Over past 10 years, the Bank's reconstruction scheme did not make much progress mainly due to non-fulfillment of commitments for contribution to revival fund by UCBs and poor track record of recovery including from Ketan Parekh
New Delhi: The Reserve Bank of India has cancelled licence of security scam-tainted Madhavpura Mercantile Cooperative Bank following failure of efforts to revive it, reports PTI.
"All efforts to revive it in close consultation with the Government of India had failed and the depositors were being inconvenienced by continued uncertainty," RBI said in its order cancelling the licence of the Ahmedabad-based cooperative bank.
The cooperative bank, was granted a licence by RBI in 1994, resorted to indiscriminate lending, particularly to companies linked to stock broker Ketan Parekh, in gross violation of lending norms during 1999-2000.
In March 2001, there was a sudden run on the cooperative bank following rumours of its large exposure to Ketan Parekh, a leading stock broker at Mumbai, who suffered huge losses in his share dealings, it said.
The cooperative bank was also holding substantial amount Rs800 crore of inter-bank deposits from a large number of Urban Cooperative Banks in Gujarat and from other banks and this posed a systemic risk for cooperative banks in Gujarat, it said.
The restructuring scheme initiated in 2001 envisaged infusion of funds, retention of existing deposits, converting call money borrowings from banks/institutions into term deposits, DICGC meeting its obligation in full to the cooperative bank's eligible depositors, investment of fresh deposits in Government securities, management aspects etc.
"During the period of 10 years, the Reconstruction Scheme did not make much progress mainly due to non-fulfillment of commitments for contribution to Revival Fund by UCBs and poor track record of recovery including from Ketan Parekh. The scheme expired on August 23, 2011," it said.
As of March 2011, the bank's assessed net worth was negative Rs1,316.50 crore, gross NPAs was 99.99%of its total advances of Rs1,126.59 crore. The bank had accumulated losses at Rs1,357.41 crore. The deposits of the bank have been eroded fully at the end of March 2011.
In view of the precarious financial position of the cooperative bank, a show cause notice was issued by RBI on 16 March 2012 asking it as to why the licence granted to it to carry on banking business in India should not be cancelled.
The cooperative bank in its reply dated 18th April, accepted that the precarious financial position of the cooperative bank which was attributed to the fraud amounting to Rs1,200 crore committed on the cooperative bank by the share broking community including Ketan Parekh and his associates in collusion with the then members of the Board of Directors, the RBI statement said.
As per the bank, it said, an amount of Rs803 crore constituting 72% of the total advances were unsecured due to unenforceable securities and defective documentation and hence not recoverable.
The cooperative bank has admitted that the revival of the bank failed due to difficulty in mobilising revival fund from the contributing UCBs and poor track record of recovery particularly from the Ketan Parekh group, it said.
The statement also said that the cooperative bank had furnished another revival plan envisaging a loan of Rs1,000 crore from World Bank or European Banks which will be procured by an NRI who will invest Rs500 crore for the next 10 years in the form of preference shares totaling Rs5,000 crore.
"It was observed that the cooperative bank was neither aware of the antecedents of the investor nor the genuineness of the sources of the funds," it said.
The cooperative bank was not sure whether the proposal will result in a turnaround for the cooperative bank by making its net worth positive, it said, adding, the proposal is also not in conformity with the bye-laws of the bank for allotment of preference shares to an investor who is not a loanee.