The Reserve Bank of India (RBI) plans to raise governance rules to strengthen the more than 1,500 urban co-operative banks after a scam at Punjab and Maharashtra Co-operative Bank (PMC) exposed cracks in the system earlier this year.
The RBI will soon be setting new regulations regarding maximum exposure to a single borrower to reduce risks in the system, it said in a post-policy document on Thursday after it left its key interest rates unchanged.
This comes after it was discovered that PMC used more than 21,000 fictitious accounts to hide loans it made to a single corporate borrower. PMC's loans to Housing Development and Infrastructure Limited (HDIL), a realty company stood at Rs 6,500 crore, which accounts for 73 per cent of its overall Rs 8,880 crore loan book.
The RBI will also bring large urban co-operatives under the Central Repository of Information on Large Credits (CRILC) framework. This will require banks with assets of Rs 500 crore and more to report loan-related information to this database, helping regulators detect signs of debt stress and potential default.
At present, only scheduled commercial banks are required to report information to CRILC which bankers say has played a significant role by serving as an easily warning signal.
The RBI is also looking into strengthening the cyber security framework for these co-operative banks. Details regarding all these regulations are yet to be issued.
The urban co-operative banks typically service small local communities in certain districts or states. Depositors at these lenders are in a relatively higher risk zone, but tens of thousands still bank with these lenders as they typically offer better interest rates on deposits.