Companies & Sectors
Continuing failures in Cooperative Banks
When will the cycle of political interference and failed supervision by Reserve Bank end?
 
While attention is focused on the mammoth bad loans of public sector banks (PSBs), one of the worst-managed segments of Indian banking continues to fly below the radar. Cooperative banks, under dual regulation of RBI and the Registrar of Cooperatives (RoC) and systematically mismanaged by politicians and political parties, are a source of big losses to innocent depositors, mainly senior citizens, who are attracted by the higher interest they pay on term deposits. 
 
Cooperative banks fail with scandalous regularity and end up duping depositors who often get just 10% to 15% of their money after a decade-long liquidation process. Often, they only get Rs1 lakh each through the Deposit Insurance Guarantee Corporation (DIGC). According to Rajendra Phanse, director of a cooperative bank, as many as 165 such banks have been shut down in Maharashtra in the past 30 years. 
 
In most case, RBI’s role as a regulator is highly callous and questionable. Mr Phanse, once a director of CKP Cooperative Bank, directly accuses RBI’s inept handling for the Bank’s problems. In May 2102, RBI superseded the Bank’s four-month old board and appointed an administrator with no powers to conduct banking operations. It could only pay salaries, recover loans and pay depositors in pre-decided driblets. The Bank’s deposits, which were over Rs1,000 crore when put under an administrator, halved in the next two years and the Bank is on the verge of failure. Mr Phanse and 10 others plan to file litigation demanding that the Bank’s licence should not be cancelled and it must be revived through infusion of funds. They plan to cite the moral hazard created by the National Democratic Alliance (NDA) immediately after the government came to power, when it ordered infusion of a massive Rs2,375 crore to revive 23 unlicensed district cooperative banks across India. Mr Phanse alleges that these 23 were the worst among 313 banks whose finances were so grim that they ought to have been shut down under RBI’s own licensing rules, but were saved by amending the rules. 
 
While CKP Bank plans to go to court, RBI’s tardy and disinterested supervision is blamed for the problems of Bombay Mercantile Cooperative Bank too. This Bank also has stringent constraints imposed on its operations by RBI, while a new management, which has been voted in just a few months ago, is spending more time battling the ousted board. RBI watches this in silence. But, as we have seen with CKP Bank, appointing an administrator would only be a death-knell. 
Mumbai District Central Cooperative Bank is another bank that is making news for the wrong reasons. Mumbai Mirror has published detailed reports about how this Bank, which has Rs4,300 crore of deposits, plans to write off over Rs250 crore borrowed by powerful, politically-connected sugar mill owners. The Bank’s management is defiantly insisting that it is only cleaning up the books by purging irrecoverable loans. Government rules compel over 18,000 cooperative housing societies to deposit their sinking funds into such banks. 
 
Ironically, cooperatives banks and regional rural banks ought to have ensured financial inclusion over the decades; instead, they are political tools. The NDA government has chosen, for the first time, to extend bailouts to this sector, without any attempt at reform and accountability. Worse, the burden of financial inclusion has been passed on to large nationalised banks which are themselves reeling from over Rs8 lakh crore of bad loans to industry and need frequent transfusion of capital by the exchequer. Apart from appointing the Bank Board Bureau to clean up the appointment process for bank directors, the government has made no move to make top management at banks more accountable or give it more autonomy, even after long deliberations over two Gyan Sangams.

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COMMENTS

B. Yerram Raju

8 months ago

It is true that there should be no licentiousness for failure of publicly held institutions. In cooperatives - both rural and urban - misgovernance and mismanagement coupled with politicisation are the reasons for the failures. But at least these institutions are allowed to fail. Having said that if we go into the last decade of UCBs ever since the failure of Madhapur nd Charminar Cooperative Banks, there is perceptible improvement.

Financial Co-operatives occupy 5% space with just 2.4% in the total financial assets in the Indian financial system and have been recognized as grassroots level institutions that have great potential to contribute to financial inclusion agenda. Their manpower is local; their management is local and has been groomed from the lower levels through on-the-job training. They mobilize local resources. They serve local clients mostly for local needs. In other words they build their assets and liabilities from the loyalties of local customers. However, a series of failures in both the urban and rural cooperative banking led the RBI to rethink about these structures.

While Madhavarao Committee in the late 1990s recommended urban cooperative banking reformation, R. Gandhi Committee (2014) gave a new road map of moving the UCBs that have attained size and performance efficiencies to graduate to either small finance banks or scheduled banks. The High Powered Committee on Urban Co-operative Banks (Chairman: Shri R. Gandhi) recommended, inter alia, that the UCBs registered under Multi-state Co-operative Societies Act, 2002 and with business size (deposits plus advances) of Rs. 200 billion or more may be considered for conversion into commercial banks while UCBs of smaller size willing to convert to small finance banks (SFBs) can apply to the Reserve Bank for conversion if they fulfill all the eligibility criteria and the selection process prescribed by the Reserve Bank and if the licensing window for SFBs1 is open. In line with the committee’s observation on the growing deposits and advances of the UCBs, it is noteworthy that while the number of UCBs have fallen due to the mergers and amalgamations, the number of Tier II UCBs have been on the rise (from 412 at end March 2013 to 442 at end-March 2014 and further to 447 at end-March 2015). There has been a perceptible increase in the size of deposits and advances of UCBs.

The capital base of the scheduled UCBs has also been increasing and six of the UCBs in 2014 qualified as per the minimum paid-up equity capital criteria for becoming small finance banks in 2014. The number of such UCBs stood at eight as at end-March, 2015. Most UCBs keep 100 percent in liquid assets (saleable within 1 to 5 days) and these would be able to manage a deposit run of 50.9 percent without any external help. They also participated in Financial Inclusion effort by opening no-frills accounts and conformed to the KYC norms.


Performance of UCBs:
As at the end of March 2015, there are 1589 Banks, down from 1721 in 2009 due to the on-going consolidation efforts. UCBs have their presence in only 11 States and a large presence in the States of Maharashtra (one-third of the total UCBs), Tamilnadu (8percent), Andhra Pradesh and Karnataka (together 31 percent). They have the potential for exposing Indian Banking to systemic risk when they fully fall in line with the mainstream banking and open channel banking.

The scheduled UCBs performance witnessed a rising trend during the last one decade as per the RBI assessment. Scheduled DCCBs, and the UCBs necessitated the carving out of a separate department – Department of Cooperative Banking Supervision (DCBS) in the RBI. The Reserve Bank had ordered closure of six UCBs in September 2014 on account of charges of money laundering. “Growth in assets of UCBs witnessed moderation during 2014-15 as compared to the previous year. Slowdown in growth of assets was led by lower growth in ‘other assets’ of UCBs. Loan & advances grew by about 12 per cent and contributed significantly to the total increase in assets in 2014-15. The UCBs performed well in terms of return on equity at 9 percent (RoE). Net interest margin (NIM), however, marginally moderated to 3 percent from 3,1 percent during the previous year. There was a deceleration in growth of both interest income and interest expense while the growth in other income and other operating expenses increased during 2014- 15. The gross non-performing advances (GNPAs) ratio witnessed an increase in 2014-15 over the previous year with the GNPA ratio rising to 6.0 per cent at end-March 2015 from 5.7 per cent at end-March 2014. Net NPA ratio also increased from 2.2 per cent to 2.7 per cent during the same period. At end-March 2015, provisions grew at a lower rate than the increase in gross NPAs resulting in a lower provisioning coverage ratio as compared to the previous years.
The 111th Constitutional Amendment Act 2012 aimed at bringing about correcting mismanagement and misgovernance and providing for better member participation as the key for the progress of cooperatives has been killed by the resistance of the State Governments. In fact, some of the States that had dual system of cooperative legal framework retracted to the Act that provided for the dominant role of the Registrar who neither knows the cooperative principles nor the financial regulation. He did not protect either the members' interests or the cooperative system. State Governments are more to blame than the RBI at least in so far as UCBs are concerned.
In regard to the Rural Cooperatives they have been systemically stymied by NABARD under whose supervision they were functioning for the last 33 years!!

sundararaman gopalakrishnan

8 months ago

Less said about governance in India the better..
Look at any walk of life, corruption is embedded..We are worse off than many African countries in this regard.

Stringent punishment for bribery,corruption is the only answer..but the powerful even" buy" the judiciary for favorable verdicts or " indefinite postponement" of hearings..Mera Bharat "MAHAAN"?

Ajay Kumar De

8 months ago

People are prone to confuse "lack of supervision" with "calculated corruptions". The Himalayan scam in Ramkrishnapur Cooperative Bank in Howrah [W.B.] is the glaring example where very senior officials of RBI Kolkata Regional Office joined hands with the corrupt directors of the cooperative in perpetrating misappropriation of public money being the life time savings of the depositors of the bank. At least the last but one predecessor of country's Finance Minister had fullest knowledge of the scam and the scamsters with vulnerable documents handed over to him personally at his residence at Dhakuria, Kolkata by the then M.P. (LS) from the area of operation of the cooperative. He believed to have sat tight with the documents RBI officials involved in the scam were his own organs. The present FM when was leader of opposition in Rajya Sabha also collected personally those vulnerable documents at Howrah in April, 2011 where he rushed to beg votes for his party colleagues contesting in WB Legislative Assembly. So, please correct that any entity without worth in respect of statutory duties which is attempted to confuse with "lack of supervision" can not also do harm to the community or the State or the Union.

manoharlalsharma

8 months ago

u have rightly caught the main culprit is political game and will continue till we do not find solution of party funding to fight larger & larger election campaigns.

Gopalakrishnan T V

8 months ago

Cooperative Banks are another source of loot and they are in that sense better than PSBs because PSBs are watched by many and RBI's is solely responsible and accountable for their Regulation and supervision although Governments intervention is very much there to make the PSBs function the way the Government wants. But the Cooperative Banks are slightly different from PSBs and other Commercial Banks. In respect of cooperative banks their regulation supervision, management and administration are under the Control of the Reserve Bank and Registrar of Cooperative societies ie the State Governments. Ownership is basically monopolised by politicians and bigwigs of the area where the banks are set up and there are shareholders who know nothing as to how the banks are run. Deposits come from the share holders and public but the bulk of deposits come from the share holders and their friends who take administrative control of the banks. The loot of the bank is well organised and it takes the form of high interest rates on deposits and loans at the Cheapest rates possible and without much of securities to take care of the recoveries in the event of failure of the borrowers to repay the loans. Politicians , major shareholders, bulk depositors and big borrowers join hands and the Registrar of societies and RBI have limited role of only observing regular losses and banks going weak one after another.In no way they can stop the loot is the ground reality. NABARD also is involved in the Supervision of a segment of Cooperative banks with the same result. The only way to save the Cooperative banks which are an essential link to promote savings, distribution of loans on an equitable basis to ensure creation of productive assets in the rural and urban segments, is to keep them away from politicians and local bigwigs completely and hand over them to share holders with Cooperative spirit in letter and spirit and run them purely on Professional support and commercial interests.RBI should be completely taken out if necessary by amending the RBI Act, 1934 and the NABARD should be entrusted with the responsibility of Cooperative banks. The major Cooperative banks set up in metro centres can be converted into Commercial banks or can be merged with some PSBs.It is time to stop experimenting with the present arrangement of duel Control on Cooperative banks and losing money on a recurring basis without any value addition either to the society or to the depositors. From this angle, the article has been very thought provoking and needs to be seriously studied and appropriate action taken .

Mahesh S Bhatt

8 months ago

Cooperated Match Fixing with Politics & Business.Very normal legal situation to fleece good FD holders.

Aam Aadmi ka Aam Juice le lena ka bankers to squeezers.

Ajit Pawar has 21000 irrigation scam but Rs 1500 tanker water should be saved for Holi water sprinkling.

Shower thy neighnour in pool & save water in tub for wife.

Mahesh

S.S.A.Zaidi

8 months ago

"RBI’s tardy and disinterested supervision is blamed for the problems of Bombay Mercantile Cooperative Bank too. This Bank also has stringent constraints imposed on its operations by RBI, while a new management, which has been voted in just a few months ago, is spending more time battling the ousted board. RBI watches this in silence"
I agree with the above statements in toto.
Bank is managed thru maneuvers and intrigues.Late Zain Rangoonwala was the victim of such intrigues. He was stabbed in the back by people who prospered and progressed under his patronage After that Bank's decline started ,once it was the best cooperative bank in Asia .It is so deplorable indeed
it is alleged that administrators appointed by RBI also did not do much to improve its functioning.It is also alleged that people who were removed on corruption charges were taken back on senior positions and RBI/Registrar dont seem to have objected.The new board which had taken over a couple of months back has again been ousted by the previous board .
Wherever vested interests work ,interest of the community and the organisation is put on the back burner.
I wish some miracle happens and the bank regains its past glory

SRINIVAS SHENOY

8 months ago

The list of defaulters should be made available atleast on the whatsapp being run under the name and style of CKP bacchav committee for the welfare of the depositors.
As elections are fast approaching this is the opportune time to tap the crooked politicians for speedy recovery. It has come to my knowledge as narrated by a present committee member that loans were advanced only by means of voucher entry. The list of major culprits, the political defaulters appeared around two years back in Mumbai Mirror.

MG Warrier

8 months ago

There are essentially two categories of cooperative banks. One, which caters to the credit needs of farm and rural sector with a two-tier (State Cooperative Bank and primary cooperative societies)or Three-tier(State and District Cooperative Banks and primary societies) and two, primary (urban) cooperative banks which are for all practical purposes, miniature commercial banks in the cooperative sector. The dual control (cooperation being a concurrent subject) and politicisation (because of the democratic cooperative structure) have been affecting their functioning all along. While primary (urban) cooperative banks-to which the 165 failed banks(in Maharashtra alone) referred to in this article belong- are under regulatory control of RBI, supervision of the other category of cooperatives has shifted to NABARD since early 1980’s. The cooperative institutions including banks deserve more attention from government/s and regulatory/supervisory bodies. Commercial banks in India do not have the kind of outreach cooperative institutions have and that is good enough reason to revamp and protect the cooperative structure.

MG Warrier

8 months ago

There are essentially two categories of cooperative banks. One, which caters to the credit needs of farm and rural sector with a two-tier (State Cooperative Bank and primary cooperative societies)or Three-tier(State and District Cooperative Banks and primary societies) and two, primary (urban) cooperative banks which are for all practical purposes, miniature commercial banks in the cooperative sector. The dual control (cooperation being a concurrent subject) and politicisation (because of the democratic cooperative structure) have been affecting their functioning all along. While primary (urban) cooperative banks-to which the 165 failed banks(in Maharashtra alone) referred to in this article belong- are under regulatory control of RBI, supervision of the other category of cooperatives has shifted to NABARD since early 1980’s. The cooperative institutions including banks deserve more attention from government/s and regulatory/supervisory bodies. Commercial banks in India do not have the kind of outreach cooperative institutions have and that is good enough reason to revamp and protect the cooperative structure.

pankaj jindal

8 months ago

How do you know the credibility of a coop bank at the click of a button??

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