the regulator’s approval for setting up an umbrella organisation as a non-deposit taking NBFC (NBFC-ND), according to the latest report on trends and progress in banking released by the Reserve Bank of India.
“In view of the pressing need for an umbrella organisation for the sector, which can provide liquidity and capital support to member banks, the Reserve Bank has given approval for its formation ”the Reserve Bank said in its latest report on trends and progress in banking. “This organisation is also expected to provide IT infrastructure and capacity building facilities to UCBs, and would contribute to their strength and vibrancy”
The Umbrella Organisation could be in the form of apex entities, as is the practice in many countries that provide access to resources/capital to financial co-operatives at the base level through their ability of tapping into the capital market, while maintaining the cooperative character, RBI said. The apex central body also provides services to its member banks and regulates their activities.
UCBs cannot raise capital through public issues, limiting their ability to comply with the regulatory requirements, even under Basel I. UCBs caught media attention in September earlier this year when RBI put curbs on Punjab and Maharashtra Co-operative (PMC) Bank Ltd, including on cash withdrawal as it is being probed for under reporting its bad loans and large exposures among others.
Umbrella organisations can also exist as a distinct entity where the credit unions are its members. In some countries. All local co-operative banks are members of this apex entity. Member co-operatives within an apex bank also agree to provide mutual support to each other in times of financial difficulty.
This system also enables self-regulation and good corporate governance in the sector. The RBI report cited the instance of Credit Agricole Group in France has an internal audit mechanism that covers all member co-operative banks and also has power to issue instructions and merge two or more entities affiliated to them. Similarly, the Rabobank Group in the Netherlands is responsible for supervising the financial health and professionalism of local co-operative banks.