Urban co-operative banks' MSME lending grows at 24% CAGR, capital adequacy ratio at 18%

The country's economy is no longer confined to the big cities. New opportunities for industry, business and employment are emerging in Tier-2 and Tier-3 cities, and the need for easy credit in these areas is growing with them. Against this backdrop, the role of Urban Co-operative Banks (UCBs) is again gaining importance. These banks can be an important link in extending loans to local traders, small entrepreneurs and small businesses according to their needs.

Prabhat Chaturvedi, chief executive officer of the National Urban Co-operative Finance and Development Corporation (NUCFDC), has spoken on the subject. He says the sector is moving towards becoming stronger through financial discipline and regulatory reforms.

Urban co-operative banks are known for their close ties with local customers and for lending according to need. Small businesses and entrepreneurs in the informal sector often face difficulties under the standard credit appraisal methods of large commercial banks. Co-operative banks that know the local market help them in such situations. But relationships alone are not enough. Transparent functioning, effective risk management and compliance with rules are equally necessary. Greater importance is therefore being given to professional management and institutional governance.

The Reserve Bank of India (RBI) is stressing training and compliance processes to build the institutional capacity of these banks. Attention is also being paid to training board members and senior officials in regional languages. As digital transactions grow, cyber security, customer protection and internal controls are also becoming important.

According to figures cited by Chaturvedi, the sector's average capital adequacy ratio (CRAR) is 18 per cent. The ratio shows how much capital the banks hold to deal with potential financial risks. Gross non-performing assets (Gross NPA) are about 6 per cent, while net non-performing assets (Net NPA) are below 1 per cent. Deposits exceed Rs 3 lakh crore, and loans and advances stand at nearly Rs 2.9 lakh crore.

The micro, small and medium enterprises (MSME) sector is an important centre of employment generation and local economic development in the country. Many small entrepreneurs do not have all the formal documents required for loans from big banks, so they can face difficulties in getting credit. Urban co-operative banks can decide on a loan by looking at the condition of local businesses, their transaction history and their relationship with the customer. In states such as Maharashtra, Gujarat and Karnataka, such banks have strong ties with local businesses.

According to information given by Chaturvedi, MSME lending in the sector has recorded a compound annual growth rate (CAGR) of 24 per cent. Home loans have grown by nearly 19 per cent.

Some regulatory rules have been changed to increase lending capacity. These include raising the limit on individual home loans to Rs 3 crore, removing the cap on gold loans and permitting planned branch expansion. This can give eligible customers more borrowing options. Actual loan approval, however, depends on the rules of the bank concerned, the customer's repayment capacity and the applicable conditions.

The rising cost of modern technology is another major challenge for these banks. Building separate digital systems, providing secure payment facilities and carrying out technical maintenance can be expensive for small banks. As a remedy, emphasis is being placed on building shared digital infrastructure through institutions such as NUCFDC. This could let small banks offer modern digital services at lower cost and give customers a more convenient banking experience.

To sustain this progress over the long term, it will be necessary to maintain discipline in loan recovery, strengthen digital security and give priority to professional management. If these banks succeed in combining local credibility with modern banking technology, small entrepreneurs can be connected to the formal credit system. The banks can play an important role in business growth, employment and regional development in Tier-2 and Tier-3 cities.