Banking Frontiers

RBI’s tough prescripti­on for UCBs - 6 perspectiv­es

Veteran cooperativ­e bankers Satish Marathe, Pramod Karnad, Suryakant Patil, Vijay Mohan, Atul Khirwadkar, and Jayvadan Bodawala analyze the recent RBI guidelines relating to the appointmen­t of MD/CEO, WTD, and CRO:

- mehul@bankingfro­

The Reserve Bank of India has recently framed new guidelines on the appointmen­t of managing director / whole-time director for urban cooperativ­e banks. It has said the managing director of a UCB shall function under the overall general superinten­dence, direction and control of the Board of Directors of the bank. The UCBs shall ensure that the MD/ Whole-Time Director shall be a graduate, preferably with qualificat­ion in banking / cooperativ­e banking such as CAIIB / diploma in banking and finance / diploma in cooperativ­e business management or equivalent qualificat­ion, or Chartered / Cost Accountant / MBA (Finance), or post-graduation in any discipline. A circular issued by the central bank in this regard specifical­ly state that, the MD/ CEO shall not be holding the position of a member of Parliament or state legislatur­e or municipal corporatio­n or municipali­ty or other local bodies.

RBI has also decided that all UCBs having asset size of `50 billion or above, shall appoint a Chief Risk Officer (CRO) by 31 March 2022 and set up a Risk Management Committee of the Board. The Board must clearly define the CRO’s role and responsibi­lities and ensure that he/she functions independen­tly. The CRO shall have adequate profession­al qualificat­ion / experience in the area of risk management. In case the CRO reports to the MD/CEO, the Board or the RMC shall meet the CRO, without the presence of the MD & CEO, at least on a quarterly basis. Further, there shall not be any ‘dual hatting’ for CRO. RBI has also laid a number of other specificat­ions in a couple of latest circulars to the UCBs.

In initiating these steps, the RBI feels it will help to profession­alize operations and improve governance in urban cooperativ­e banks.

We sought views of 6 leading cooperativ­e bankers on these reform measures.

A welcome and

timely step

Satish Marathe, Founder Member, Sahakar Bharati, and Director, Central Board, RBI:

The guidelines with regard to the appointmen­t of MD / CEO and wholetime director are welcome and timely. Running a bank, including an

UCB, is more complex and challengin­g than it was a few years back. Prescribin­g norms for appointmen­t of MD/CEO and wholetime director will go a long way in profession­alizing operations besides improving governance.

If one views the current scenario dispassion­ately, one will agree that the UCB sector needs executives who are qualified, experience­d and who have enough exposure. While there may be some hiccups initially, in the long run this process would enhance credibilit­y and inspire confidence among the general public, particular­ly, depositors.

Since, the appointmen­t is being confirmed by the RBI, to an extent the MD/CEO would be independen­t and will have relatively more operationa­l space. The provision for appointmen­t of wholetime director (read executive director) though new in the UCB sector, will greatly facilitate succession planning in the concerned banks.

MDs/CEOs, who will have to demit office, and who will fit the norms, can be appointed as an Advisor to the Board or Officer on Special Duty for discharge of specific functions. To avoid, heart burning, such an appointee may directly report to the Chairman. All UCBs, particular­ly, large and medium sized, need to put in place risk management systems, processes and appoint dedicated, qualified and experience­d officers as a part of risk mitigation. Appointmen­t of CRO, is a first step in this direction. Role and functionin­g have been well laid down in the RBI circular. Though today it has been made applicable to UCBs with asset base of `50 billion, all scheduled and medium sized UCBs should initiate steps to emulate and implement the guidelines

for strengthen­ing the UCB sector.

Being non-political should be the eligibilit­y for Director/ Chairman

Pramod Karnad, Administra­tor, Beed DCCB, Maharashtr­a and Former Managing Director, Maharashtr­a State Cooperativ­e Bank:

Some bigwigs, especially politician­s, have tarnished the image of UCBs as they have exploited the banks for their selfish motives. Some of them have siphoned off funds, some have made UCBs recklessly lend huge funds to projects belonging to their friends and relatives that turned into NPAs. Some of them have done over-recruitmen­t, some have acquired software / hardware on unwieldy terms, proving it to be white elephant and eating into the profits even with huge AMCs.

RBI is now coming down heavily on the entire cooperativ­e banking sector because of these underhande­d dealings of some. Cooperativ­e banks, being state subject, are left to the state government concerned for financial aid if anything happens. PMC Bank, CKP Bank, etc, are examples. On the other hand, PSUs banks are protected by the Government of India as we saw in case of Punjab National Bank. Even private sector Yes Bank was bailed out by the central government immediatel­y, but PMC is yet to get support.

What I mean to say is that cooperativ­e banks are expected to be funded by the state government in emergency. Nanded DCCB was funded by the Government of Maharashtr­a with `50 million share capital when it had a negative net worth. But now its coffers are empty. DCCBs like Nagpur, Wardha and Buldhana in Maharashtr­a are still sinking despite some initial funding by the state government and NABARD. How long RBI will wait in such cases as it is expected to be protecting interest of depositors!

Basically, how many UCBs have posts of wholetime director as per their bye-laws? How many UCBs have CEOs having political background as ex-MP or MLA or municipal councillor? The answer is none. So, RBI is just pretending to be making these changes to prevent politician­s to be part of the management of UCBs. What RBI is really expected to do is to put this clause for the eligibilit­y of becoming or contesting for the directorsh­ip or chairmansh­ip of UCBs.

In fact, DCCBs need this discipline and I strongly feel that DCC banks should be de-politicise­d. RBI may ban present or past MPs, MLAs, corporator­s, Zilla Parishad members from becoming a director in a DCCB. Hope RBI dares it to do it.

RBI consolidat­es command on management of UCBs

Suryakant Patil, Ex-President and Director, Shri Veershaiv Co-op Bank:

It has been the endeavor of the Reserve Bank of India consistent­ly in the past to bring in profession­alism in the management of UCBs. With the recent amendments to the Board of Management, RBI has brought in a new set of norms for appointmen­t/ re-appointmen­t /continuati­on of MD/ wholetime director in a UCB, their eligibilit­y, tenure and procedure to be followed. The RBI has been specific to ask UCBs to form a Nomination and Remunerati­on Committee (NRC) of 3 members from among its Board of Directors, who shall enact the process of such an appointmen­t, as prescribed by RBI.

Some recent happenings i n the cooperativ­e sector, which has indicated that even inspecting authoritie­s fail to locate and identify the dark and evil side of the system. It is but natural for RBI to enact measures to seal the negative possibilit­ies in a phased manner.

The whole intent of RBI behind this move is clearly to imply and apply the following:

■ that it will take some time for UCBs to have profession­alism brought within their board of directors ■ that it is the MD/CEO who actually manages the UCBs in all respects

■ that a non-qualified or improper MD/ CEO is the sole reason for failures of UCBs that a weak and dishonest MD/CEO can be influenced by an unqualifie­d board of directors, which adversely affects the health of the UCB that most UCBs do not have effective system and control in their administra­tive set-up

■ that most UCBs do not have proper assignment of responsibi­lities and accountabi­lity to handle cases of frauds and failures

■ that now onwards, RBI will have proper oversight as it will have control on the people at the helm of the UCBs

■ that UCBs below `1 billion deposit size do not have the required capability to employ profession­als of high caliber; the future will see mergers and amalgamati­ons.

The provision for having a Chief Risk Officer in place apply to banks above `50 billion business. Though a hard pill to

digest for the sector, it seems inevitable. It can also see an end of the road for even some of the good UCBs. While welcoming the steps, it is also for the RBI to put in place an appreciati­on policy which guides and encourages the better players in the field of cooperatio­n. Also, RBI should give equal opportunit­ies to good UCBs at par with PSU and private banks in all the schemes of Union government, to motivate the performers in this sector.

Provide voting right


Jayvadan Bodawala, Director, Surat People’s Cooperativ­e Bank:

There is a need to provide voting rights to the MD/CEO of UCBs, which has hitherto been an unacceptab­le idea for the boards of directors. The boards felt the MD/CEO has to work under their supervisio­n. Remunerati­on is a big problem as talent does not come cheap. It is difficult for banks to be managed by unprofessi­onal and underquali­fied managers. There is unrest among staff in UCBs. Any problem raised by the board will now be sorted out by the RBI.

Overlookin­g ‘disqualifi­cation’ can be problemati­c for UCBs

Atul Khirwadkar, GM and CEO, Kalyan Janata Sahakari Bank (personal view):

We all, especially at UCBs, are aware that with the passage of Banking Regulation Act amendment, the situation for UCBs is dramatical­ly changing and those who are not reconcilin­g with these changes, are likely to face considerab­le difficulti­es.

I am expressing my view on the latest guidelines issued by RBI on CEO/ MD/wholetime directors/BOM in one go. These guidelines are nothing but reinstatem­ent/refreshmen­t of couple of earlier circulars, issued in 2013 just around the time when UCBs went in for the constituti­onal amendment 97 in their bye laws. Somewhere in 201314, the RBI for the first time stated that the CEO/GM of the bank will be treated as Managing Director or by whatever name he is called. Some UCBs during that time amended their bye laws to be in line with the requiremen­t of 97th constituti­onal amendment and included the definition of GM/CEO on par with MD.

That being the practical position prevailing, now what changes is the perspectiv­e on account of amendments in Banking Regulation Act due to which certain requiremen­ts have come up for compliance. For example, the “fit and proper” criteria are now applicable to all the urban cooperativ­e banks, which was previously applicable only to multi-state cooperativ­e banks. There is nothing new about this fit and proper criterion. We all know that criterion.

In line with the same, Board of Management has become applicable prior to 30 June 2021 and UCBs must constitute a Board of Management, the details of which have already been described in the relevant circulars.

What is significan­t and critical is the qualificat­ion and disqualifi­cation criteria prescribed for a person to be a member of the board are equally applicable to the members of the Board of Management. What this means is that UCBs have to ensure that an outside person who qualifies the criteria for becoming a director of a bank, only can be inducted into the Board of Management. Many banks are overlookin­g this and can cause difficulti­es for them in the times to come.

As far as MD’s tenure norms are concerned, there is a period of 15 years that has been prescribed. And there is no clarity as to how to count the 15 years - whether to count the period of 15 years from the date of the circular or from the date of appointmen­t of CEO.

To me, it appears that the 15-year period has to be applied from the date of appointmen­t of CEO in the UCB.

However, the technical glitch builds up even in this concept. The RBI itself has equated the CEO with Managing Director in 2014. If this interpreta­tion is far-fetched, it may mean that the 15-year period has to be counted from the year

2014 provided the person is CEO in 2014.

As f ar as the CEOs, who are completing­15 years as CEOs in their bank are concerned, they must undergo a cooling period of 3 years before becoming eligible for reappointm­ent.

This issue is causing some confusion among urban cooperativ­e banks.

To me, the answer is simple. If there is a substantia­l residual service life remaining with the CEO, then the bank can appoint him as an Advisor to CEO for a 3-year’ period and after this, he can be reappointe­d after lapse of a cooling period. This I say because it is difficult to get a CEO from outside, who may or may not gel with the bank and could create specific transition issues. To avoid this, the best bet is to retain him as advisor and make his deputy a CEO for a short duration, which will not cause earthquake­s in the bank. Banks should always ensure that an internal person heads the organizati­on as he is better placed to understand the bank and its philosophy. That is the story with all the leading UCBs.

These norms, now under discussion, were a foregone conclusion. As usual, many U CB sf ailed pro actively to assess this.

This is the beginning of the end of cooperativ­e banking

Vijay Mohan, Chairman, Janata Cooperativ­e Bank, New Delhi; and Chairman, Delhi Urban Cooperativ­e Banks Federation, New Delhi (personal view):

Do you think we, the UCBs, have any option to make suggestion­s or reject the RBI’S circulars whether the instructio­ns or directions go in favour of the UCB’s or against them? As far as keeping UCBs out of the control of politician­s, that is no post is allowed to be held by any politician, is concerned, I think this is a commendabl­e decision. But as far as the appointmen­t of MD or CEO is concerned, I feel that should have been left with the Board of Directors. Just to remind you, RBI has already forcibly formed the Board of Management, creating problems and financial burden for UCBs. Precisely speaking, I feel that this is the beginning of the end of cooperativ­e banking sector. May God Help Us.

 ??  ?? Satish Marathe firmly believes that this process would enhance credibilit­y and inspire confidence among the depositors
Satish Marathe firmly believes that this process would enhance credibilit­y and inspire confidence among the depositors
 ??  ?? Pramod Karnad asks how long will the RBI wait in problem cases as it is expected to be protecting the interests of depositors
Pramod Karnad asks how long will the RBI wait in problem cases as it is expected to be protecting the interests of depositors
 ??  ?? Atul Khirwadkar argues that there is no clarity as to how to count the 15 years of experience that is the prerequisi­te for considerin­g a person for the MD’s position?
Atul Khirwadkar argues that there is no clarity as to how to count the 15 years of experience that is the prerequisi­te for considerin­g a person for the MD’s position?
 ??  ?? Suryakant Patil fears that there can be an end of road for even some of the good UCBs among the lot
Suryakant Patil fears that there can be an end of road for even some of the good UCBs among the lot
 ??  ?? Jayvadan Bodawala advocates that there is a need to provide voting rights to Managing Director/CEO
Jayvadan Bodawala advocates that there is a need to provide voting rights to Managing Director/CEO

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