'The NPA situation of urban cooperative banks is not satisfactory', RBI Governor gave this advice to the lenders.

Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday said the central bank (RBI) is 'not comfortable' with the gross non-performing assets ratio (NPAs) of 8.7 per cent in urban co-operative banks (UCBs).

Addressing UCB directors at a conference organized by the RBI, Das urged that such banks should improve governance standards, avoid related party transactions and focus on credit risks.

Let us tell you that the UCB sector of the country is facing many challenges in recent times, during which the Mumbai headquartered Punjab and Maharashtra Bank has also collapsed. Das reminded UCB directors that banks are run on depositors and said the security of hard-earned money collected from the middle class, poor and retired people is more sacred than visiting a temple or gurudwara. Das said that the overall situation looks good but the situation regarding GNPA and capital adequacy is not satisfactory.

He said that the total GNPA has improved to 8.7 percent, although this is also not a good number. This is not a comfortable number even at an overall level. GNPA of scheduled commercial banks stood at a decade-best level of 3.9 per cent in March 2023 and is broadly expected to improve further. To better manage the NPA crisis, Das suggested that the focus should be on credit risk management with better underwriting. He said that RBI has found instances of conflict of interest or related party transactions, which need to be avoided.

RBI Governor gave this advice to improve NPA
Das said that similarly, examples of many top defaulters have also come to light where they are individuals or businessmen who have the capacity to pay. He said the top 20 defaulters account for more than 60 per cent of the outstanding loans and focusing on this segment could help in improving the overall NPAs. On the capital adequacy front, he said the ratio improved to 16.6 percent at the end of FY 2023, from 15.5 percent a year ago. Making it clear that he wanted to share the RBI's concerns with lenders, Das encouraged UCBs to focus on the quality of governance by paying attention to compliance, risk management and internal audit.

Das said the Reserve Bank has come across cases where there is only paper compliance and no compliance is observed when field inspection takes place. The Governor asked the bank management to present risk analysis reports to the Board on a quarterly basis and not on an annual basis. Das said that SCB directors who are not appointed but elected also need to understand the financial sector, credit risk, banking, information technology and risk management.

He said the Reserve Bank of India has set up the Board of Management to help the elected board members with professional help in running the bank, and this should not be seen as an obstacle. Das said board discussions should be free and fair and it is important not to be dominated by one or two individuals in decision making. He said, 'There should be free, clear and democratic discussion. Board members should be encouraged to ask any questions they may have.

Recruitment should be done on the basis of needs and spending capacity: Shaktikanta Das
Das expressed RBI's discomfort with board committees handling important functions like audit and risk, saying there have been instances where such meetings are not held for months or even years. He also asked urban co-operative banks to monitor the asset-liability gap, follow transparent accounting practices and recruit people based on needs and spending capacity.

On the technology front, he said RBI has observed that the quality of core banking solutions in some banks is not at all satisfactory and treasury operations are not being reflected in the CBS. Das said that in times to come, the UCB segment will face competition from tech-savvy entities like digital lenders, fintechs, non-bank lenders and micro-lenders, and hence there is a need to focus more on technology. The governor said the UCB sector, created to serve as neighborhood banks, is "performing well" from an overall perspective. The RBI Governor also clarified that RBI is comfortable with some big institutions in the sector.