Failure of the Punjab and Maharashtra Cooperative (PMC) Bank triggered the Union government into taking action, which resulted in amending the Banking Regulation Act 1949, bringing the cooperative banks within the direct regulatory ambit of the Reserve Bank of India (RBI), putting a full stop to dual regulation of the cooperative banking sector. The ordinance does not include primary cooperative societies, the principal constituents of the state cooperative banks (StCB) and district cooperative central banks (DCCBs). Only those urban cooperative banks (UCBs) and multi state cooperative banks (MS-UCBs) and the rest of the rural cooperative credit structures which fall within the ambit of the National Bank for Agriculture & Rural Development (NABARD) supervision will be subject to such amended regulation.
The preamble to the ordinance on the Banking Regulation Act 1949 Amendment makes it clear that the cooperative banks are not well managed; not properly regulated; and the affairs conducted are detrimental to the interests of the depositors. They also lack professionalism, good governance and sound banking practices. The objective of the amendment is to correct all of them. It is important to view this ordinance in the backdrop of the latest report on UCBs chaired by R Gandhi, when he was the deputy governor.
The R Gandhi (2015) report says: “As UCBs form an important vehicle for financial inclusion and facilitate payment and settlement, it may be appropriate to support their growth and proliferation further in the background of the differentiated bank model. However, the question remains whether unrestrained growth can be allowed, keeping in view the restricted ability of UCBs to raise capital, lack of level playing field in regulation and supervision and absence of a resolution mechanism at par with commercial banks.”
UCBs now have high aspirations of competing with commercial banks and they expect RBI to provide relaxations in various regulatory restrictions.
In countries like Canada, the cooperative banks pose a formidable challenge to commercial banks and the former follow the capital regulations of Basel, conduct elections regularly, associations of cooperatives conduct induction courses and retreats for board members on governance. Without harming the principles of cooperatives, cooperative banks pose a stiff competition to the commercial banks.
A study was conducted on behalf of Gandhi committee to ascertain the range of loans granted by scheduled and non-scheduled UCBs. The study shows diametrically opposite trends in the range of loans granted by the two types of cooperative banks. While the scheduled banks granted 59.6% of the total loans in the largest loan size ranging from the Rs1 crore to 5 crore range and the above Rs5 crore segment, the non-scheduled banks catered to the small loan segments up to Rs10 lakh in a substantial way as this segment constituted 59.5% of the loans granted by this component of UCBs.
The study further supports the premise that large MS-UCBs have aligned their business models and goals with those of commercial banks while availing of the concessions granted to the sector. Even this study could not bring out the frauds and maleficence of banks like PMC because the fraud has been traced to an even earlier period.
The report says; "Major considerations to be kept in mind are the aspirations of large UCBs, conflicts of interest, decline in cooperativeness, regulatory arbitrage, limitations on raising capital, limited resolution powers of RBI, the capital structure of UCBs and opportunities for growth that will accrue after such conversions.”
The UCBs are subject to annual inspections by the RBI. Yet it could not hold them accountable for the large scale frauds in UCBs.
Insofar as StCBs and DCCBs are concerned, they are under the supervision of NABARD and the board appointments are supposed to be done as per the ‘fit and proper’ criteria fixed by RBI. Elections to the cooperative societies are conducted by the registrar of cooperative societies. Cooperative societies as per cooperative statute are member-driven, member-controlled and member-protected. If members who are large in numbers choose to abdicate their responsibilities or do not take enough interest in their activities, jeopardising the interests of other stakeholders and particularly the non-member depositors, the remedy rests only with the registrar.
In so far as banking is concerned, it is only RBI that regulates all, and all UCBs are subject to inspections by the RBI annually or whenever any aberration comes to their notice even during a year. Depositors’ constituency for long has been asking for a representation on the board and this can be done only by an amendment to the Cooperative Act.
The latest Report on Trend and Progress of Banking in India from RBI (December 2019) has stated that the importance of cooperative banks in India lies in their ‘grassroots’ integration into the life and ethos of the widest sections of society and their being effective instruments of financial inclusion. They account for about 10% of total assets of the scheduled commercial banks in 2017-18. The report also clarifies that the combined balance sheet of UCBs witnessed robust expansion underscoring the effectiveness of measures taken to strengthen their financials.
Although 89.5% of the UCBs’ resource base happens to be deposits, their growth is muted and remains well-below the average of 13.9% achieved during 2007-08 to 2016-17. A capital adequacy; asset quality; management; earnings; liquidity; and systems and control (CAMELS) rating model is used to classify UCBs for regulatory and supervisory purposes. UCBs in the top-ranking categories— with ratings A and B—accounted for 78% of the sector. Only 4% to 5% are in D category for the past five years. And yet, the well-rated UCBs have defalcated with impunity for years. Will this ordinance rectify this malady?
UCBs are under the regulation of RBI and the registrar of cooperatives of the state government where they were situated. The regulatory conflicts were being resolved through the Task Force on Co-operative Urban Banks (TAFCUB) during the past 10 years to the satisfaction of both banks and the regulators at the altar of RBI.
During the last two decades, the Marathe Committee, the Madhava Rao Committee, the Malegam Committee, the Gandhi Committee and RBI’ Vision of UCBs have gone on record on the measures to be taken for strengthening them in the face of a series of frauds and maleficence and even closure of several UCBs in Gujarat, Maharashtra, and Andhra Pradesh.
The government of India even brought out a comprehensive 97th Amendment to the Constitution of India in 2011 as a Model Cooperative Act to be enacted by the state governments. None except the government of Orissa showed interest. Had this Act been passed and implemented in letter and spirit there would have been no need for the ordinance now.
No state is keen on legal reforms to cooperatives. Cooperatives are the seedbed of politics and every prominent politician of the country, barring some Rajya Sabha or Legislative Council Members, everyone started his/her political career with a cooperative society as the base. One may well say that cooperatives without politics are lame and politics without cooperatives is blind. Viewed from this perspective, this ordinance makes a great difference. It sets at naught all political interferences beyond the primary cooperative societies.
Several commercial banks, fully under the regulation of the RBI since 1949, have also been victims of frauds and maleficence. Several banks, both in the public and private sectors, like SBI, ICICI, PNB etc continue to hit the headlines on such a count.
The difference is that in all such cases, the interests of depositors have been protected. There were mergers or amalgamations but there were very few occasions wherein the affected banks were closed or deposits barred from withdrawal. It should be worthy to recall that even in case of commercial banks the deposits are secured to the same extent as UCBs/MSCBs, viz., Rs1 lakh earlier, recently enhanced to Rs5 lakh per depositor.
Several UCBs are already part of the national payments system. Financial inclusion demands customer centricity and smart technology applications, apart from financial learning at the institutional and client level.
Rural credit cooperatives have been in the throes of change: accounting practices, (from single entry book keeping to double entry book keeping), technology change; regulatory changes and structural changes. They have come into the mainstream of financial inclusion agenda of the country.
When NABARD has a new guard, it would have allowed scope for the new management to carry out the required improvements to the short term cooperative credit structure instead of clubbing them with the UCBs. All the DCCBs have already been brought under the regulation of RBI notwithstanding the ordinance. Further, RBI invested in computerization of both the UCBs and rural cooperative societies and banks with the allocation of Rs4 lakh per UCB and a maintenance cost of Rs15,000 per month for a period of three years post-implementation. The government of India in their 2017-18 budget allocated Rs1900 crore towards computerization of the Primary Agricultural Credit Societies (PACS). This initiative should have been properly monitored to ensure transparency, better accounting practices and better customer service on par with commercial banks. To search for a solution of lost opportunity in the ordinance does not reflect a good governance practice.
Though the organisation may introduce appropriate strategies, it is the culture of the organisation and governance that would require to be looked at in cooperatives. They can improve the bottom-lines through reduced costs; enhance customer experience; and strengthen security and compliance through state-of-the art encryption practices, audit trails and security certifications. Customers always need their data to be safe and secure.
When the problem rests with the regulator – lax inspections, lack of transparency in dealing with the banks and improving governance, the remedy is sought through a legislative amendment! This may perhaps provide a better lever to RBI to merge weak UCBs with strong ones and disable closures as a solution to protect the interests of depositors. Will the PMC depositors now get fully all their deposits and interest? We should wait and see.
Development of cooperatives is no longer an option, but a compelling necessity to achieve financial inclusion. Implementation of the ordinance should only strengthen the cooperative system and not eliminate them under the guise of regulation.
(The author is an economist and risk management specialist.)