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).

  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    A S Bhat

    8 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!

    Laxmikant

    9 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. :)

    Pankaj

    9 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.

    REPLY

    pantulu

    In Reply to Pankaj 9 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

    9 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 .

    REPLY

    C Jyoti

    In Reply to Catherine Johnson 9 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.

    pantulu

    In Reply to C Jyoti 9 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

    10 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

    10 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...

    Rubina

    10 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

    10 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!

    Rubina

    10 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

    10 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

    10 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.

    ABanerjee

    10 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.

    pantulu

    10 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

    10 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

    10 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?

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Close

    To continue


    Please
    Sign Up or Sign In
    with

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    28 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 4 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)