In light of the massive uproar over regulatory lapses at the fraud-hit Punjab and Maharashtra Cooperative (PMC) Bank, the Reserve Bank of India has come up with a stringent supervision framework that will be applicable to the Urban Cooperative Banks.New policy measures were announced on Thursday to strengthen the regulatory framework at the UCBs. The development comes in the backdrop of ambiguity over who really controls Cooperative banks in the country.PMC Bank is not the first case of a cooperative bank coming under the scanner of the authorities. The RBI had cancelled the licence of Ahmedabad-based Madhavpura Mercantile Co-operative Bank in 2012 after the bank indiscriminately lent to stock broking firms violating the lending norms of the RBI.Revised exposure normsPMC Bank had huge exposure to just one business family, the Wadhawans-owned HDIL. The exposure, to the tune of Rs 6500 crore, was 73% of its entire asset base, way above the prudential norms. This jeopardised the interests of the depositors putting them at the mercy of just one big borrower.The RBI has now said that it intends to change the guidelines on exposure norms for single and interconnected borrowers for UCBs. This would mean that the chances of a repeat of PMC Bank-like misadventures will likely come down.RBI has a set of provisions for Scheduled Commercial Banks under which they cannot advance loans to individual groups or sectors beyond a certain limit based on prudential norms.Heightened supervisionThe RBI keeps an eye on large credits through Central Repository of Information on Large Credits (CRILC), a central repository for all scheduled commercial banks and certain non-financial banking firms. On Thursday, the central bank said that it intended to build a similar framework for UCBs with assets of Rs 500 crore or more.The move will facilitate early detection of signs of stress in large accounts and avert large scale defaults. The RBI has also decided to prescribe a comprehensive cyber security framework for UCBs.Dual controlCurrently, Urban Cooperative Banks come under a dual control structure. These banks are registered under (a) the State Cooperative Societies Act for intra-state banks, and (b) Multi-state Cooperative Societies Act, 2002, for banks which have multi-state operations.From March 1, 1966, these banks came under the regulation of banking laws, thereby leading to duality of control.The cooperative banks are supervised both by the Registrar of Cooperative Societies/Central Registrar of Cooperative Societies and the Reserve Bank of India. The cooperative societies are concerned with administrative/management supervision of banks whereas the RBI’s superintendence is statutory in nature.The Madhavpura Mercantile Cooperative Bank episodeThe Ahmedabad-based cooperative bank was granted a licence by the RBI in 1994. During 1999-2000 its role in indiscriminate lending to certain stock brokers came to light. In 2001, rumours of the bank’s huge exposure to Ketan Parekh, the infamous broker who lost substantial wealth in the stock market manipulation scam orchestrated by him and some bankers, began doing the round.Madhavpura Cooperative Bank also held Rs 800 crore worth of deposits from other UCBs in Gujarat because of which its failure would have posed a huge systemic risk. On RBI’s request, the Central Registrar of Co-operative Societies (CRCS) superseded the Board and appointed an Administrator on March 14, 2001 to oversee the affairs of the co-operative bank.After the bank failed to mobilise funds for its revival and its financial position became untenable with Gross NPAs of 99.99% and capital adequacy ratio of (-)1941.1% in 2011, its licence was cancelled in 2012.The TAFCUB mechanismAfter the Madhavpura episode, the RBI entered into MoUs with states with high concentration of UCBs. It issued a vision document envisaging a Task Force on Co-operative Urban Banks (TAFCUB). The TAFCUBs were represented by the Regional Director (RD) of the RBI for the concerned state, Registrar of Cooperative Societies, an official from Central Office of Urban Banks Department (UBD), in-charge of UBD of the concerned Regional Office of RBI and a representative each from TAFCUB and the State Federation of the UCBs. The mandate was to identify financially weak banks and chart out revival plans for them in a time-bound manner.After the PMC debacle, the government has also stepped up its efforts. Finance Minister Nirmala Sitharaman, in October, after meeting the PMC depositors, said that the govt will constitute a committee represented by economic affairs secretary and secretary of financial services. It will have a deputy governor-level member from the RBI. The committee will consult the nodal ministries to lay guidelines for supervision of cooperative banks.Even though cooperative banks have lost much of their sheen, they are still systemically important owing to their deep penetration and wide reach — factors that could help bolster RBI’s financial inclusion agenda. With the new framework, the RBI is trying to plug the gap in UCBs regulation with the objective of preventing a PMC Bank-like fiasco.