Reforming governance and regulation of urban cooperative banks in India

Purpose - To argue a case for a paradigm shift in the way urban cooperative banks (UCBs) are managed, governed, and regulated in India to enable them to enhance their contributions to achieving greater degree of financial inclusion, and more broad‐based growth. Design/methodology/approach - The paper first surveys the quantitative importance of the UCBs in India, and their key performance indicators. Various official reports by the country's Central Bank, the Reserve Bank of India (RBI), and other relevant organizations are used extensively. The paper then identifies key areas of reforms, centering primarily on the current business model, governance and regulation practices, and capital adequacy. It then argues for a change in a paradigm shift by the UCBs, and how better governance and regulatory structure can assist this shift. Findings - The paper finds that if the UCBs are to remain relevant and play a significant developmental role in India, they will require same quality of governance and regulation as well as professionalism and modernization as the mainstream commercial banks. The governance and regulatory structures need to be brought in conformity with India's current and prospective economic structure; and relevant laws modernized. This requires a paradigm shift in the role of UCBs. Research limitations/implications - The research has been based primarily on secondary sources, particularly various reports by the RBI, the country's Central Bank. Better understanding of the reasons for differences between well‐governed and financially sound UCBs on one hand, and those that are not, requires focused interviews and more searching examination of the operating environment and financial statements of a sample of the UCBs. This could be the next stage of research. Originality/value - This paper represents a part of public debate on ways of integrating the UCBs into the mainstream banking sector. This is an important public policy issue as even though the UCBs represent relatively small proportion of the total banking assets, they still represent a systemic risk to India's financial system, and without reforming them, broad‐based economic growth would be difficult to achieve.