The Urban Cooperative Bank (UCB) segment, which was considered as one of the robust and fast expanding segments of the banking system till the late 1990s, has become one of the weakest with regular cases of failures. This paper clearly establishes the relationship between the extension/tightening of prudential standards and performance of UCB. On one hand, the share of deposits and advances of UCB to the total of the banking system has shown a declining trend, while on the other hand, the tightening of prudential standards particularly, after 2000-01 has resulted in a significant structural break in the direction of growth rates of key variables. This trend, if continued for next 4-5 years would not only further reduce the contribution of UCB, but also may result in failures on a much larger scale. It must be recognized that the UCB is driven by the philosophy of cooperation and in an increasingly competitive environment, an urban bank becomes more vulnerable to factors like size, location and compulsions to lend to a sector and thus, is deprived of scale economies. Rather than tackling the ever-increasing number of weak and sick UCBs through restructuring and rehabilitation programs, the Government/RBI must revisit the idea of setting up of a separate regulatory body for UCBs and promote professionalism and governance, so that the impact of size related disadvantages of UCBs can be minimized to some extent. For smaller UCBs, a different set of norms may be carved out from the existing prudential standards and for larger UCBs having multi state presence and offering full range of banking services, perhaps appropriate regulatory and supervisory mechanism is a prerequisite for the extension of prudential standards on par with other players.

Introduction

Credit cooperatives are the oldest and most numerous of all the types of cooperatives in India. Inspired by the success of urban cooperative movement in Germany and Italy, in the early part of the last century, urban cooperative credit societies were organized on community basis and their lending operations were confined to meet the consumption-oriented credit needs of their members. Interestingly, the cooperative credit movement in modern India is a state initiated movement. The process of globalization, the reforms in the Indian economy and the changing role of the Government from that of `provider/patron' to `enabler' have affected the functioning of cooperatives.

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