Companies & Sectors
Co-operative banks are in terrible shape; account-holders will be at the receiving end. RBI should act decisively, and soon

A number of co-operative banks in Maharashtra are saddled with bad debts. Political interference seems to have silenced the banking regulator. It is high time the RBI, and the shareholders & depositors of these beleaguered entities woke up 

Recent news reports suggest that there are nearly 28 co-operative banks in Maharashtra which are having large NPAs (non-performing assets) and negative net worth and are in a bad financial state.

However, there is nothing new about this situation. A lot of such banks have collapsed in the recent past, and no doubt many more will in the future. The RBI (Reserve Bank of India) seems to be inactive instead of being proactive in making sure that these banks close down and are acquired by other banks to safeguard the interests of the depositors.

There is a strange argument doing the rounds that if the RBI takes action (like declaring a moratorium on sick banks) there will be a run on most banks that are sick. If this happens, it will actually be a good thing. Instead of protecting weak banks for 'safeguarding' depositors, let the RBI merge them.

The banking regulator seems to have forgotten the Vaidyanathan and Madhavan Committee recommendations. Most state governments have signed MoUs (memorandums of understanding) with the RBI and have given the regulator all powers for supervision of co-operative banks as far as banking regulations are concerned, though state governments still have powers over these banks as these banks are under the control of their respective Registrar of Co-operatives (ROCs).

Now it seems that the RBI needs the consent of these ROCs for placing these sick banks under a moratorium. However, if such consent is not forthcoming due to political pressure-as many such banks are controlled by politicians-then the apex bank should go ahead and suspend the banking licenses of these banks unilaterally.

There is also the curious case of Pune-based Rupee Co-operative Bank. There was a run on this bank sometime in 2002 and the board of the bank was dismissed, and it was put under an Administrator. According to some banking professionals who were advising the administrators, they were appalled that no proper records were available and the bank was unable to prepare its financial statements. The bank needed to be put under moratorium at that time itself.

After five years under the 'supervision' of these administrators, fresh elections were held for the board of directors and many who were responsible to get the bank into trouble in the first place were re-elected!

Today the bank claims that it has made a profit of Rs28 crore for the year ending March 2011. It also claims that no loan granted over the last two years is an NPA. However, the fact remains that almost 46% of its advances are classified as NPAs and the bank has in the process negative net worth and thus has a negative Capital Adequacy Ratio which has to be 12% of weighted risk adjusted assets of a bank!

It is high time the RBI took action instead of watching the situation "closely" and giving more time to the management.

The depositors of the bank have cause for worry. If the bank is put under moratorium for a long time like the Suvarna Sahakari Bank which remained under moratorium for two years before it was finally acquire by IOB (Indian Overseas Bank), then all the money of the depositors will get locked in the bank. Last time when there was a run on the bank, the depositors had panicked and stood in long queues to take out their money.

However, as the RBI assured liquidity support and said there was no need to panic, the same depositors stood in long queues to re-deposit their money as the bank announced increased interest rates to lure the customers back.

The simple rule in finance is a bad borrower is forced to pay an interest rate higher than the market rate as a reward for higher risk that an investor requires. However, most depositors do not even understand that when they put money in a bank; the bank is a borrower. Even today I am afraid that most depositors in this bank are unaware of the risk that they are facing!

And what about the shareholders? They too seem to be an ignorant, callous and ignorant lot. They have received no dividend for the past many years. Their shares have absolutely no value today. Even if the bank is merged with another bank, shareholders are not going to get any money as had happened in the case of Global Trust Bank.

It will be worthwhile to see what security the bank is holding against the accepted NPAs of Rs500 crore, and what is the value of these securities. My guess is that not much value can be realised. It will also be pertinent to find out if the bank has used the provisions of the SARFAESI Act, 2002, against its willful defaulting borrowers. This Act gives enormous powers to banks in recovering bad loans. 

We must force the RBI to give answers to these questions in the interest of shareholders and depositors.

However, let us also not have too much sympathy for the shareholders and depositors because they have not pressurised either the management or the regulators, for protecting themselves. Even God helps those who help themselves!

Financial ignorance is not an insurance cover against getting your fingers burnt.

(Prof Agashe teaches at Symbiosis and other management schools in Pune).



A S Bhat

3 years ago

What about the curious case of Cosmoos Bank? I heard that there were strong roumors within the Bank (of the Bank's failure) and a number of officials withdrew their deposits one day. Then the Management made an announcement of estimated profit, tax payment etc and the confidence was restored!


5 years ago

in our region (Warud, Dist. Amaravati, Maharashtra 444906), there is gadgebaba sahakari bank. now they have closed some of their branches saying we are bankrupt. so they denied money to all common people who have invested in gadgebaba sahakari bank but it is still on the run to get the money from lenders. Police and local authorities are neglecting such issues. there is another bank bhagyoday which is also following same route. warud urban bank is also another example and hit by scam. both warud urban bank and gadgebaba sahakari bank was looted by Menghal and other local authorities of banks. When we approached consumer court, biyani square, amaravati. they are saying you should send them notice and fight in normal court.. which means we will invest more than what we owe to bank. :)


5 years ago

its a business now a days. These people are looting common man lurring them with very high rate of interest on FDs. and then disburse the loans to relatives and MLAs and their relatives.
its a trap run by influential people and supported by local MLAs and authorities.



In Reply to Pankaj 5 years ago

It is very true.This type of swindling has been going on for the last 15 years and no authority seems to be concerned. Since supreme court is very active now it is high time they take up this scam on high priority as it affects common people more than anyone else. I request supreme court to take up this issue on its own since vested interests are trying to scuttle for reasons best known to themselves.

Catherine Johnson

5 years ago

SHARP GROUP is an international corporate conglomerate who have come forward to help and bail out the sunk cooperative banks in India . The take-over policy has very clear agenda for the depositors , for employees , for the borrowers and for the share holders . But these banks after they are taken over will cease to be cooperative banks and will become private bank.

SHARP GROUP has already signed these agreements with Pen Urban cooperative bank and Goregaon Urban Cooperative Bank .

The cell number of SHARP GROUP banking business manager Mr. Ravi Kumar in Mumbai is 09870366603 .Anyone who wants to know more about such possibilities of take-over can contact him .


C Jyoti

In Reply to Catherine Johnson 5 years ago

Must only foreigners lead us to life? Why not have faith in ourselves and give up our naked love for the white skins, both as rulers and as guides? In India, coop. movement has fallen prey to criminal politicisation and economics being the language of politics, this movement is a very potent weapon in the hands of politicians who invariably are traitors and criminals.


In Reply to C Jyoti 5 years ago

Unfortunately this has become the norm since our leaders do nothing even when several thosands of crores are looted and they pretend as if they know nothing about it. Our RBI is a spectator . They simply change the Interest rates as if that solves all the problems of economy. FDI is needed in such cases where our own people loot voiceless common people because of the loopholes in our system. We have to encourage the few sincere people we have at the top and defeat people who are thriving on hypocrisy.

Nagesh KiniFCA

5 years ago

Some time MoneyLife had and reported on Maharastra State Coop. Bank in which practically all Coop. Hsg. Societies have parked all their funds. Today's papers have front page report on Administrators being appointed. This was long overdue. The MOAgri. has major stakes and all sugar mills are major borrowers and the President of India was the Chief Guest at the Centenary celebrations not long ago
RBI should tighten its monetary control and take it from the State Coop. ministry.

prashant bhat

5 years ago

Journalist Prashant Bhat r/o Vashi, Navi Mumbai had filed a complaint with the Government of Maharashtra, Reserve Bank of India, CBI (Anti-Corruption Wing), Bureau of Anti-Corruption, the state police authorities and even to Hon’ble High Court, Mumbai more than six months back against the Maharashtra State Co-Operative Bank for its illegal operations without even having a mandatory Banking Licence under section 22 of Banking Regulation Act, 1949 from Reserve Bank of India and that the financial health of the MSC Bank having been in serious state. Nobody took it seriously that time..!! Oh Darling, ye hai India...


6 years ago

M not denying what he has to say...
it's only that the presentation is not clear enough and seems like a mental product without any study or backup

And also what he has said, there is nothing new, even my grandmom would say the same thing.
What is expected is the cure
Its east to say "RBI should act", but HOW???

Nagesh KiniFCA

6 years ago

Rubina's comments
- Suggest you read the last Annual Report of Maharashtra State Co-op. Bank with all the "quantitative data" or whatever you seek.
The NPAs have been quantified as also the unprovided for losses.
It has the lowest "D" Audit Classification.
Is all this not bad enough?
It is a "reality". The facts are as clear as day light.
Only someone with an axe to grind will make such nasty comments.
Please think twice before going public in doing so!


6 years ago

This article seems to be the pure mental product.
As it is not backed by any quantitative data. It's is what Prof Agashe thinks which might not be the reality.
This is proved in the article where at many place he has mentioned the phrases like " i think" , my guess..

Mr Agashe, before pointing to other first do clear ur facts.

Love Rubina

Daisy Sheby

6 years ago

Agashe Sir, Can you give some information about the much heard about Basel Accord and how much of an impact does it have in the Indian Banking Industry?

Sudhakar Bhalchandra Kulkarni

6 years ago

In most of theCo-op banks CEO and other senior officials have very liitle say and these banks are the whims and mercy of founder chairmans who are bye and large politicians. These people use the banks for their politicial motives having scant regard for rules and regulations, it is high time that RBI should intervene so that these banks will be managed professionally and interest of the common man will be protected.


6 years ago

The hesitation to act on the part of RBI/Govt. is not very difficult to understand-most of these co-op. Banks are the handmaids of powerful politicians whose unaccounted millions are safely kept in benami accounts or the funds are used by them for their personal gain. The situation in the Left(ist) states is no different, there the problem is that of recovery of the loans forcibly granted under the Local Committees of the COI-M, a most heinous and anti-people repressive machinery in the hands of the ruleing conglomerate and the situation is not likely to change-the tradition having been established. The Co-op. movement in India has been a disaster for the people for whom this was conceived and started, due to the all-pervading and permissive culture (or religion) of corruption in an otherwise characterless nation.


6 years ago

Depositors have always suffered because of such Banks and NBFC.s. This has been happening since 1997. RBI never did anything to curb this menace. Evidently high level corruption is responsible for this state of affairs. Here official liquidators go on stating there is no money. Where has the money gone? It cannot vanish in thin air. They say that Swiss banks are flooded with unaccounted money. Our Govt again says it can do nothing. Kapil Sibal says Anna Hazare

Nagesh KiniFCA

6 years ago

Reply to Sunil Otiv

Read Loksatta front page Sept. 25, 2010.
Fress Press Journal May 6, 2010.

MoneyLife has had a detailed report too.

Dr Patwardhan

6 years ago

Congrats Moneylife! I assumed money was safe in banks! Can you list the 28 co-op. banks in a bad financial state? By the way, what is the financial status of Saraswat co-op. bank?

India looking at alternative banks for oil payments to Iran

As per a scheme being worked out, Indian oil firms could open accounts in a UAE or Turkey-based bank so they can undertake a direct transfer of money for oil they buy from Iran. Also, state-run National Iranian Oil Company, too, will open an account in a UAE or Turkey-based bank to receive direct money transfer from Indian oil companies

New Delhi: Jolted by Germany's refusal to route its payments to Iran, India is exploring using Dubai or Turkey-based banks as conduit for paying for crude oil it imports from the Persian Gulf nation, reports PTI.

"We are exploring if Indian oil firms can open accounts in banks like Dubai-based Noor Islamic Bank so they can undertake a direct transfer of money for oil they buy from Iran," a senior government official said.

Under the scheme being discussed, state-run National Iranian Oil Company (NIOC) too will open an account in a UAE or Turkey-based bank to receive direct money transfer from oil companies.

"The mode of payment will be Euro," he said. "We have forwarded a list of banks to Iran... they have to choose the bank where both Indian firms and NIOC can open account."

Indian firms opening account in the UAE or Turkey bank will however be subject to Reserve Bank of India (RBI) nod.

Last month, Germany under US pressure stopped accepting money from India for onward transfer to an Iranian-owned, Hamburg-based bank, towards payments for the import of crude.

India in February had begun clearing past dues for Iranian oil imports by making euro payments through German-based Europisch-Iranische Handelsbank AG (EIH Bank).

But EIH, which is owned by Iran, is a banned entity in the US and Washington persuaded Germany to stop payments.

About euro 1.5 billion had been paid through EIH when Germany refused to accept any further payments.

This has resulted in outstanding of $2.8 billion as on March end towards Iran, which has continued to supply oil on credit.

The problem began after RBI in late December last year scrapped a long-standing payment mechanism used to pay for Iranian crude oil imports, which make up for 12% of the nation's oil needs.

In February, the two nations decided to route payments through EIH and oil minister S Jaipal Reddy in early March made a statement to Parliament saying "pending dues of NIOC are now being cleared and as of 1 March 2011, payment of euro 1.5 billion has been made to the Central Bank of Iran."

But that was the last payment made to Iran as, soon after the news broke out, the US told Germany of the sanction conditionalities against the gulf nation for its nuclear policy.

Oil supplies from Iran have, however, not been affected and the Persian Gulf nation continues to sell oil on credit backed by corporate guarantee.

"We are considering various alternatives... making payments in rupee is one of them," the official said.

Mr Reddy on 3rd March stated in the Lok Sabha that "consequent to the withdrawal of the Asian Clearing Union (ACU) mechanism by the RBI with effect from 23 December 2010, all payments to Iran for import of crude oil have to be settled in any permitted currency outside the ACU mechanism."

India imports 12 million barrels of crude oil every month from Iran, which is the nation's second-largest supplier after Saudi Arabia.

The official said 21.2 million tonnes of crude oil was imported from Iran in 2009-10 fiscal.

These imports were undertaken by Mangalore Refinery (6.9 million tonnes) Essar Oil (5.3 million tonnes) Reliance Industries (3.3 million tonnes) Hindustan Petroleum Corporation (3.2 million tonnes) and Indian Oil Corporation (2.5 million tonnes).

In 2010-11, Reliance completely stopped using Iranian oil and in first six months a total of 8.9 million tonnes of oil was imported from Iran, Mr Reddy said.

Sources said as per the requirement of the German central bank, Deutsche Bundesbank (DBB)-which had permitted payment in euros through EIH-the entire oil bought from US-sanctioned Iran was certified.

First, the oil companies certified the crude oil they bought from Iran and payments that are due. This is being counter-certified by the petroleum ministry. Furthermore, State Bank of India-the banker which was routing the payments-also affixed its seal on the transactions.

But the US is not agreeable to payments going through EIH and asked Germany to stop all such payments.


NGO demands transparency in bidding for power projects, regulatory oversight, to consolidate gains

Pune-based Prayas Energy Group sees an improvement in power capacity addition since the introduction of competitive bidding, but it says that the process must be above board

Competitive bidding for power projects has significantly improved the tempo of capacity addition in the country, but the bidding process must be transparent, with necessary regulatory oversight and scrutiny, and developers must adhere to contractual obligations if the gains are to be sustained, according to Prayas Energy Group.

In a report titled 'Transition from MoU to Competitive Bidding: Good take-off but turbulence ahead', published last week, Prayas has analysed issues arising from the shift in policy for new power projects and how this has progressed over the past five years. Prayas is a non-government organisation based in Pune set up by professionals  working to protect and promote public interest in health, energy and education fields through various initiatives.

The report points out that the guidelines for competitive bidding, issued in 2005, are not being followed consistently and that critical provisions on transparency and accountability are being compromised. In this respect, it says, it is necessary that changes are not made to benefit a particular developer and that such practices can be curbed through periodic reporting on the ongoing bidding exercise to the appropriate regulator and undertaking public hearings before initiating any changes in the projects.

Prayas has focused on coal-based thermal capacity contracted on a long-term basis through the bidding process. The Electricity Act 2003 enabled competitive bidding that encouraged private sector investment in power generation. The guidelines were notified by the power ministry in 2005.

The Act allows industries to set up captive power plants and also gives consumers a choice to select the power generator through an 'open access' mechanism. Over the past five years, state electricity distribution companies have contracted over 42,600 MW capacity through the competitive bidding route, Prayas reports.

On the issue of transparency, Prayas says many states do not make public on websites the information of the bidding for engineering, procurement and construction (EPC) contracts which has led to questions on the integrity of the process.  It has recommended that it be made mandatory to upload the bid documents, the bid evaluation  spreadsheet and evaluation report, certificates, correspondence and all other agreements  with the successful bidder, for the benefit of the common people .

In this respect, Prayas has proposed the setting up of a central information repository that will compile all such important information and documentation for each bidding process in each state. It says that necessary amendments should be made to the bidding guidelines to allow citizens easy and timely access to this information. Similarly, an modifications to be made in the bid evaluation spreadsheet in a particular case should be done only under the approval and supervision of the regulatory commission.

The NGO has also described certain problems that continue to hamper work for developers, like the acquisition of land, securing environment clearance and uncertainty over fuel supply that may result in non-compliance with the power purchase agreement (PPA). It says that in these situations, provisions may be considered for multi-stage bid bonds, and to ensure procurer's rights over the generation plant in case of default by a developer.

Prayas thinks that the tariff discovery through the bidding process has been quite competitive vis-à-vis projects coming up on a cost-plus basis. For example, the capacity charge of competitively bid Case-1 projects is equivalent to the capital cost of about Rs3.5 crore to Rs4.5 crore per MW, whereas many cost-plus projects have a capital cost between Rs4.5 crore and Rs5.8 crore per MW.

The report highlighted the failure of the Independent Power Producers (IPPs) policy in the 1990s, under which IIPs were allowed to set up power plants by signing memorandums of understanding (MoUs) with respective state governments. But, Prayas says, due to the lack of transparency, the power sector saw small capacity additions during the 1990s. The controversial Dabhol Power Corporation set up by Enron in Maharashtra is a classic example of a governance crisis during the IPP era. The IPP process not only resulted in high project cost, but it also failed to bridge the growing demand-supply gap.


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