The Role of Urban Cooperative Banks in Financial Inclusion
ention UCBs in corporate circles or even public sector commercial banking and chances are that you will evoke a smirk of dismissal. There are over 1,650 UCBs with close to 7,000 branches in the country. Yet they form a tiny part of the banking system accounting for less than 3% of the total banking assets and deposits and less than 3.5% of total advances. They also follow the 80-20 rule to the T. The top 20% of UCBs account for almost exactly 80% of its deposits.
In spite of being present in 25 states, much (almost 80%) of the action happens in the five states of Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu – with the lion’s share going to Maharashtra. As on March 31, 2010, the state accounted for over a third of all UCBs, almost half of all UCB branches, around 60% of total extension counters of UCBs and more than 85% of all its automated teller machines (ATMs). Accordingly, more than 60%of the total banking business of the UCB sector was concentrated there but their numbers have been dwindling in recent years. During 2000-2010, 132 banks had their licenses cancelled and 62 merged with other banks. In this scenario, it is perhaps understandable why this sector does not exactly steal the limelight in banking policy discussions.
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Yet, as far as financial inclusion is concerned, ignoring the value of these institutions would be a grave mistake. By their very nature and raison d’être, UCBs in India can play a critical role in this area. They have traditionally played an important role in mobilising resources from lower and middle-income groups and in providing direct finance to small entrepreneurs and traders. When appointed, commercial banks struggle to reach to the financially excluded, not just through physical means but also by creating an environment of trust and support that is hard to develop between executives hired through an all-India recruitment process and local communities. UCBs, with their deep-rooted connections with specific communities, can easily inspire the trust of small savers and borrowers. By being local in nature and intricately interwoven with the local community, the UCBs have a clear advantage over commercial banks. It is easier for the UCBs to break the psychological barrier that proves prohibitive in the last mile of financial inclusion – create trust for the bank among its target community and bring customers within its fold. Today, when large commercial banks are working hard to set up branches and employing technology to reach out to hitherto untapped regions of the country, it is time for the UCBs to step into the game that is naturally theirs to win.
Financial Inclusion Advantages of UCBs
While a large section of the financially excluded population inhabits rural areas, financial exclusion is widespread in urban and semi-urban areas as well. Generally farmers, small vendors, agricultural and industrial labourers, people engaged in unorganised sectors, the unemployed, women, older and physically challenged people are the most commonly excluded segments. These segments are best addressed by the UCBs. The key advantage that UCBs enjoy over commercial banks is derived from their cost structure. The labour costs of UCBs are considerably less than that of commercial banks and generally the operating costs are also minimal.
Equally important is the local nature and the consequent informational advantages of the UCBs. Being an integral part of the community, UCBs have an advantage over their commercial rivals in terms of having information both about upcoming business opportunities as well as borrower quality, which national-level banks have a hard time gathering.
Finally, the advantages of the local nature of the UCBs also manifest themselves in the flexibility that these banks can provide to their local clientele. Unlike their commercial counterparts, who need to adhere to national and global policies to change in order to alter their practices, UCBs can be far more responsive to the needs of the local community and the changes there. Once again, that provides a massive competitive advantage.
Recently, the UCBs have increasingly started adopting the three-pronged financial inclusion strategies used by commercial banks – Banking Correspondents (BC), “no-frill” accounts and promoting microfinance activities. Once again, their local nature gives them an advantage over their national rivals in executing these moves better. UCBs enjoy an undeniable edge in the area of relationship banking.
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