- Over the years, cooperative banks have provided essential banking services to millions of people across the country.
- Yet, Urban Cooperative Banks (UCBs), which comprise a significant portion of the cooperative banks in the country, did not have the same privileges as commercial banks.
- Recently, the Ministry of Cooperation announced that eligible UCBs may soon have a clear and straightforward path towards becoming a “Scheduled” bank under Schedule II of the Reserve Bank of India (RBI) Act, 1934.
- This new development is potentially great news for the UCB sector as it will give such banks a clear idea of what they can do in order to become a Scheduled entity in future.
- Scheduled Status: Its Meaning & Significance When a bank becomes “Scheduled,” it means that it is entered in the Second Schedule of the RBI Act, 1934.
Over the years, cooperative banks have provided essential banking services to millions of people across the country. Yet, Urban Cooperative Banks (UCBs), which comprise a significant portion of the cooperative banks in the country, did not have the same privileges as commercial banks.
Recently, the Ministry of Cooperation announced that eligible UCBs may soon have a clear and straightforward path towards becoming a “Scheduled” bank under Schedule II of the Reserve Bank of India (RBI) Act, 1934. This new development is potentially great news for the UCB sector as it will give such banks a clear idea of what they can do in order to become a Scheduled entity in future.
Scheduled Status: Its Meaning & Significance
When a bank becomes “Scheduled,” it means that it is entered in the Second Schedule of the RBI Act, 1934. For a normal customer, this implies that the Scheduled banks – which also include other commercial banks – are extremely credible and trustworthy institutions, as they have been assessed by the monetary authority as healthy financial entities. The latter would also help the common depositor, since it is only the Scheduled banks that can offer them adequate level of security for their money deposits.
Previously, many such UCBs were “non-scheduled” entities. Therefore, as compared to other banks that are recognized under the Reserve Bank of India (RBI), they did not receive many of the benefits reserved for the former.
Criteria to Meet in Order to Schedule a UCB
These banks must fulfill the following business authorization criteria notified by the Ministry of Cooperation in order to obtain a “scheduled status.” First, they should satisfy the stipulated requirements for the relevant authority. Second, a UCB that wishes to reach this coveted status must maintain a “Tier 3” deposit for a period of two consecutive years. A “Tier 3” category refers to a situation where a UCB has between 1000 crore and 10,000 crores. Clearly, if a bank falls into the Tier 3 category and manages to stay there for two years, it is quite the strong financial organization.
Incentive to Reach Tier 3 and Scheduled Status: Why it Matters to UCBs
What would motivate a UCB to accomplish these goals? Why, a wide range of significant benefits both for the banks and their customers.
First, a scheduled bank would have better access to the emergency support program – in other words, a facility provided by the central bank of the country. As a result, when disaster strikes, the former institution will be able to take a loan from the latter at a standard rate of interest.
Apart from that, a scheduled bank obtains the benefit of operating as a member of the clearinghouse – which makes it much easier for such a financial institution to perform its daily operations by facilitating the transfer of money between the bank and its customers as well as other banks. A scheduled bank acquires “lender of last resort” status – that is, the capability of receiving funds from the central bank of the country. Finally, scheduled status provides such banks with a huge customer base and increases overall public confidence in the image of the bank. As a consequence, commercial banks will also be more willing to provide large deposits and loans, thereby enhancing the profitability of these institutions.
The Meaning for Cooperative Sector
For years, the process of becoming a scheduled bank seemed ambiguous for many banks. However, by publicly announcing these specific target figures, the Ministry of Cooperation and the RBI have virtually challenged such UCBs to raise their game. For these financial institutions, the benefits of adopting a set of specific actions to increase their capitalization and strengthen their overall performance outweigh the costs by a significant amount. These targeted measures will motivate them to enhance profitability and attract larger deposits from the public, thus becoming stronger entities in a matter of years.
After that, an enhanced level of banking credibility can be achieved. All of this would help the cooperative sector as a whole.