1. Introduction

It is believed that despite the tremendous growth of the commercial banking sector in the country, cooperative banking has its own relevance, its own niche market. Cooperative banks are a true embodiment of ‘inclusive banking’. The professionalisation of management and efficiency of governance are the keys to the sustainability of any banking institution and equally so for a cooperative bank. However, in changing environment, the dimension of management efficiency has dramatically changed from a very traditional form of management to a forward-looking risk management system. Banking is the business of risk-taking. Therefore, risk management is a key to the sustainable development of banks. The major risks to banks have been categorised as credit risk, market risk, operational risk and liquidity risk. While credit risk and market risk are largely internal efficiency-based risks and can be minimised by the proper risk management system, operational and liquidity risks, have an added external dimension. A bank may always face operational and liquidity risks despite a very strong risk management system. For example, earthquakes, floods, robbery are events where the internal risk management system has a limited mitigating role. Similarly, a run situation on a bank resulting in a severe liquidity crisis may sometimes be without any management failure of the bank. It could be due to some systemic reasons or owing to some ill-founded rumour against it (exogenous factors). Banking is the business of transformation of maturity. Liabilities (sources of funds) of a bank are generally of short-term nature, while assets (deployment of funds) are mostly of a long term nature. So, liquidity risk is innate to banking. It cannot be eliminated completely; it can only be mitigated.

This article is structured as follows. Section 2 describes the structure of urban cooperative banks (UCBs) in India. Section 3 is a review of the literature. Sections 4 and 5 cover the research gap, objective of the study and methodology. Section 6 gives a bird’s eye view of the extant regulatory prescriptions of the Reserve Bank of India (RBI) on asset-liability management for banks in India. Section 7 briefly covers recent stress testing conducted by the Indian regulator on UCB’s resilience to a liquidity shock. Section 8 and 9 cover the findings of the research in relation to the observed real-life liquidity stress scenario faced by selected UCBs and its handling by the respective UCBs. The article ends with conclusion and policy recommendations in Section 10.

2. Structure of UCBs In India

The structure of banking in India comprises of several categories of banks viz commercial bank, local area bank, regional rural bank, small finance bank, rural cooperative bank, UCB and payment bank. Amongst these, the Primary Cooperative Banks, also known as UCBs in India, are registered as cooperative societies under the provisions of either the respective State Cooperative Societies Act(s) of the state concerned or the Multi-State Cooperative Societies Act, 2002. These are essentially cooperative societies, licenced by the RBI for conducting banking business. In terms of business, as of March 31, 2019, there were 1539 UCBs with an aggregate asset size of INR 6,23,905 crore (INR 6239.05 billion) (Report on Trend and Progress of Banking in India 2019-2020). Total advances and deposits of UCBs stood at INR 3,05,453 crore and 5,01,208 crore, respectively, as of March 31, 2020. Out of the total 1539, there are 54 scheduled UCBs, mostly bigger in size. They account for 46.57 percent of the total assets of UCBs as of March 31, 2020. UCBs constitute about 3.46 percent of the aggregate asset size of the mainstream scheduled commercial banks in India. Therefore, in terms of the size of the business, UCBs in India is comparatively very small, but they are important in the sense that they usually cater to the people of smaller means and to micro, small and medium enterprises (MSMEs).

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