Panel suggests support system for urban co-operative banks

A Reserve Bank of India expert committee has recommended the establishment of a separate national umbrella organisation to provide payments and settlement services and other liquidity support, which are normally provided by a central bank, to member urban co-operative banks.

Market experts say this move could be aimed at insulating the mainstream payments and settlement system from any fallout due to failure of urban co-operative banks (UCBs).

The RBI's committee on licensing of new UCBs has suggested that the umbrella organisation be preferably in the form of a multi-state UCB with membership restricted to and mandatory for urban co-operative banks other than scheduled ones.

“There is no need for an umbrella organisation for payments and settlement now as UCBs are becoming robust when it comes to financial strength,” said Mr Satish Marathe, General Secretary, Sahakar Bharati, an umbrella body for promoting co-operatives in various fields.

Member urban co-operative banks should be required to maintain their cash reserve ratio (a portion of deposits) in the form deposits with the umbrella organisation. The organisation should invest its funds only in the form of balances with the RBI, deposits with commercial banks or in statutory liquidity ratio (SLR) securities such as government securities.

The committee, headed by Mr Y.H. Malegam, Director, Central Board, RBI, said, the umbrella organisation should offer repo (liquidity injection) and reverse repo (deployment of surplus liquidity) facilities to UCBs in the same manner as RBI offers to commercial banks and at the same rates of interest. In turn, the umbrella organisation should enjoy repos and reverse repo facilities with the apex bank.

Gateway

Urban co-operative banks can avail of repos facilities only to the extent of their excess SLR holdings. Until the payments and settlements facilities are provided directly to UCBs, the proposed organisation will act as a gateway to provide these services for a fee to the banks. In turn, the organisation will be a member of the payments and settlement system.

Being an urban co-operative bank, the umbrella organisation would have a board of management and will be subject to the regulation, supervision and inspection of the RBI.