Cooperative Banks: Outright Loot
Almost every month, the Reserve Bank of India (RBI) puts out a brief press release announcing the closure of one cooperative bank or the other. Deposit insurance payment data show that Maharashtra has the highest number of cooperative banks going bust. According to one petition, 165 cooperative banks have been shut down in Maharashtra in the past 30 years. These small banks fail with monotonous regularity because of they are under the dual regulation—that of the RBI and the Registrar of Cooperatives. Cooperative banks are usually set up by politicians or their cohorts and RBI does not bother to block their dodgy advances until it is too late for a rescue. Over the past two decades, the only insurance claims paid out by the Deposit Guarantee Insurance Corporation of India (DGICI), a subsidiary of RBI, are on account of cooperative banks. Their hapless depositors get only Rs1 lakh each paid out after the bank is actually liquidated which can take a few years. Unlike nationalised banks, which are owned by the government and, hence, carry an implicit sovereign guarantee, there is no such protection for cooperative banks from the states or the Centre. 
Occasionally, when a bank is politically powerful, or otherwise sensitive, RBI has coerced a quiet merger with a public sector bank. Nobody questions RBI’s secretive dealings; so one never knows when rules are bent or flouted. So pathetic is the supervision of cooperative banks that RBI discovered 23 banks across India were operating without a licence! Ironically, the National Democratic Alliance (NDA) took the unprecedented decision to infuse a massive Rs2,375 crore to revive these shady banks, within months of coming to power. 
Let me illustrate, with examples, how this endangers the savings of cooperative bank depositors. Pravin Darekar, chief of Mumbai District Co-operative Bank (MDCB) was booked for alleged embezzlement and causing a loss of Rs123 crore to the Bank by the Mumbai police in 2015. On 3 June 2017, the Maharashtra government issued a government resolution (GR) ordering all school and junior colleges teachers in the state to shift their salary accounts from a safe, nationalised bank (Union Bank of India) to the MDCB from 1st July. The reason? To ‘strengthen’ the cooperative movement in Maharashtra, but more likely to support Mr Darekar, who is now a BJP member of the legislative council; he has continued to head the Bank, despite being under police investigation. Over 30,000 teachers are affected and angry at this decision. MDCB does not even have the same infrastructure as a nationalised bank. But the government is unmoved and even justifies the action. Some teachers are now planning litigation against the order. 
Now consider the case of the Bombay Mercantile Cooperative Bank (BMCB). One of the oldest, multi-state minority cooperative banks, BMCB was considered on par with, or better than, the Saraswat Cooperative Bank, at one time. But their growth trajectories have been diametrically opposite in the past couple of decades. Saraswat Bank has gone from strength to strength, kept political interference to the minimum and is the best among a handful of well-run cooperative banks. BMCB, on the other hand, has been systematically looted and mismanaged, despite every effort by a few dedicated whistle-blowers to draw the attention of RBI and the Central Registrar of Cooperative Societies (CRCS) since 1986. 
I have been writing about the mismanagement of BMCB since the early 1990s, when I worked for The Times of India. After RBI’s intervention, a former secretary of the government was appointed managing director; but the turnaround was temporary. He was soon co-opted by the cabal that runs the Bank and the rampant loot resumed. In November 2104, I wrote to RBI governor Raghuram Rajan drawing attention to the fact that no action was initiated on the adverse findings of an RBI-ordered investigation by RM Khan, a retired district judge. I have forwarded an extensive letter by the whistleblowers detailing how dubious loans were being disbursed to companies connected with the management. This led to an inspection which, again, yielded negative findings and some curbs on management. But there was no decisive action, even under Dr Rajan. RBI follows a ponderous approval process for those who head the large private and nationalised banks; but it has turned a determined blind eye to the fact that the chairman and two directors of BMCB are facing criminal charges for cheating and fraud at Lucknow. All three have allegedly flouted banking regulations to avail bogus loans, usually by submitting fake documents. These loans, says the whistleblower (producing documents to back his charges), were then transferred to nationalised banks and were later classified as non-performing. Loans to the directors are in direct violation of the Banking Regulation Act. 
After whistleblowers learnt that a Union minister has been making calls to support the Bank management, two MPs (Members of Parliament) from the Shiv Sena—Anand Rao Adsul and Gajanan Kirtikar—have taken up the matter with RBI, finance minister Arun Jaitely, and the Central registrar, in August. In a letter to the RBI deputy governor on 16th August, Mr Kirtikar has expressed surprise at RBI’s lack of action, when its own inquiry has established embezzlement of funds by the chairman Zeeshan Mehndi. He has also, among other things, drawn attention to two shell companies—M/s Shah Traders and M/s Universal Enterprises, which were used to route loans to the directors. In June 2017, RBI wrote to the CRCS agreeing that these dubious transactions were confirmed by its investigation. On 1st August, the joint secretary, CRCS, Ashish Kumar Bhutani, issued a bland show-cause notice to the chairman Zeeshan Mehndi and the Bank’s managing director. Nothing further has been done. 
Meanwhile, a whistleblower has filed a public interest litigation (PIL) in the Bombay High Court. The petition claims that the directors’ loans, mentioned above, were part of Rs200 crore worth of bad loans sold to an asset reconstruction company, to hide the trail of dodgy transactions. The petitioner says he has received threats, from a dreaded gangster, asking him to desist from exposing the Bank management. In addition, the Bank has slapped a series of charges to discredit the whistleblowers, who are its former employees and trade union leaders. Fortunately, the court issued a notice to RBI and CRCS seeking their response. It is this that has finally led to a show-cause notice on the chairman. Remember, the transaction mentioned here is just one among scores of dubious deals identified by the whistleblower and backed with evidence to establish the charges. But who is listening? 
At a time when RBI claims to have initiated corrective action against some nationalised banks, what will shake it up and force it to take decisive action to save BMCB? The Bank continues to sink; the fate of 1,500 employees and innumerable depositors hangs in the balance. Remember, the Bombay Mercantile case is not an exception; it is the norm. The only difference, if any, is that it has had a dedicated set of whistleblowers working to save it. 
These are just two examples of how cooperative banks remain in the tentacles of shady politicians, while both the regulators—RBI and the CRCS—continue to remain unconcerned to the shock and frustration of insiders and whistleblowers. Indeed, shady cooperative banks continue to thrive under all governments, even the current one, which claims that it has declared a war against corruption.
Tukaram Raja
2 years ago
Forget about getting money, it is only when the coop bank goes into liquidation, you can get Rs one lakh, by that time you will be liquidated, the bank directors or owners will move forward, change names identities , court case if you go to court will take a century and Directors who are politicians or netas will mark you down and you will have a SUPARI. There is no FRAUDIT , inspection is by CHAPRASIS OF COOP DEPT and DICGC will collect its Hafta and sleep. But BEWKOOFS like me will deposit in Coop Bank as it
pays me 0.5 % more interest and Manager smiles at me when I enter the Bank. This is what fooled me.
Know The Truth
4 years ago
While the deposits in co-operative bank are (supposedly) insured by DGIC upto Rs.1 lakh, in practice this rarely happens. The article does mention the statistics of this payout. I hold deposit in a cooperative bank in Pune which has gone bust 5 years ago. RBI has appointed an administrator who is driving recovery of bad loans. Court cases have been lodged against managing committee members and some bank officers responsible for siphoning away deposits and causing bad loans. No bank is willing to take it over this bank due to high NPAs. Meantime, employees are agitating to not close down the bank as they will become unemployed. While court has given liquidation orders some time back, the employees are getting a stay on it. For a depositor, the one lakh rupees will be paid by DGIC only if bank gets liquidated. Due to delay in liquidation, my deposits in the bank are accruing interest and grown to over 2 Lakh rupees- however I will receive only Rs.1 lakh from DGIC. This is a mockery of the banking system and investor confidence. The least i would expect from RBI is to not further delay the liquidation process.
Sucheta Dalal
Replied to Know The Truth comment 4 years ago
Ideally, as a reader it would have been valuable for you to attend moneylife foundation's financial literacy seminars... may have avoided such a predicament.
Govinda Warrier
Replied to Know The Truth comment 4 years ago
May be, readers may not be able to help expedite things. But it's intriguing that the identity of the cooperative bank is also held back. If revealed, who knows, some other depositor who could get back part of the deposit may share experience!
Shahid Shaikh
4 years ago
I am a employee of a Co Op bank in Maharashtra .RBI is treating us like a adopt child . We have to wait for a long time to take our bank online. there should be a latest GR for our sectors
Mahesh S Bhatt
4 years ago
Thats why Government wants PSU & Cooperative Banks hence they shall never be privatised for personal buffers Amen Mahesh Bhatt
4 years ago
Thank you for this much awaited piece on the breeding ground of corruption and loot at the grass-roots level-- cooperative banks. You are right as you say: "Cooperative banks are usually set up by politicians or their cohorts and RBI does not bother to block their dodgy advances until it is too late for a rescue. " I would. however, like to add that, not usually--but most of these dubious cooperative banks (like the sugar cooperatives of Maharashtra) are created and run by the politicians. The story is the same all over the country, with no control whatsoever on the illegal activities carried on by their management. All that written in the article is known to the govt and the spineless bureaucrats. But, for certain compelling reasons, timely action is not taken.
4 years ago
When banking involves dealing with people's money, there should not have been dual regulation. But the political class and their cohorts are interested to keep their loot away from public glare, co-operative banks which until recently did not follow any KYC norms, provided them a safe heaven. Any attempt to bring under RBI was opposed in the name of federalism. Who lost the money are those poor farmers and wage earners. It is high time banking in any form is brought under the sole control of RBI.
Sanjeev Rajgarhia
4 years ago
These Bank operate under Co-operative Act which is State Laws. Most of these Co-op Banks are owned / patronized by Politician. They are den of Corruption and Money Laundry Unit for them. Very Few of them are better managed .
Govinda Warrier
Replied to Sanjeev Rajgarhia comment 4 years ago
This is an oversimplified observation. For a few more decades at least, cooperatives will continue to play a role in the rural and semi-urban economy in India. Reason is, private sector banks are not yet reconciled to penetrating beyond certain geographical areas where urban facilities are available and even public sector banks would prefer to open branches at walkable distance from towns. Cooperatives have a network of outlets in villages where such facilities are yet to reach. There is no denying that there is exploitation by politicians and landlords who exercise 'ownership rights' in cooperatives.
Govinda Warrier
4 years ago
This article gives a broad picture of the messy situation in which cooperative banks have landed. There are multiple categories of cooperatives doing 'banking' in India and a multiplicity of regulatory and supervisory arrangements for these institutions. In 1966, certain provisions of Banking Regulation Act,1949 were made applicable to Cooperative Societies through an amendment to B R Act. Since then, we have three categories of cooperative banks, State Cooperative Banks, District Cooperative Banks and Primary (Urban) Cooperative Banks. While district co-op banks (DCBs)are in a sense federations of primary cooperatives in districts and state cooperative banks(SCBs) are Apex Banks at state level for DCBs, primary (Urban) co-op banks are mini commercial banks working in the cooperative sector. While SCBs and DCBs are regulated/supervised by RBI/NABARD, primary (urban) co-op banks are regulated/supervised by RBI. All cooperatives are under the administrative control of respective state governments. During Demonetization days, we have seen the problems faced by cooperatives which were short-circuiting legal provisions using political clout and state government support. Kerala has initiated a process of consolidating all co-op banks (except Urban Cooperative Banks) and having a large Kerala Bank. If the experiment succeeds, it will be another 'Kerala Model' worth emulating by other states.
Rounaqhe ABBAS
4 years ago
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