When a crisis erupted at the cash-strapped Yes Bank a few weeks ago, the Reserve Bank of India was uncharacteristically swift in resolving it. The Central bank quickly floated a reconstruction plan, with the State Bank of India as the anchor investor. The plan was immediately approved by the government and Yes Bank resumed full operations in two weeks.
About six months ago, Mumbai-based Punjab and Maharashtra Cooperative (PMC) Bank, one of the large cooperative banks in India, had a similar problem, and it has left thousands of depositors in the lurch. The rescue of Yes Bank raised their hopes. However, to their dismay, the RBI extended the restrictions on PMC Bank by another three months on March 21.
“Why can’t someone come and put money in PMC Bank?” asked Jitsu Sheth, who had deposits worth Rs28 lakh in the bank. With the funds tied up, Sheth’s small business has come to a standstill: the past six months have seen her virtually taking to the streets to get the money back. “All I had was this money and now am dependent on help from relatives,” she said. “I can’t go begging on roads now.”
PMC Bank had loaned money to the now bankrupt real estate developer HDIL and it had allegedly used dummy accounts to hide the exposure, which was about 73 per cent of its total loan-book. The bank’s MD and CEO Joy Thomas, several of its board of directors, and HDIL’s promoters Rakesh Wadhawan and Sarang Wadhawan were arrested. The Bombay High Court had ordered the sale of HDIL’s assets to repay the bank. However, that order was stayed by the Supreme Court.
Just as the PMC Bank case was dragging on in Mumbai, trouble hit another cooperative bank in Bengaluru. In January, Guru Raghavendra Sahakara Bank plunged into a non-performing assets crisis, prompting the RBI to impose restrictions on the bank. A case has been registered against a former chief executive of the bank.
As the cases are being fought in the courts, deposit holders of these banks can only wait and watch, hoping that some day they will get access to their hard-earned money. And they know that it is not going to happen anytime soon.
Two dozen cooperative banks have gone under RBI restrictions in the past few years. Pune-based Rupee Cooperative Bank has been under RBI restrictions since 2013 and the Mumbai-based CKP Cooperative Bank was put under restrictions a year earlier. Last year, the RBI issued similar directions to Hindu Cooperative Bank based in Pathankot, Punjab. There is, however, no assurance that such banks will come out of the crisis because of RBI action. Madhavpura Mercantile Cooperative Bank, the oldest cooperative bank in Gujarat, was crippled in 2001 after loans worth Rs1,030 given to stock broker Ketan Parekh went bad. Parekh was later convicted in a stock market scam. The bank was shut down in 2012 by the RBI, as it failed to recover the money. More recently, Bhopal Nagrik Sahakari Bank was ordered to shut shop in January 2018, and Bhilwara Mahila Urban Cooperative Bank in Rajasthan was ordered to be liquidated in September 2018, with the RBI cancelling its licence for violating lending rules.
A common thread in all these cases is lack of adequate capital and failure in recovering loans. CKP Bank, for instance, has a negative net worth of Rs23,918 crore. Rupee Cooperative Bank, which had deposits of Rs1,300 crore as of 31 March 2019, reported a loss of Rs665 crore.
Why do cooperative banks fail so often? While the PMC Bank crisis was a clear case of fraud, Madhavpura Bank was brought down by a scamster. In Nagpur, two dozen people, including a former CEO and a director of Navodaya Urban Cooperative Bank, were arrested by the economic offences wing last November for allegedly distributing bogus loans. The bank went into liquidation.
“If you are talking about cooperative banks in general, there are huge issues that come out of dual regulations. There are issues that come out of the disadvantage of size and there are also issues that come out of too much growth, and control and governance,” former RBI deputy governor Usha Thorat told THE WEEK.
In the past five years, urban cooperative banks reported about 1,000 cases of fraud worth more than Rs220 crore. Lack of corporate governance practices and risk management structures in cooperative banks is a key reason for the problems. Said Satish Marathe, founder member of Sahakar Bharti, an NGO in the cooperative sector, and also a member of the RBI board, “It is necessary for banks to have risk management structures in place.”
Political interferences and lack of professional managements are the other reasons. “There has to be a separation of ownership and managements. Many urban cooperative banks have board-led managements, and not many of these board members may be equipped to take decisions in today’s complex banking scenario,” said Marathe.
The bigger worry, though, is their regulation. While scheduled commercial banks are regularly inspected and supervised by the RBI, that is not the case with cooperative banks. While they are also governed by the Banking Regulations Act, several regulatory powers that the Act gives the RBI have been diluted when it comes to cooperative banks.
Urban cooperative banks (UCBs) are registered as cooperative societies under the State Cooperative Societies Act. Multi-state cooperative banks fall under the Multi State Cooperative Societies Act. Hence, the RBI cannot take action against an urban cooperative bank without the assistance of the state registrar of cooperative societies. Thorat said the Central bank should have the same regulatory powers over both cooperative banks and commercial banks. “Bringing everybody under Reserve Bank regulation will help. But, the issue about cooperative banks is how much state governments will be willing to give up,” she said.
The RBI, through various committees over the years, has looked to address the issues. In 2015, a committee headed by then deputy governor R. Gandhi suggested conversion of urban cooperative banks into commercial banks, a move that would bring them under the direct supervision of the RBI. “Though UCBs were set up as small banks offering banking services to people of limited means belonging to the lower and middle classes, a well laid-out transition path is required for at least the larger UCBs to convert themselves into universal/niche commercial banks due to the changing financial landscape in the country and providing further growth opportunity to well managed UCBs,” said Gandhi.
The RBI has now allowed voluntary transition of UCBs into small finance banks. UCBs with a minimum net worth of Rs50 crore and CRAR (capital to risk weighted assets ratio) of 9 per cent are eligible for such a transition. However, the transition will not be easy, given that the converted entities will have to maintain a CRAR of 15 per cent.
After the PMC Bank crisis erupted, the Central government initiated steps that will give the RBI more powers over UCBs and multi-state cooperative banks. As per the proposed amendments to the Banking Regulations Act, which were approved by the Union cabinet last month, UCBs will now be audited according to RBI norms. Appointment of chief executives at these banks will also require prior permission from the Central bank. The RBI will also be able to supersede the management of a cooperative bank. “From the cooperative sector, those who are using the word bank in their name would be brought under the Banking Regulation Act, to be monitored and regulated by the Reserve Bank of India, which means they will have to follow the same rules and regulations, which govern any scheduled commercial bank,” said Finance Minister Nirmala Sitharaman.
The RBI, however, will still not have complete control over the UCBs as the Registrar of State Cooperatives will continue to wield administrative powers over these banks. Nevertheless the Central bank has initiated several steps to strengthen UCBs. Banks with assets of Rs500 crore and above as on March 31 of the previous financial year should report credit information on all borrowers with aggregate exposures of 05 crore and above to Central Repository of Information on Large Credits (CRILC) maintained by the RBI. UCBs now have to submit CRILC report on a quarterly basis.
The RBI has also directed UCBs to amend their bylaws and constitute boards of management, comprising people with practical experience in banking to facilitate professional management. Such banks will also have to do due diligence to determine the suitability of candidates being considered for inclusion in the board.
Fundraising has been an issue for UCBs as they cannot raise capital via a public issue. The RBI has now given approval for setting up an umbrella organisation, which can provide liquidity and capital support to member banks. The umbrella organisation is also expected to provide IT infrastructure and capacity building facilities.
On March 23, the RBI said that it was trying to revive PMC Bank. The depositors were offered a plan, under which part of their deposits would be converted into perpetual deposit instruments, essentially a bond, with a lock-in period of 10 years. Depositors, however, are not happy with it. “No depositor would agree to lock in his hard-earned money for 10 years,” said Sheth. She instead called for “out-of-the-box” solutions like selling the assets of bank directors and using that money to repay the depositors.
For now, lakhs of deposit holders whose money is stuck in cooperative banks will have to wait for the law to take its own course and hope that the strengthening of regulations will ensure fewer troubles in the future.