RBI Extends Curbs Over 3 Maharashtra-based Cooperative Banks – Customers Pay for Banks’ Fault
On 30 July 2020, the Reserve Bank of India (RBI) extended its directions to the Vasantdada Nagari Sahakari Bank, the Kapol Cooperative Bank and the Maratha Sahakari Bank. All three urban cooperative banks are from Maharashtra.
Mumbai-based Maratha Sahakari Bank was placed under RBI directions vide directive dated 31 August 2016, from the close of business on 31 August 2016, for a period of six months. The validity of the above directions has been extended from time to time, the last one being vide directive dated 18 March 2020, valid up to 31 July 2020, for a further period of five months from 1 August 2020 to 31 December 2020.
The Kapol Co-operative Bank from Mumbai was placed under directions vide directive dated 30 March 2017, from the close of business on 30 March 2017. The validity of the above directions was extended from time to time, the last one being vide directive dated 29 January 2020, valid up to 31 July 2020, for a further period of six months from 1 August 2020, to 31 January 2021.
The RBI in separate notifications for these two banks (The Kapol Cooperative Bank and The Maratha Sahakari Bank Ltd) said that extension should not “per-se be construed to imply that it is satisfied of substantive improvement in the financial position of the aforementioned banks.”
Kapol Cooperative Bank depositors have faced restrictions on accessing their money – one withdrawal of Rs3,000 in six months – since 1 April 2017. The Bank’s board was dissolved by RBI in 2014 and an administrator appointed following instances of rampant corruption and nepotism.
Kapol Cooperative Bank was established as a community-driven bank in 1939 and currently has 15 branches, of which 14 are in Mumbai and one in Surat. The Kapols are vaishyas or baniyas from Saurashtra in Gujarat.
The Maratha Sahakari Bank was placed under an RBI administrator in 2016 after an audit found that its books were manipulated. The bank had given Rs22 crore in loans to 10 borrowers without following the due procedure. A forensic auditor was commissioned by RBI and a report was submitted in the last week of February 2020. The report said that the 10 borrowers defaulted on their loans, plunging the bank into a crisis. Most of these loan accounts have already been tagged as non-performing assets (NPAs). The forensic audit found that the bank favoured the ten borrowers by refusing to ask for sufficient collaterals, or verifying their documents. In some cases, loans were even granted on the basis of forged documents.
The central bank, in the public interest, had issued directions to Vasantdada Nagari Sahakari Bank Ltd, Osmanabad, Maharashtra in the exercise of powers vested in it under sub-section (1) of Section 35A of the Banking Regulation Act, 1949 from the close of business on 13 November 2017. RBI has now further extended the directions for a period of two months from 1 August 2020, to 30 September 2020, subject to review.
The RBI clarified that this should “not per se be construed as cancellation of banking license by it. The bank will continue to undertake banking business with restrictions till its financial position improves.”
Over the past decade, Moneylife has been continuously highlighting the plight of cooperative bank customers and warning people to be careful while choosing the banks for their savings and investments.
In September 2019, RBI had placed various regulatory restrictions on the Punjab and Maharashtra Cooperative bank (PMC Bank) on account of financial irregularities, failure of internal control and systems of the Bank and wrong/under-reporting of its exposures.
Almost every month, RBI puts out a brief press release announcing the closure of one cooperative bank or the other. Deposit insurance payment data showed that Maharashtra has the highest number of cooperative banks going bust.
More than 165 cooperative banks have been shut down in Maharashtra in the past 30 years. These small banks fail with unvaried regularity because they were under the shady system of dual regulation—that of RBI and the registrar of cooperatives (RoCS) - which comes under the state government). Both were supposed to be regulating them. RoCS officials used to admit that the RBI did not look closely at these banks, while the RBI claimed that it waited for government recommendations to act as the state's cooperatives department has its auditors on the boards of the banks.
In April 2020, the RBI acted on nine cooperative banks. This included the cancellation of licence of Mapusa Urban Cooperative Bank. RBI found that the bank did not have adequate capital and earning prospects and its continuance would be prejudicial to the interests of its depositors.
In 2020 till date, RBI has put at least 44 cooperative banks across the country under watch citing deterioration in their financials or for flouting prudential norms. This includes cases where the regulator has put fresh restrictions on the business activities and those where RBI extended the restrictions already imposed on the entities.
On 24 June 2020, the Union government issued an ordinance to bring 1,482 urban cooperative banks and 58 multi-state cooperative banks, with over 86 million depositors and Rs4.84 lakh crore deposits under the direct supervision of RBI.
The ordinance now empowers the RBI to override the RoCS to remove the management and merge or dissolve cooperatives, among other things. These banks will now be audited as per RBI norms.
Thus, it gives RBI the same powers of supervision over cooperative banks as it does over scheduled banks and also a say in key appointments. This means that RBI will now be fully responsible if any cooperative bank fails. Moneylife
’s managing editor Sucheta Dalal wrote about this historic move here
. You can watch her speak on this
on Moneylife News Bites. Dr Yerram Raju wrote his take on this here
Of course, the question remains whether RBI has the supervisory bandwidth to do justice to its steadily growing mandate, and it looks difficult unless its supervisory machinery is beefed up.
In September 2019, cooperative banks were provided an opportunity to convert themselves into small finance banks. However, they have shown little interest and only one bank came forward and got the in-principle approval from RBI.
In a recent interview, RBI board member Satish Marathe said that with the latest change in law, RBI must stop asking cooperative banks to turn into small finance banks and, instead, look to make them better by setting milestones.
The RBI governor Shaktikanta Das said recently that in the case of the urban cooperative banks (UCBs), special efforts are being made to move towards a risk-based and proactive supervisory approach to identify weaknesses in their operations early. He said “An early warning system with a stress-testing framework has been formed for timely recognition of weak banks for appropriate action.”
Before you get lured by the higher interest rates on deposits offered by the cooperative banks, you need to research and check these following details:
1. How much capital does the bank have? The bank’s capital is the capacity of the bank to withstand losses. Since cooperative banks have deposits which need to be paid, banks need to have adequate capital. Cooperative banks need to have a minimum capital adequacy ratio (CAR) of 10.875%.
2. Profitability of the bank: This is determined by return on assets (RoA). It is an aspect that should be looked into. A RoA of 1% or more than 1% certifies that the bank is sound provided all other parameters are good too.
3. Non-performing assets (NPAs) or bad loans where borrowers are unable to repay the loans: Higher NPAs indicate that the bank’s finances are deteriorating. The banks have to classify these bad loans as NPAs and keep aside a part of their earnings to cover up for these NPAs.