Money & Banking
Bailing Out Cooperative Banks

Narendra Modi continues with the poor governance of earlier regimes


On 5th November, Union minister Ravi Shankar Prasad was on television announcing a massive Rs2,375-crore infusion of funds into 23 district central cooperative banks across the country. These include 16 banks in Uttar Pradesh, three each in Jammu & Kashmir and Maharashtra and one in West Bengal.

The minister said that the move was aimed at protecting small depositors. A Cabinet meeting that approved this capital infusion at taxpayers’ expense had imposed some meaningless conditions like growing deposits at the rate of 15% and halving bad loans over the next two years. On 30th June, The Mint had reported that 45 cooperative banks were likely to face penal action by the Reserve Bank of India (RBI).

Of these, 23 did not even have licences and would need Rs2,100 crore even to meet the 4% capital adequacy ratio. These 23 seem to be the ones that have received taxpayers’ money.  

The action sets a terrible precedent by ignoring the fact that cooperative banks are in a mess because of dual regulation, political involvement and interference in their management and the fact that large chunks of their irrecoverable loans are usually to politically connected persons who are wilful defaulters.

Consequently, cooperative banks are poorly regulated and fail, with alarming regularity. Unfortunately, most people are unaware of the poor supervision of these banks which usually target small depositors with higher interest rates. Interestingly, while banking decisions are hugely susceptible to political pressure, the government has ensured that deposits of up to Rs1 lakh of all banks, including cooperative banks, are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

It is important to remember that a previous BJP-led National Democratic Alliance (NDA) government (1999-2004) had not hesitated to get a pliant RBI governor and DICGC to bend the rules for Madhavpura Mercantile Cooperative Bank (MMCB) after the Ketan Parekh scam of 2000-01. MMCB’s management had destroyed the Bank by lending nearly Rs1,000 crore to scamster Ketan Parekh. Under DICGC rules, deposit insurance is paid out only after a bank goes into liquidation. An exception was made for MMCB, to appease a powerful BJP minister and several hundred crore rupees were paid out. Those days, a decimated Congress, as the leading opposition party, did not protest. It will be a sad day for financial consumers if history repeats itself and a powerful BJP government decides to protect shady cooperative banks instead of bringing them under the clear and unambiguous regulation and supervision of RBI.


Over the years, politicians have quietly pushed for deposit insurance to be raised, so that the poorest depositors (read voters) are covered by insurance when banks fail, preventing widespread outrage that could affect their political fortunes. The customer services committee headed by M Damodaran had recommended that deposit insurance be raised to Rs5 lakh. 
Many consumer organisations have also mindlessly advocated that all bank deposits must be fully insured, without understanding the costs that such a move would eventually impose on customers; or that this would only encourage further loot of cooperative banks by the political class.
In 2012, finance minister, P Chidambaram, told the Parliament of a DICGC proposal seeking to double deposit insurance to Rs2 lakh. He said, DICGC was asked to consider doing this on a ‘risk-based deposit insurance premium structure’. It is not clear whose interest DICGC was advocating because a higher insurance cover will eventually be passed on to customers. Also, records show that insurance payouts by DICGC have invariably been on account of cooperative banks, although the premium is collected from all banks. 
The statistics are revealing. DICGC paid out a massive Rs1,025 crore in claims over the past three years to 83 banks, all of which were cooperative banks. While close to a 100% of payments have been made to cooperative banks, less than 8% of the total premium is raised from the 2,080 cooperative banks under DICGC and 88% comes from around 200 commercial banks.
Dr KC Chakrabarty, former deputy governor of RBI, responding to a question raised at an open-house organised by Moneylife Foundation in 2013 had said, “Nowhere in the world is there unlimited deposit insurance. If you do want that, premium will become so high that you will have to pay the bank even to keep your money.” Moneylife is of the view that DICGC must have a separate insurance cover for cooperative banks, given the lopsided payouts. 
Ignoring this background, the BJP-led government has decided on direct infusion of funds into cooperative banks. The move protects their politically-influenced management but is craftily pitched as an action to protect depositors. This is hardly the way towards the good governance, fair administration and change that prime minister Narendra Modi has promised Indians. 



M A Srinivasan

3 years ago

Concentration of assisted co-ops in UP seems to be a "political" move. The famous saying holds good even today :
in India,
Co-operation has failed, but it should succeed.

NK Padhi

3 years ago

Actually, most of the co-operative Banks have no reason to exist. Many survive because they do not deduct TDS from interest earned on deposits of Members, i.e, shareholders. I do not know why this exemption is given to them ! TDS should be paid by everyone as people are free to claim it back by filing returns. What social service is expected one office co-op banks who survive by discounting local cheques or by giving jewellery loans ( mostly to private financiers )


3 years ago

The PSBs are frequently funded by the Centre as they have majority stake in them. It may be for the first time that a ' Government at the Centre ' is rescuing Coop. Banks. 23 coop. banks get Rs.2375 crore.
It is sad that the BJP which has come to power with promise to root out corruption is shielding the coop.banks which have gone red because of corrupt practices, mismanagements, among others. The managements of the failed coop. banks are by and large in the hands of ruthless politicians.The BJP seems is obliged to them to repay the dues it owes: quid pro quo. What BJP practices is different from what it professes. Other ailing coop. banks also may await the incumbent lift karale, the boost by the Central Government !
The coop. banks which are victims of politicians are put on moratorium by the Regulators. As a result, the depositors, the public have to bear the burnt.The public, if not the Regulators, should oppose the mis- utilising the exchequers/ tax payers money by the Central Government.

Goregaon, Mumbai.


Seven Scams that Target Veterans

Fraudsters are found targeting military members through bogus services and scams. Don’t get fooled


Veterans who have served the country often have unique concerns specific to their military service, such as finding a job when they return home or filing for certain benefits they have access to through government programs. Unfortunately, fraudsters know this too and target military members through bogus services and scams. Here’s a list of areas where scam artists sometimes prey on veterans with links to what vets can do to avoid getting ripped off.

  1. For-profit schools

  2. Phony job offers

  3. Phishing and identity theft

  4. Pension claims

  5. Home-based businesses

  6. Charitable donations

  7. Bogus investments

Service members also have some unique consumer protections provided by federal law. Read more about those protections here.


For further information about protecting veterans from fraud, click here.




Shiv Sena ready to sit in the Opposition in Maharashtra

Uddhav Thackeray has written to the secretariat of Maharashtra Legislature seeking appointment of party's group leader Eknath Shinde as the leader of opposition


Ending the days of high-drama, often one-sided, the Shiv Sena on Monday staked claim for the seat of Leader of Opposition (LoP) in Maharashtra Assembly. Either the Shiv Sena leadership is using this as part of its 'pressure' tactics on chief minister Devendra Fadnavis and his Bharatiya Janata Party (BJP), or may have simply gave in to 'unbearable' humiliation and endless waitings.

Shiv Sena president Uddhav Thackeray has written to secretariat of the state legislature seeking appointment of party's group leader Eknath Shinde as the LoP, say reports.

Earlier, members of legislative assembly (MLAs) from Shiv Sena elected Eknath Shinde, a loyalist of party chief Uddhav Thackeray as its leader in the house. Shinde, who won from Thane for the second time, would become the LoP, unless there is any (?) last minute deal between BJP and Shiv Sena.

Separately, Nationalist Congress Party (NCP) chief Sharad Pawar reiterated that the party’s offer to support the BJP government in Maharashtra must be seen as an endeavour to have a stable government in the State. Asked if he has sent a letter of support to the governor, he said, “why should we give anything in writing. We know how to act in the floor of the house.”

NCP abstaining from a vote will bring down the effective size of the house to 247, bringing the BJP within sniffing distance of comfortably winning the trust vote in the 288 member Assembly.

BJP has 121 MLAs in the 288-member House and the 41-member NCP has assured its outside support to the new government. Sena, led by Uddhav Thackeray, has 63 MLAs.


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