RBI bars co-operative banks from granting large loans to state-run firms

The Reserve Bank of India (RBI) has advised urban co-operative banks (UCBs) to refrain from grating large loans to public sector or government entities, saying that these transactions could go against the core functions of these lenders. This suggestion came after India’s Apex Bank observed the high value loans that were being granted to public sector undertakings (PSUs) by admitting them as nominal members or otherwise by such banks. Co-operative banks have drawn flak in the past for their alleged nexus with local politicians. In recent years, RBI has taken a harsh stance towards cooperative banks, asking them to trim bad loans, improve governance practices and building up a minimum capital base. RBI, for non-implementation of this, have also cancelled the licences of several co-operative banks. RBI in its latest decision highlighted that the primary function of cooperative banks was to help meet the credit needs of society by providing loans and advances to small borrowers, agriculture and small businesses, however, granting high value loans to PSU only meant diluting this cooperative character.