risk management structures in nbfcs. urban co - operative banks 16. let me now turn to co - operative banks. they contribute significantly in credit delivery and in bringing other financial services to the people. the performance of some of these institutions, however, has been hampered due to operational and governance issues. the recent unearthing of fraud in one of the urban co - operative banks ( ucbs ) has brought up issues relating to their governance, prudent internal control mechanisms, and adequacy of checks and balances to the forefront. 17. turning back to history, the urban co - operative banks were brought under the ambit of the banking regulation ( br ) act, 1949 with effect from march 1, 1966. certain provisions of the br act, however, were not made applicable to them, limiting the scope of regulation and supervision over them1. broadly speaking, banking - related functions of cooperative banks are regulated by the reserve bank and management - related functions are controlled by the concerned state / central government. the reserve bank ’ s regulatory control over ucbs is affected due to this duality of control. rbi has made concerted efforts in the past to mitigate the adverse impact of dual regulation in the form of mous with state / central governments and setting up of a statelevel task force for co - operative urban banks ( tafcub ). however, challenges still persist. at present, the reserve bank is working with the government to amend the act governing cooperative banks. we have suggested several legislative changes to the central government for better regulation and supervision of ucbs. on our part, we are reviewing the existing architecture of regulation and supervision of ucbs and shall carry out necessary changes in sync with the evolving requirements. 18. going forward, ucbs are likely to increasingly face competition from players such as small finance banks ( sfbs ), payments banks, nbfcs and micro - finance institutions ( mfis ). it is, therefore, necessary for them to adopt robust technology to enable them to provide banking services at lower costs and with adequate safeguards. the reserve bank has been taking proactive steps to assist these institutions to adopt a robust it infrastructure. the proposed national level umbrella organisation ( uo ) is expected to provide liquidity and capital support to member co - operative banks, and will therefore contribute to the strength and vibrancy of the sector. new frontiers of banking 19. the emergence of new banking models, in the form of payments

and foreign counterparts. psbs, probably to fulfil the additional social objective of their mandate, had taken higher exposure in some of the critical sectors of the economy such as mining, iron and steel, and infrastructure. npa levels in these sectors shot up as all these sectors suffered external shocks leading to the respective stress – mining and energy was hit by the cancellation of allocation of coal blocks ; iron and steel sector faced cost pressures due to dumping of cheaper steel from china ; telecommunications sector underwent a disruption in the form of cancellation of 2g spectrum allotment ; and the construction sector was marred by delays in obtaining necessary government approvals, in particular environmental clearances. 6. to add to these issues, shocks in the form of debt waivers / moratoriums and payment issues of discoms also meant significant costs to the fisc and also affected the health of the banking sector as well as the credit culture. interestingly, data put together by the indian banks association shows that of the 10 states that announced debt waiver schemes since 2017, only three states have reimbursed almost completely as promised. thus, it is imperative that write - off amounts are reimbursed to the banks and discom payments are made in a time bound manner, so as to improve the health of banks and their capacity to lend in subsequent years. corporate governance – the elephant in the room 7. this brings me to some of the internal challenges faced by the psbs, and their governance could easily be identified as a central concern. in fact, many of the problems that currently seem to affect the psbs such as the elevated levels of npa, capital shortfalls, frauds and inadequate risk management can mostly be attributed to the manifestation of underlying corporate governance issues. the role of independent boards in fostering a compliance culture by establishing the proper systems of control, audit and distinct reporting of business and risk management has been found wanting in some psbs leading to build - up of npas. also, the understanding of risks from a business perspective by the boards in some banks has been inadequate due to skill gap and, competency issues. the fact remains that a strong corporate governance culture, with a focus on transparency and accountability, has to percolate from a strong board which sets the example by leading. 8. let me also touch upon governance issues in private sector banks ( pvbs ) which originate from altogether different set of concerns. the issues here mainly relate to incentive structure of their managements,