City Cooperative Bank’s Decay under RBI’s Watch Holds Lessons for PMC Bank’s Revival
Last week, I wrote about how the Reserve Bank of India’s (RBI’s) inspection reports
, procured by Girish Mittal under the Right to Information (RTI) Act, had all but identified the fraud that led to PMC Bank’s (Punjab and Maharashtra Cooperative Bank) eventual failure way back in 2014-15; but RBI failed to dig deep or follow it up. Three years later, RBI froze depositors’ funds and eight persons succumbed to the shock and stress of their hard-earned savings likely to go up in smoke.
The story repeats itself with City Cooperative Bank (CCB), which is much smaller, with only 10 branches and Rs440 crore of deposits. CCB has been placed under RBI directions since 17 April 2018 for six months. Depositors were allowed to withdraw only Rs1,000 of their hard-earned deposits. This was a tightening of RBI’s regulatory action which was already in place in 2015-16.
RBI has extended the restrictions three times, the latest on 17 October 2019. By then, PMC Bank had collapsed and, with CCB depositors also reviving their protests, RBI increased the amount they could withdraw from Rs1,000 to Rs5,000.
When RBI places a bank under directions, it suggests a possible revival. RBI’s statement accompanying the CCB action said, “The issue of directions should not per se be construed as cancellation of banking licence by the Reserve Bank of India. The bank will continue to undertake banking business with restrictions till its financial position improves.” The reality is diametrically different. In CCB’s case, RTI activist Girish Mittal’s application yielded inspection reports for three years: 2015-16, 2016-17 and 2017-18.
Even a cursory reading of the summary findings, as of 31 March 2016 (marked Secret), clearly show that the Bank “did not have adequate assets to meet its liabilities” and there were plenty of other irregularities as well.
RBI had also imposed a ‘Supervisory Action Framework’ (SAF) on 23 November 2016. But, instead of an improvement, things only deteriorated over the next three years. Interestingly, the number of depositors nearly halved, from over 96,000 to just over 50,000, indicating an exit of savvy persons.
What explains RBI’s failure to take steps to revive the Bank in 2016? Was it that this tiny bank was headed by Anandrao V Adsul, a four-time member of parliament (MP) from Amravati, representing the Shiv Sena which was part of the then ruling alliance in Maharashtra? Several members of the Adsul family were also a part of the board of directors.
Or, was it because RBI, completely blindsided by a much bigger scam at PMC Bank, actually believed that CCB would be taken over and no other action was required? When RBI put PMC Bank under strict restrictions, PMC Bank was in talks to acquire two loss-making banks in Goa --The Mapusa Urban Cooperative Bank and the Madgaum Urban Cooperative Bank. It had also submitted a proposal to RBI to acquire CCB.
This only establishes RBI’s poor supervision and inspection and complete lack of market intelligence. Let’s look at what the RBI inspection reports said.
Inspection Report 2015-16: The report says that CCB’s assets would not cover liabilities. Its capital to risk-weighted assets ratio (CRAR) was -5.2% against the minimum stipulated level of 9%. The Bank’s net-worth was fully eroded. The report says that the realisable value of assets after provisions and depreciation, at Rs522.89 crore, was less than outside liabilities assessed at Rs547.70 crore. The real value of paid-up capital and reserves (-Rs15 crore) was inadequate to meet liabilities.
There were instances of fraud that were “neither reported by the Bank nor adequate provisioning was made thereon,” it says. RBI asked for 100% provisioning of these loans which only increased losses. Its credit appraisal was ‘not satisfactory’ and was not based on the ‘genuine need of the borrower’. The post-disbursement supervision was also ‘not satisfactory’.
The Bank’s board was not bothered about addressing all the issues and non-compliances noted by RBI. As in PMC Bank’s case, the audit system was found deficient, wasn’t adhering to KYC (know your customer) policy and had not even allotted unique customer identification code (UCIC) to all customers.
The Bank’s reported gross NPAs (non-performing assets or bad loans) were 11.83% and net NPAs were 8.84%. As against this, the gross and net NPAs, as assessed by RBI, were massively higher at 46.24% and 44.50%, respectively.
Based on the financials, as assessed in the inspection report on 31 March 2015, RBI imposed SAF, which placed strict restrictions on the Bank’s operations, without any revival plan.
At this time, CCB had deposits of Rs534 crore, of which Rs409 crore were high-cost term deposits (over 76.7%), and only Rs124.45 crore were current and saving accounts (CASA). Bad loans jumped in 2015-16 from Rs42 crore to Rs167.65 crore (gross NPAs) and the Bank did not have adequate provision for loan losses.
Inspection Report 2016-17: The Bank continued to remain under SAF that year. Yet, it’s paid-up capital increased by Rs11 lakh to Rs10.62 crore due to ‘new members’. However, CRAR declined dramatically from -5.12% to -28.68% “mainly due to high level of divergence in the loan portfolio of the bank,” says the inspection report.
The realisable value of assets, at Rs531 crore, was less than its outside liabilities assessed at Rs600 crore. Real value of paid-up capital deteriorated further. The report says, value of deposits as well as capital and reserves were fully eroded to the extent of 11.89%.
In simple terms, this means that the Bank was already eating up customers’ deposits. And, yet, there was nothing from the RBI to warn ordinary persons who were depositing more money into the Bank.
The inspection report says that total deposits increased from Rs534 crore to Rs586 crore; of these, term deposits had increased from Rs409 crore to Rs433 crore. The biggest jump of 22% was in CASA accounts which rose from Rs124 crore to Rs152 crore.
With RBI restrictions in place, the Bank’s loans and advances declined from Rs362 crore to Rs343 crore. Although the Bank was under RBI’s close watch, the insipid inspection report has no significant violations to report, except weaknesses in certain processes and absence of a policy on identifying bad loans, followed by a routine narration of the management structure and operations. The only negative observation is that the functioning of the audit committee, the loan and scrutiny committee and recovery committee needed improvement. The CEO (chief executive officer) of the Bank had resigned in July 2017 on health grounds; but RBI has no comment on management continuity or efficiency.
Interestingly, CCB’s operating income jumped a massive 103% due to profit earned from trading in securities (trading profit alone was up 341%). This, along with lower operating expenses (staff, etc), still led to a declared a net loss of Rs20.03 crore. However, RBI assessed the net loss for 2016-17 at Rs94.82 crore.
The report makes it clear that RBI imposed restrictions and hobbled operations with absolutely no turnaround plan. Meanwhile, innocent depositors were clueless that the Bank was sliding dangerously.
Inspection Report 2017-18: As is obvious, CCB’s position had deteriorated further by 31 March 2018, even under the SAF. Accumulated losses led to a decline in capital and the assessed CRAR declined from -28.68% to -65.46% on 31 March 2018. The Bank’s own estimate was much lower.
Finally, on 17 April 2018, RBI tightened restrictions by imposing more stringent ‘all inclusive directions’ on the Bank. This only confiscated depositors’ money and prevented them from withdrawing more than Rs1,000 from their accounts, with no revival plan. The inspection report notes that CCB’s real net-worth declined to -Rs120.19 crore, while the assessed net-worth fell 72%, to Rs50.48 crore.
This report also indicates a big drop in bulk deposits and savings accounts. Deposits dropped a hefty 24.20% (see table). Although RBI had prohibited premature withdrawal of deposits, and CCB also did not accept fresh deposits, people were allowed to take away term deposits on maturity.
Since CCB was made to reduce interest to the level offered by State Bank of India (SBI), as part of RBI directions, this too could have led to the withdrawal by alert depositors. The rest of the inspection report is a wishy-washy narration of routine markers. What is clear is that CCB had been forced into a zombie state due to RBI’s directions; the Bank had no leeway to improve profitability.
None of the three reports has any comment on quality of management; nor do they indicate whether CCB’s downfall was due to political interference, behest lending or sheer incompetence. These insipid reports call into question the very purpose of RBI’s annual inspections, which seem to add no value, but, in fact, precipitate the downfall of the Bank once it goes into the red.
All this holds important lessons for PMC Bank, where RBI is promising a turnaround, based on the sale of collateral security offered by the HDIL (Housing Development and Infrastructure Ltd) group against the massive Rs6,500 crore of fraudulent borrowings. With no independent assessment of the security, or the claims of other banks and creditors, the PMC Bank will remain in a zombie state, swallowing up depositors’ money. It is already a zombie on a path of slow decay with a running cost of Rs1crore a day!
We clearly need a different way of dealing with loss-making cooperative banks that are eating away people’s savings.
Here is the copy of RBI Inspection Report on The City Cooperative Bank as on 31 March 2016...
Here is the copy of RBI Inspection Report on The city Cooperative Bank as on 31 March 2017...
Here is the copy of RBI Inspection Report on The city Cooperative Bank as on 31 March 2018...