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Business News/ Industry / Banking/  RBI suggests good-bank, bad-bank structure for cooperative banks
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RBI suggests good-bank, bad-bank structure for cooperative banks

Rajan calls for stronger governance and greater accountability within the cooperative banking sector

A file photo of RBI governor Raghuram Rajan. Photo: ReutersPremium
A file photo of RBI governor Raghuram Rajan. Photo: Reuters

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan has called for stronger governance and greater accountability within the cooperative banking sector, while suggesting a good-bank, bad-bank model to deal with stressed assets of cooperative banks.

Speaking at a meeting of the State Level Coordination Committee, Rajan said that there is a need to improve governance, capital infusion and the resolution mechanism for cooperative banks, which play a crucial role in credit flow to rural areas.

“Without efficient governance, capital infusion would not benefit the sector, as it would function as a ‘leaky-bucket’," Rajan said, according to a press release issued by the central bank on Monday.

Rajan suggested evolving an effective resolution mechanism, such as, the “good bank-bad bank" model in which good parts of the bank could be identified and segregated from the bad and the bad part could be dealt with appropriately.

The RBI in its last annual report had identified cooperative banks as one of its areas of focus. In January, the central bank had set up a committee to re-examine and recommend appropriate set of businesses, size, conversion and licensing terms for the urban cooperative banking sector.

Speaking about the economy, the RBI governor said that India’s macro economic parameters have improved but growth was still slow in picking up.

Rajan added that fiscal consolidation, both quantitative and qualitative, remains important. State governments would have a critical role in improving the consolidated fiscal performance of the government sector as a whole, Rajan said.

Deputy governor H.R. Khan also cautioned states on the challenges they may face in raising funds from the market given the increasing size of central and state government borrowings at a time when the mandated bond holdings for banks are coming down.

The statutory liquidity ratio, or the amount of government bonds that banks must hold, has been reduced over time to 21.5% of net demand and time liabilities.

“Despite these challenges, the weighted average spread of borrowings by the State Governments vis-à-vis the Central Government securities of corresponding maturity had come down to 38 bps last year as against 75 bps in the year before, “ Khan said.

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Published: 26 May 2015, 01:09 AM IST
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