Urban co-operative banks are falling like pack of cards, leaving hapless depositors high and dry!

There is an unprecedented euphoria both at the Reserve Bank of India (RBI) and the Finance Ministry to grant new banking licenses. There are 26 aspirants waiting in the wings to start banking operations once they get through the fit and proper criteria prescribed by RBI. To add to this excitement, the governor of RBI has recently announced that the central bank would soon come out with major reforms in the banking sector that will allow foreign banks to enter India in a big way and even take over domestic lenders, which has even created ripples in the stock market in our country.
 

On the other side of the spectrum is the strong view conveyed by the Parliament’s Standing Committee on Finance (PSCF) against granting new banking licenses to industrial houses. The PSCF felt the industrial houses may not be geared to achieve national objectives of priority sector lending and financial inclusion, going by the past experience of poor performance of many new private banks licensed by RBI in two tranches in1993 and 2001.
 

In this exuberance, what is conveniently forgotten is the pitiable plight of a large number of bank depositors caused by a series of failures of urban co-operative banks (UCBs) year after year. During first ten months of the current year, ten urban co-operative banks kissed death causing untold hardships to a large number of bank depositors, who are virtually left high and dry for no fault of theirs. The UCBs that went belly up during the current calendar year are as under:
 

Urban co-op banks de-licensed by RBI from 1 January to 30 September 2013
 

As on 31 March, 2013, there were 2,007 urban co-operative banks functioning in the country under the dual control of the state governments and the RBI and these banks are covered under the deposit insurance cover of Rs1 lakh per depositor provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a subsidiary of RBI. And every year several urban co-operative banks go into liquidation. During 2012-13, as many as 19 co-operative banks have been wound up, where as during 2011-12 banks numbering 23 were closed down.  If you go through the press releases of RBI, every other day, the central bank penalizes one co-operative bank or the other for breach of banking regulations. This finally, culminates in the withdrawal of banking licence at an average of more than one bank a month, which is not only painful to the depositing public but a sad commentary on the functioning of the banking institutions in our country.
 

Why urban co-operative banks (UCBs) are important for the economy?
 

According to Manual on Financial and Banking Statistics 2007 of RBI, “urban co-operative banks play an important role in meeting the banking needs of urban and semi urban areas of the country. UCBs account for about 5% of deposits and almost equal proportion of advances of the banking system. Despite their small share in business, UCBs contribute significantly towards social and economic development, as instrument of financial inclusion. They mobilize savings from the middle and lower income groups and purvey credit to small borrowers, including weaker sections of the society and thereby fill up an important gap in the mechanism for delivery of financial services.”

If UCBs are so vital to the economy, can they not be saved from failure?
 

What ails the co-operative banks?
 

A number of UCBs suffer from a series of maladies of miss management, absence of professionalism, interference by political bosses, laxity in internal control due to poor systems and procedures and weak financial position caused by high non- performing loans and their inability to raise required capital. And these problems get compounded by the duality of control by state governments and the RBI, as the latter has very limited control over these banks. When the managements of these banks totally abdicate their responsibility to resurrect the troubled banks, RBI is forced to impose restrictions on their operations, and when they reach a state of beyond repair that RBI withdraws the license resulting in liquidation of these banks. Though the number of sick and weak UCBs is coming down, there still exist a large number of them who need to improve their position to remain in banking business.
 

Role of Deposit Insurance & Credit Guarantee Corporation (DICGC)
 

If a bank goes into liquidation the DICGC is liable to pay to each depositor through the liquidator, the amount of his deposit up to Rs1 lakh within two months from the date of receipt of claim list from the liquidator. As per the rules, the DICGC does not deal directly with the depositors of failed banks. The liquidator has to prepare a depositor-wise claim list and send it to the DICGC who on scrutiny makes the payment to the liquidator, who is liable to pay to the depositors. But if the liquidator fails to submit the claim to the DICGC, the depositor has no way to get his dues and has to suffer in silence.
 

Can this suffering of depositors go beyond a reasonable period due to the failure of the liquidator to submit the claim to DICGC in time? Unfortunately, the position is so bad that depositors of as many as 25 UCBs, who went bankrupt during the last14 years, are yet to receive their dues from the DICGC due to the failure of the liquidators of these banks to file their claims with the DICGC. This shows utter callousness on the part of the concerned government authorities in continuing with the liquidators, who have miserably failed in their duties to the depositors of these banks. Can there be a worst tragedy than this for the bank depositors? Here is a list of these 25 banks as listed in the website of DICGC.     
                                                    

           List of Banks under liquidation where claim lists have not been received by DICGC

 Source: www.dicgc.org.in

What needs to be done to protect the hapless depositors of these banks?
 

First, and foremost, there is an urgent need to force the liquidators to do their primary job of submitting the claim to DICGC, get the amount due and disburse the same to the depositors of failed banks without any further delay. If the liquidators are not amenable to the directions they should be replaced without any fear or favour and steps should be taken to appoint liquidators who comply with the orders of the authorities concerned.

The DICGC should not only pay the amount of insured deposits against such a claim, but also pay interest at the bank rate on these deposits over and above the insured deposit amount, as the delay is only due to the failure of the government appointed liquidators. Besides, DICGC as the protector of bank depositors should amend their rules and accept claims from the depositors directly, if the liquidators do not do their job within a reasonable time.
 

DICGC should be empowered to not only take stern action against the defaulting banks but also be authorized to step in to the shoes of the liquidators who fail to deliver to protect the interest of depositors of failed banks.
 

RBI should take immediate steps to put an end to the dual control of these banks even by getting the required laws amended and have complete control over these banks to ensure that they are run on sound lines and failure of these banks should be considerably minimized if not totally avoided.
 

In the context of many co-operative banks falling like of pack cards causing irreparable damage to the banking system and unbearable loss to the poor depositors, who have no voice in the present scheme of things, RBI should first put the house of co-operative banks in order before venturing into granting new banking licenses. The low level of deposit insurance cover existing at present in respect of the weak and shaky co-operative banks is nothing but a mockery of the banking system that calls for total overhaul in the interest of retaining public confidence in the banking system in our country.  
 

RBI should give utmost priority to protect the hapless depositors and work out a new banking order that is 100% safe and secure to protect the poor, illiterate and less fortunate people of our country, who are now virtually pushed in to the banking system in the name of financial inclusion without ensuring safety of their hard earned savings.
 

(The author is a banking analyst and he writes for Moneylife under the pen-name ‘Gurpur’)