The Reserve Bank of India (RBI) is “not comfortable” with the gross non-performing assets (NPAs) ratio of 8.7% in urban cooperative banks (UCBs) and has asked them to improve on it, its Governor Shaktikanta Das said.

Such lenders should improve the governance standards, avoid related-party transactions and focus on credit risks, Das said while addressing directors of UCBs in Mumbai at an RBI-organised conference.

The UCB sector has been fraught with multiple challenges and also witnessed difficult times in the recent past like the implosion of the city-headquartered Punjab and Maharashtra Bank, news agency PTI reported.

Banks, Das said, run on depositors and protection of their hard-earned money is far more sacred than going to a temple or a gurdwara.

While the overall picture at an aggregate level looks nice, the situation on gross NPAs and capital adequacy is "not at all satisfactory", Das added.

The gross NPAs have improved to 8.7% but it is not a comfortable number even at an aggregate level, Das said.

Scheduled commercial banks' gross NPAs stood at a decadal best level of 3.9% in March 2023 and are widely estimated to improve further, PTI reported.

To manage the scourge of NPAs better, Das suggested that there should be a focus on credit risk management with better underwriting. 

He said the RBI has come across instances of conflicts of interest or related party transactions, which need to be avoided. 

Similarly, there have been instances of many of the top defaulters being individuals or businesses having the ability to pay, Das said. 

The top 20 defaulters account for over 60% of the loan overdue, and focusing on this segment can help improve the overall NPAs, he added. 

On the capital adequacy front, he noted that there has been an improvement in the ratios to 16.6% at the end of FY23 from 15.5% a year ago. 

Das, according to the PTI report, exhorted the UCBs to focus on the quality of governance by paying attention to compliance, risk management and internal audit. 

He said the RBI has come across instances where there is only 'paper compliance' and no compliance is observed when an on-field inspection takes place, Das said, adding that the internal audit function also requires focus. 

The governor asked bank management to present a risk analysis report to the board on a quarterly basis, rather than making it into an annual effort. 

It is also necessary for the directors – who are elected and not appointed based on their skill sets, unlike the SCBs - to understand the financial sector, credit risk, banking, information technology and risk management, Das said.

The RBI has prescribed a board of management to help the elected board members with professional help in running a bank, and the same should not be seen as an impediment, he added. 

Stressing that the board discussions should be free and fair, Das said it is important to have any dominance of one or two persons in the decision-making.

'There should be free, frank and democratic discussions. Board members should be encouraged to ask whatever questions they have on their mind,' he said. 

Das also expressed the RBI's discomfort with board committees like those handling important functions, such as audit and risk not meeting regularly, stating that it has come across instances where such meetings are not held for months or even multiple years.

He also asked UCBs to monitor asset-liability mismatches, follow transparent accounting practices and recruit people based on requirements and ability to spend, PTI reported. 

On the technology front, he said the RBI has found that the quality of the core banking solution is not at all satisfactory in some banks, and the treasury operations are not getting reflected in the CBS.

Going ahead, the UCB segment will be facing competition from tech-savvy entities like digital lenders, fintechs, non-bank lenders and micro-lenders, and hence, need to focus more on technology, Das said. 

The governor said the UCB sector – built to serve as the neighbourhood bank - is 'doing well' from an overall perspective, and also made it clear that the RBI is fine with some of the entities in the sector growing big.