Introduction

Primary Cooperative Banks, popularly known as Urban Cooperative Banks (UCBs), are cooperative societies registered under their respective State’s or the Union’s cooperative laws and licensed by the Reserve Bank of India for undertaking banking business under the provisions of the Banking Regulation Act, 1949 (AACS). As of March 31, 2021, there were 1534 Primary (Urban) Cooperative Banks. The position of their deposits, advances and other assets is shown in Table 1.

Table 2 presents a summary of the key financial indicators of UCBs. The year 2020-21 shows some improvements in the return on assets, return on equity, and net interest margin. While there was some deterioration in the position of gross non-performing assets (GNPA), a higher provision coverage helps to keep the net non-performing assets (NNPA) at the same level as compared to the previous year.

Notwithstanding the financials and despite the localised presence in large numbers and an important role in the last mile reach, the UCBs are increasingly becoming a marginal player in the Indian financial system. Their clientele share is increasingly being taken away by other banks by capitalising on technology, branch network, and a superior public perception of safety and professionalism. As a result, the total balance sheet size of UCBs as a proportion to that of Scheduled Commercial Banks (SCBs) has fallen from 5.6 percent in end-March 2005 to 3.4 percent in end-March 2021, as is shown in Figure 1. The recurring phenomenon of UCBs being in the news for the wrong reasons, certain instances of depositors facing trouble due to the inadequacies in governance and mismanagement have added to their woes.

Figure 1 shows that UCBs face certain issues and, if not an existential threat, a considerable challenge indeed, which requires a thorough understanding of the issues and corrective measures for strengthening the sector. The focus of this article is primarily on a multidimensional analysis of the issues internal and closely connected with the working of UCBs, and it makes only a passing reference to the external environment. The central idea is that an internally strong entity can handle the external environment, but tackling the internal issues is far more challenging and should be a priority. The rest of the article deals with the major issues, constraints, bottlenecks, and conundrums relating to the functioning of UCBs and the solutions thereof. The article concludes by summing up observations and suggestions.

Issues, constraints, bottlenecks, and conundrums

The analysis of the issues facing the UCB sector can be broadly grouped into four broad categories, namely,

1. issues concerning the cooperative structure,
2. constraints relating to capital, funding, and market relativity,
3. bottlenecks pertaining to the scale, cost and efficiency, and
4. governance conundrums, which is further described in Figure 2.