These banks have lost their licenses and are mismanaged by politicians. Is this the minimum government and maximum governance that Narendra Modi had promised?

The Narendra Modi government has decided to infuse Rs2,375.42 crore to revive 23 unlicensed district central cooperative banks (DCCBs). These 23 DCCBs, include 16 from Uttar Pradesh, three each from Maharashtra and Jammu & Kashmir and one from West Bengal. Last year about 45 cooperative banks, including these 23 were facing action from Reserve Bank of India (RBI) for not maintaining minimum capital and reserve requirements. The question, therefore, is why the government is keen to infuse taxpayers money in to these banks, which are struggling due to poor financial management and in many cases, suffering from misappropriation of funds? Notably, many of them are directly or indirectly controlled by politicians.

These banks have deposits base of about Rs6,839 crore and loan book of around Rs3,774 crore. However, their financial situation is not adequate for them to get licenses from the banking regulator. Once these banks are revived with the infusion of new funds, they would become eligible to get license.

In fact, last year the Prakash Bakshi Committee appointed by RBI even recommended to consolidate some very small CCBs. It had said, "The Committee has also estimated that about 58 CCBs would generally not be able to mobilise the required capital, or their business sizes are so small that they would not be sustainable in the long run and would have to be therefore consolidated with other CCBs. The Committee recommends that broad parameters for attempting such consolidations should be a minimum business level Rs200 crore for the consolidated CCB and achieving CRAR of 7% by 2014-15 and 9% by 2016-17 with a concrete action plan for contributing any additional capital that may be required."

During 2011 and 2012, the RBI and NABARD implemented a roadmap for issue of licences to unlicensed StCBs and CCBs in a non-disruptive manner, with an intention to complete the licensing agenda by end of March 2012. After considering NABARD’s recommendations for issuance of licences based on inspection or quick scrutiny, 41 out of 370 CCBs were found to be unable to meet the licensing criteria by end-March 2012. RBI, therefore, allowed time up to 30 September 2012 for concrete steps to be taken by these 41 banks and the respective state governments for meeting the licensing parameters. Based on the capital infusion and other support provided by the states, NABARD recommended for issuance of licence to 15 banks and the balance 26 CCBs, however, did not meet the criteria by the set date 30 September 2012. Further, six StCBs and 23 CCBs, which had been granted licence by RBI earlier were found to be not able to maintain the 4% CRAR as on 31 March 2012.

At present, there are 92,000 primary agricultural credit societies (PACS), 371 DCCBs with 13,000 branches and 32 state cooperative banks (StCBs) with more than 1,000 branches across the country. However, poor performance of cooperatives in the country calls into question their viability and sustainability.

According to RBI, mounting losses, growing non-performing assets (NPAs) and poor resource base are factors contributing to the decline in the performance of the cooperatives at the grass-root level. Speaking at an orientation programme in Mumbai last week, Dr Deepali Pant Joshi, executive director of RBI, had said, "The institutions at the lower/ middle level mostly depend on the higher agencies for financial support, i.e. PACS have to borrow from DCCBs and Central cooperative banks, in turn, have to borrow from the apex banks. There is thus, a chain of dependency at all levels of the cooperative credit structure for resources from the outside. If one institution underperforms, it affects the entire chain."

RBI had relaxed the criteria for licensing of rural cooperative banks stipulating CRAR of just 4%. However, the central bank felt that StCBs and DCCBs cannot continue to operate in the banking environment with such a low capital base. It then introduced the concept of capital to risk weighted assets ratio (CRAR) in December 2007 and advised these banks to disclose the level of CRAR every year as ‘notes on accounts’ to their balance sheets.

To strengthen capital structure of state and central cooperative banks, RBI later decided to prescribe a minimum CRAR and asked these banks to achieve or maintain a minimum CRAR of 7% on an ongoing basis from 31 March 2015 and 9% with effect from 31 March 2017.
 
According to a report submitted by RBI appointed Expert Committee to examine Three Tier Short Term Cooperative Credit Structure (ST CCS), about 238 CCBs already have a CRAR of 7% or more, and two-third of them would be able to meet additional capital requirements and sustain CRAR of at least 7% by 2014-15 and of 9% by 2016-17. "However, a large number of CCBs and some StCBs do not have adequate capital to meet even the relaxed licensing norm of 4% CRAR. The Committee recommends that 31 March 2013 may be set as the deadline for these banks to mobilise the required capital either internally or from any other external source so as to achieve 4% CRAR failing which RBI should take the necessary regulatory action," the report submitted in January 2013 says.

The Committee, headed by Prakash Bakshi estimated that 209 CCBs of the 370 CCBs will have to mobilise, as an aggregate, Rs4,024 crore by 2014-15 and Rs6,498 crore by 2016-17 to achieve CRAR of 7% and 9% respectively. Bank-wise, these amounts range from as low as Rs1.84 lakh to Rs282 crore. The Committee has estimated that about 151 CCBs should be able to mobilise the required capital from their members by asking the members to contribute amounts ranging from Rs2 to Rs4,000 over four years.

In 1966, non-scheduled cooperative banks were prescribed cash reserve ratio (CRR) of 3% and statutory liquidity ratio (SLR) of 25%, which remained unchanged for several decades. Pursuant to the amendments to the Banking Regulation Act, 1949 (AACS), CRR and SLR for all cooperative banks were brought on par with scheduled commercial banks from the fortnight beginning 12 July 2014.

On 5 June 2014, RBI asked StCBs and DCCBs to increase CRR to 4% from 3% and bring down SLR to 22.5% from 25%. The central bank gave time until 31 March 2015 to these lenders to start maintaining SLR assets.

The government had said, to implement the fund infusion scheme, a tripartite agreement in the form of memorandum of understanding (MoU), stipulating conditionalities and deliverables, will be signed between the Central Government, concerned State Governments and NABARD. During the implementation of the Scheme, operations of these 23 unlicensed DCCBs would be closely monitored by NABARD and RBI, so that they meet the licensing requirement within the time frame as prescribed in the Scheme.

Here is list of the places where the DCCBs are located:

Uttar Pradesh:  1. Deoria 2. Bahraich 3. Siddharth Nagar 4. Sultanpur 5. Jaunpur 6. Hardoi 7. Basti 8. Ballia 9. Azamgarh 10. Gorakhpur 11. Fatehpur 12. Sitapur 13. Varanasi 14. Allahabad 15. Ghazipur and 16. Faizabad

Maharashtra: 17. Buldhana 18. Nagpur 19. Wardha

Jammu & Kashmir: 20. Baramullah 21. Anantnag 22. Jammu

West Bengal: 23. Birbhum

The question is even if these 23 lenders are infused with funds to meet the RBI criteria for CRAR, how will the government make sure that these banks survive without further funding from taxpayers, especially since politicians will continue to exploit them?