RBI signals reforms in Urban co-op banks

Context 

Recently, the Reserve Bank of India (RBI) Governor has indicated that the RBI will bring regulatory changes to reform urban cooperative banks (UCBs).

• UCBs have been plagued by a series of failures.
• RBI has also warned people against depositing their savings in banks offering high returns.

What are UCBs?

• The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. 
• These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. 
• These banks were traditionally centred around communities, localities and workplace groups. 
• They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

Difference between UCBs and Commercial Banks

• Regulation: Unlike commercial banks, UCBs are only partly regulated by the RBI. 
• Banking operations of the UCBs are regulated by the RBI, but their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government.
• Borrower can be a Shareholder: In a commercial bank, there is a clear distinction between its shareholders and its borrowers whereas in a UCB, borrowers can even double up as shareholders.