On 24th June, the Union government issued an ordinance to bring 1,482 urban cooperative banks and 58 multi-state cooperative banks under the direct supervision of the Reserve Bank of India (RBI). This big step takes forward its failed attempt to do this through an amendment to the Banking Regulation Act just before the COVID-19 pandemic broke out.
The ordinance will give RBI the same powers of supervision over cooperative banks as it does over scheduled cooperative banks and also a say in key appointments. This means that RBI will now be fully responsible if cooperative banks continue to fail with the same chilling regularity as they have, under shared regulation with the registrar of cooperatives, in the past few decades.
Most cooperative banks are controlled by powerful politicians, which explains their poor supervision and the lack of political will to change things, despite the regular losses suffered by innocent depositors. The argument to retain status quo has been that these banks cater to under-banked rural India and, hence, need more leeway and indulgence. This excuse is still trotted out, decades after a combination of microfinance, the spread of non-banking and fintech companies have established a better reach to the target customers claimed by undercapitalised and poorly-supervised cooperative banks.
Moneylife has repeatedly warned savers to be wary of cooperative banks which fail at an average of at least one every month. In case after case, RBI imposes restrictions on lending and withdrawals, years after warning signs and weaknesses are evident. The banks then remain in a zombie state for years before they are wound up and their licence is cancelled. Depositors are often denied even the pitiful deposit insurance of Rs1 lakh for several years, until the bank is finally liquidated. Since no previous regime has wanted to change this, one can only welcome the government’s action, whatever the motivation behind it.
Remember, this government led by the Bharatiya Janata Party (BJP) itself started its innings with the most brazen support for these badly supervised banks. In November 2014, it was the first government ever to legitimise even unlicensed cooperative banks (yes, RBI had discovered that there were at least 23 banks operating without a licence) with a massive Rs2,375.42 crore bailout. So powerful is the political protection for these banks that, in 2011, it was discovered that as many as 28 of them had continued to operate despite a negative net worth.
Political pressure wasn’t the only reason for this state of affairs. RBI itself is notoriously reluctant to do anything that increases its work and supervisory responsibility. Despite hundreds of cooperative banks having failed in the past few years, as a category, they are still the biggest chunk at over 1,400, compared to just over 100 scheduled commercial banks.
Bringing cooperative banks under RBI’s exclusive supervision increases its accountability and it would be no surprise if there was a lot of internal resistance to the move. In fact, RBI has a notorious record of refusing to act even when whistleblowers at cooperative banks—like Bombay Mercantile Cooperative Banks—have exposed corruption and loot, with documentation.
In September 2018, the government allowed cooperative banks to convert to small finance banks. But with only one bank receiving ‘in principle’ approval to become a small finance bank in January 2020, that is clearly a damp squib.
Is the failure of Punjab and Maharashtra Cooperative Bank (PMC Bank), a turning point for supervision of cooperative banks? Probably. Although the finance ministry has steadfastly ignored the plight of depositors, their sustained campaign is certainly a political embarrassment for the NDA government, especially BJP leaders from Maharashtra who have cold-shouldered PMC Bank victims. There is a lot of anger within RBI itself, since its own officials have lost nearly Rs200 crore invested by two separate cooperatives of RBI officers and clerical staff.
Meanwhile, after a three-party coalition government was formed in Maharashtra, the Nationalist Congress Party (NCP) is playing to the gallery on PMC Bank. In February this year, it proposed a merger with Maharashtra State Cooperative Bank (MSCB), controlled by NCP big guns.
MSCB has been extremely controversial. RBI had ordered an investigation and clean-up in 2010-11. An investigation by the National Bank of Agriculture and Development (NABARD) had revealed that MSCB’s former management was guilty of exactly the same kind of fraudulent activities that felled PMC Bank. Can RBI possibly consider MSCB ‘fit and proper’ to acquire PMC Bank? Does MSCB really have the financial strength to take on the massive losses of PMC Bank, which are reportedly in excess of Rs6,000 crore, even though it seems to have turned around, recording a Rs251 crore profit for year ended 31 March 2019?
Following a directive of the Bombay High Court (HC), the economic offences wing of the Mumbai police had to initiate action in August 2019 against the present deputy chief minister Ajit Pawar and 70 others in what was billed as a Rs25,000 crore scam. Unsurprisingly, the investigation has lost momentum after the NCP became a key member of the ruling triumvirate. But the political jostling over banks continues and the ruling coalition went after Axis Bank and forced many government and police accounts to shift away from the Bank, alleging that it was favoured by former chief minister Devendra Fadnavis, since his wife worked with the Bank.
RBI could have avoided this embarrassing and politically sensitive situation if it had acted quickly and appointed a strong administrator with a mandate to find buyers for PMC Bank. Indeed, this was among the suggestions made to the government by Moneylife soon after the PMC Bank collapse. The COVID pandemic has made the job of finding a suitor for PMC Bank more difficult and, at the same time, exacerbated the difficulties of depositors who have lost their jobs as well as their savings in the lock-down.
NCP’s political gimmick, of proposing a merger with the MSCB, puts Maharashtra BJP’s leaders in a spot. PMC Bank depositors don't care about the antecedents of MSCB or the motivation of the NCP, so long as they get access to their own hard-earned money. They also feel badly let down by BJP leaders who, probably taking a cue from the central leadership, have done nothing to help or even facilitate a dialogue with the authorities.
The ordinance to bring all cooperative banks puts a new spin on events. It brings all the politically controlled cooperative banks in Maharashtra under RBI supervision and scrutiny. But will we really see a clean-up? Maharashtra, along with Gujarat and Andhra Pradesh has the largest concentration of politically controlled, badly regulated cooperative banks. In Maharashtra, it is the NCP and the Congress which had a strong hold over these banks as well as cooperative institutions.
As part of the MSCB scandal, the Maharashtra government has even had to cough up over Rs1,000 crore, following a Supreme Court order, on account of loans guaranteed on behalf of politically controlled sugar factories, spinning mills and agricultural units. But, lest we forget, some powerful politicians in this sector defected to the BJP before the Maharashtra state elections.
The ordinance is, indeed, a very positive move; but is it only a part of political gamesmanship or will lead to a clean-up and reduce political control over cooperative banks? How will the conflicting interests of the NDA’s newly acquired state leaders affect the process? Nobody seems to have a clue.
We can only hope that it also helps end the misery of PMC Bank depositors and it finds a better suitor for the Bank. RBI governor, Shaktikanta Das, has always maintained that he is working at a resolution. With the lock-down ending and stock markets rising, maybe RBI hasn’t missed that opportunity altogether.