MSC Bank: The RBI finally steps in to clear the mess in Maharashtra’s apex co-operative bank

The action by the RBI to supersede the board of directors of the MSC Bank and to appoint administrators has highlighted the need to bring all co-operative banks, a majority of which are controlled by politicians, under the central bank's direct control

Over the weekend, the Reserve Bank of India (RBI) superseded the board of directors of the Maharashtra State Co-operative Bank Ltd (MSCB), the nodal bank for all co-operative banks in the state and appointed administrators. This has brought forward the infighting between the Indian National Congress and the Nationalist Congress Party (NCP), the ruling partners in Maharashtra. More about this later.

Moneylife had written about the financial mess in the MSC Bank caused due to the bank's suspicious loan distribution to some of its favoured co-operative banks as well as some loss-making sugar co-operative factories. (Read Maharashtra's apex co-operative bank in financial turmoil )

While the RBI regulates all banks in the country, the co-operative department of state governments, however, has direct control of co-operative banks. A majority of these co-operative banks have become virtual fiefdoms of politicians, who grant loans to themselves, their friends and relatives. Many co-operative banks do not even follow the prudential governance norms for non-performing assets (NPAs).

In the case of MSC Bank, the RBI took action after finding deficiencies in the bank's annual inspection report prepared by the National Bank for Agriculture and Rural Development (NABARD).

For FY10, the bank's auditors, Joshi Nair and Associates, have given a 'D' grade to MSC Bank as it could score only 31 marks out of 100, based on various parameters. As per the provisional figures provided on the bank's site, for FY10, its gross NPAs were 20.9%. However, while converting the same into net NPAs, the bank had shown the figure at 7.7%!

Although the auditors refused to share the audit report with Moneylife, according to some media reports, politicians were pressing hard to change MSC Bank's audit grade to 'C' from 'D' as a damage-control measure. The bank has shown deposits of Rs21,500 crore and a net profit of Rs2.83 crore. However, according to the audit report, the bank had to suffer a loss of Rs1,070 crore, mainly due to NPAs.

According to the statutory audit report for 2009-10, MSC Bank had negative net worth of Rs144.22 crore, while its deposits were Rs17,428 crore, out of which deposits in current and savings account (CASA) were just Rs1,340 crore. The bank has a cash balance of Rs1,350 crore and it has its own funds of Rs3,053 crore. The bank has given loans of Rs10,478 crore.

Last year, the RBI appointed an expert panel, under YH Malegam, for granting new licences to co-operative banks. Even the High Court has passed on strictures on status of co-operative banks in Maharashtra. On 15 May 2010, Justice AB Chaudhari of the Nagpur Bench of the Bombay High Court, said, "It is a matter of concern, particularly in the state of Maharashtra, that crores of rupees of public money have been lost due to fraud played in co-operative banks."

The directions issued by the state from time to time to invest or deposit the money with cooperative banks require a serious reconsideration and, in my opinion, recall thereof in order to avoid further loss of public money," Justice Chaudhari said while hearing a petition filed by the Municipal Commissioner of Akola.

Last year in September, after Moneylife published the report about the financial turmoil in MSC Bank, several co-operative housing societies withdrew their money deposited with the bank. At that time, Vinod Sampat, advocate and founder, Vinod C Sampat and Co, had said that the profit claimed by MSCB was nothing but "window dressing." He had said, "Co-operative banks are not following proper laws and are not run on a professional basis. There is lack of accountability and they are surviving because of monopoly and patronage of the co-operative department. No one likes to invest in a co-operative bank, but they are forced to do so under the statutory rules. There is a lot of political interference also. It is full of double-standards."

Previously, co-operative housing societies were mandated by the law to park their funds with a co-operative bank only. Housing societies from Mumbai alone had deposited their funds, worth crores of rupees with the MSC Bank. Although the state government had tried to assure depositors, the maximum amount the depositors will get, in case of default, is capped at Rs1 lakh.

Now, let us examine the political side of the co-operative sector, particularly in Maharashtra. The state is one of the major beneficiaries of the co-operative movement, which brought forward tremendous changes in financial, social and political status of farmers. The co-operative movement in Maharashtra played a significant role in changing the economic conditions in the fields of rural credit, agricultural marketing, small-scale and village industries, farming, housing and consumer societies.

Unfortunately, there is increased political interference, so much so that almost all co-operative banks, sugar factories and credit societies have some politician as chief patron. This has caused massive corruption, poor management (or no management at all), which ultimately resulted in turmoil in many co-operative banks, sugar factories and societies. In such a scenario, it was impossible for MSC Bank to remain untouched by political interference.

Over the years, MSC Bank has remained a stronghold of Congress leaders, so much that during 1998, the then ruling Shiv Sena-BJP combine's determined efforts to take control of the bank failed miserably. Even the combine's effort to appoint an administrator failed to materialise at that time.

Last year in March, all political parties in Maharashtra joined hands and elected their representatives by adopting a seat-sharing formula. This resulted in a jumbo board of directors at MSC Bank. Before being superseded, the board had 77 directors, out of which 44 were elected and 33 appointed. Maharashtra deputy chief minister Ajit Pawar is one of the directors.

Several 'powerful' leaders like Rajendra Shingane, Vijaysinh Mohite-Patil, Sadashivrao Mandlik, Yashwantrao Gadakh, Prasad Tanpure, Diliprao Deshmukh, Madan Patil, Hasan Mushrif, Jaywantrao Awale and Dilip Sopal were directors of the MSC Bank. However, NCP, through its leader-directors, virtually controls the nodal bank. NCP's election symbol is the 'clock' and in Marathi, 'Aata Wajale Ki Baara', which loosely translates into 'your time is over'.

Although the ruling alliance of the Congress and NCP controls the MSC Bank, Ajit Pawar, on the other hand, had accused senior leaders of the Congress from New Delhi to be behind the appointment of administrators. At the same time, Congress leaders pointed out that following the report from NABARD (which is regulated by the Ministry of Agriculture-and thus under the control of NCP head Sharad Pawar, the paternal uncle of Ajit Pawar), RBI took action against the MSC Bank.

In short, Congress leaders are highlighting the so-called tussle between the uncle and nephew, as the reason for RBI's action. Both are conveniently forgetting the financial turmoil and mess created by them in the MSC Bank.

Anyway, now since the RBI has superseded the board of directors and the state government appointed two administrators, Dr Sudhir Kumar Goel, principal secretary of agriculture and marketing and Sudhir Shrivastava, principal secretary, planning department, we can only wait and watch, if they will be able to resurrect the nodal bank.

The MSC Bank is the apex co-operative bank in the state since 1954 and has initiated major schemes for the co-operative banking sector in India. It has been helping agricultural credit co-operatives and agricultural processing co-operatives. The bank provides a re-finance facility to District Central Co-operative Banks, which cater to the agricultural sector.

It also promotes finance to artisans and agro-industrial co-operatives-especially sugar factories and spinning mills by providing them medium-term loans as well as interim loans.

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Santosh Morayya
1 decade ago
i want to know if the RTI act is applicable to MSCB
1 decade ago
Mr. Shanbhag has actually hit upon a great idea,. It should be made mandatory foe all Banks to annex to their Annual Reports the names of all high valu defaulters-those whose outstanding debts are on the verge of becoming NPA. And these lists must also be made available on demand to all a/c holders of all kinds. Once this is done, the realities will no longer be hidden from the public eye. If those people are naked, what is the harm in declaring them as such?
Replied to Rabatan comment 1 decade ago
Mr.Rabatan - declaring names of defaulters there is a catch. As per Banking Regulations Act, banks can not declare the names of defaulters and for change of this act banks need amendment to existing acts which has to be done by Hon Parliament, I understand the bill is pending for quite a long time.
1 decade ago
Boss - the affairs of mismanagement vis-a-vis health of the Bank is no secret at all. If you see the list of persons and defaulters you will find number of politicians of all parties and their direct/ indiret involvement. Time permits SD her colleagues can expose the misdeeds of these politicians. In days to come Govt. will hv to bail out the bank by pumping your/our money and peanuts will be recovered from these defaulters.
Aurobindo Banerjee
1 decade ago
RBI is really not that independent an authority as is conceived. Being an autonomous body of the GoI, and the CEO called by a misnomer "Governor", it is as good or as bad as any ministry or department of the govt. with rather more stiff (but more highly paid) stratification and intense throat-cutting to reach the next higher position or to go on a deputation.This is one of the reasons that the Directorship of the RBI is never open to an honest IRS officer of proven capability in investigation and knowlege of law only to ensure that the inside story remains within the fold of a similar clan of interested onlookers! It is against this overall context that we must evaluate and analyse RBI's role and intent, being essentially a tool of the Finance Ministry-and that is why, barrring a few exceptions, the Finance Secretaries are found to be the safest baits for the post of Governor. The delay in finally moving against MSC Bank thus essentially emanates from the political compulsions of the govt. in hesitating against the powerful political allies in the UPA and the resultant fallout if the action misfired. Eve this late action is certain to produce no results, the damage having been done with impunity.

What instead ought to have been done is to supersede allthe boards of similar coop. banks in the entire country reporting to a retired judge of the Supreme court. This alone would expose the true ste and extent of mismanagement, misappropriation and concoction of evidence/books would come to light.. But does the govt. have this courage of conviction?
1 decade ago
It is not unrelated that the largest number of luxury cars found in India are from the Maharashtra area, and that one reason for this is the fascination that many people who are robbing the State dry have for such symbols of ostentatious possessions, but it now also makes sense why so many manufacturers would often talk that payments were made by small unknown co-op banks - with a knowing smile and look.
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