In an attempt to increase the oversight on urban cooperative banks (UCBs), the Reserve Bank of India on Tuesday released the final guidelines on constitution of the board of management (BoM) at those lenders. The guidelines provide that board of directors (BoD) of UCBs with deposit size of Rs 100 crore and above shall constitute BoMs. These guidelines provide special powers to BoMs for exercising oversight over the banking-related functions of UCBs. Interestingly, the RBI has encouraged banks to also follow these guidelines on a voluntary basis.
“Banks are exempted from constituting BoM although they are encouraged to do so voluntarily,” RBI said in the release. These guidelines are in line with the suggestions made by YH Malegam Committee in 2011 and R Gandhi Committee on UCBs in 2015.
The main functions of BoMs include recommending action for recovery of NPAs, one-time settlement and assisting the board in monitoring the same. The RBI has said the BoM (excluding CEO) shall have a minimum of five members and maximum number of members shall not exceed 12. The CEO would be a non-voting member. The tenure of BoM shall be co-terminus with the tenure of board of directors.
UCBs will require prior approval of the RBI for appointment of their CEOs. The banking regulator has specified that board of directors will continue to be the apex policy-setting body and responsible for the general direction and control of a UCB. It will continue to look after all the administrative functions as spelt out in the respective Co-operative Societies Acts.
Earlier on Monday, the RBI proposed reduction in loan amount an UCB can lend to a single entity and a group of borrowers to 10% and 25%, respectively, with an aim to prevent PMC Bank like scams caused by large exposure to one group. PMC Bank collapsed due to its huge exposure totalling Rs 6,226.01 crore to Housing Development and Infrastructure (HDIL) group companies. Earlier this month, the RBI Central Board had reviewed functioning of UCBs and the enforcement framework.
The central bank had earlier found major irregularities in PMC Bank, including major financial violations, failure of internal controls and systems and wrongdoing and under-reporting of its lending exposure. In its annual report for the year ended March 31, 2019, HDIL has disclosed that it banked with a dozen different entities. While the list included small banks such as Jammu and Kashmir Bank and troubled institutions such as IL&FS, PMC Bank did not find a mention anywhere.
The central bank also announced on December 24 that it will issue draft guidelines on corporate governance for regulated entities.