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 In May 2102, RBI superseded the Bank’s four-month old board and appointed an administrator with no powers to conduct banking operations.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.