When Kiran Gupte saw televised images of anguished depositors breaking down and weeping outside the branches of Punjab and Maharashtra Co-operative Bank (PMC) over the last fortnight, bitter feelings came flooding back. Since 2014, whenever he has heard of someone considering depositing money in a cooperative bank, he has advised them against it, because he wouldn’t want anyone to go through what he has. When the Reserve Bank of India (RBI) placed Mumbai’s CKP Co-operative Bank under restrictions on withdrawals and lending in 2014, it changed Gupte’s life. Nearly Rs 12 lakh, about 85% of his life’s savings, are stuck at the bank, with no clarity on if and when he might get the money back.
“I really don’t know what will happen to us now,” says the 72-year-old former employee with a chemical company, who lives with his wife in Dombivali in Mumbai.
He found CKP attractive for the higher interest rate on fixed deposits the bank offered, compared with larger state-owned or private commercial banks.
Gupte has only managed to get Rs 15,000 from his savings account and has not been getting interest on his fixed deposit, which amounts to Rs 85,000 annually, for five years now. A group of depositors sends periodic representations to banking authorities and the prime minister. They haven’t heard much back.
Gupte is among the tens of thousands of depositors who are faced with financial ruin as a consequence of the potential folding of a poorly managed or fraud-hit cooperative banking institution.
PMC Bank, which has lately been in the news for fraudulently extending loans to Housing Development & Infrastructure Ltd (HDIL), imperilling deposits of numerous customers, is just the latest in a series of cooperative banks that have been placed under restrictions by the RBI. As of March 2019, 26 urban cooperative banks (UCBs) were placed under directions of the central bank for putting depositors at risk, thanks to mismanagement or fraud. This means operations are restricted and, often, deposits are stuck.
Every time a crisis such as PMC surfaces, there’s some sympathy over the plight of depositors, and debates around the need to regulate cooperative banks better. But then the world moves on, leaving hapless depositors to pick up the pieces of their lives, and denting people’s faith in the banking system ever so slightly.
The regulatory inaction leaves room for the next crisis at another bank somewhere else.
Why have institutions that are called banks but are not entirely within the purview of mainstream banking regulations? Especially in a country with low financial literacy, where depositors sometimes discover the difference only after a bank run?
The answer is complicated, and any potential regulation requires consensusbuilding among differing parties, such as central and state institutions. That’s partly what has come in the way of effective regulation so far. Now, however, Finance Minister Nirmala Sitharaman has said the government will assess if legislative amendments are needed to implement effective regulation. If that happens, it might just be the silver lining on the PMC crisis.
Long History
Co-operative banking institutions account for about 8% of deposits and 9% of advances and loans in India. Periodic tumult notwithstanding, they remain essential to the banking ecosystem in some ways, especially at the lower end of the income pyramid.
“Co-operative banks are still relevant because they cater mostly to first-time borrowers who may not be looked at positively by public-sector banks or private banks. We understand these borrowers because we come from the same ecosystem,” says Gautam Thakur, chairman of Saraswat Co-operative Bank, India’s largest scheduled UCB by assets.
While this is true, co-operative banks charge a higher rate of interest on loans to compensate for the higher risk, and consequently are able to offer more attractive rates to depositors.
The Indian co-operative credit movement has its origins in the late 19th century when it was attempted as an alternative to usurious moneylenders in villages.
The enactment of the Co-operative Credit Societies Act, 1904 (later amended in 1912), provided an impetus to the idea as more co-operative credit societies were set up in rural and urban areas.
R Gandhi, former deputy governor of the RBI, does not think the problem lies in the ownership structure of co-operative banks. “In fact, dispersed ownership is good. The problem is, in a co-operative structure, you cannot have a professional board.” The board of directors of a co-operative bank is elected by the bank’s members and the process is often gamed by politicians to gain control of the bank. Politicians also wield a lot of influence in other co-operative institutions, such as sugar mills in Maharashtra. In many states, political control of such institutions plays a key role in the maintenance of the networks of political patronage, through loans as well as jobs at such institutions.
In 1966, co-operative banks with paid-up share capital and reserves of more than Rs 1 lakh were brought under the purview of the Banking Regulation Act, 1949, kicking off dual regulation of UCBs that continues to this day. While the state registrar of co-operative societies is responsible for monitoring the administration and audit of these banks, the apex bank regulates their banking functions. Multi-state UCBs come under the ambit of the central registrar of co-operative societies.
This dual control has been cited as one of the key reasons why irregularities in UCBs often escape detection. UCBs do not need the RBI’s approval to appoint their chief executive, unlike commercial banks.
With the RBI’s liberalisation of licensing norms in 1993, the number of UCBs swelled from 1,311 to 1,926 in 2004. But a third of these new banks became financially sick within a short period and the RBI stopped issuing new licences in 2004. The Madhavpura Mercantile Cooperative Bank scam, in which there was a run on the bank in 2001, following revelations of the bank’s exposure to entities linked to tainted stock broker Ketan Parekh, only added to RBI’s caution. There have been 129 mergers of UCBs between 2004 and 2018, and as of March 2019, there were 1,542 UCBs, 54 of which were scheduled and the rest non-scheduled. Scheduled banks have more stringent norms than non-scheduled banks and can borrow from the RBI for their normal banking requirements, unlike the latter. Bengaluru has the most UCBs in India, at 263, followed by Nagpur (254) and Mumbai (241).
Besides their higher interest rates, UCBs continue to be popular also because of the localised personal attention they provide their clientele, which is missing in large commercial banks. “Around 90% of the staff in our branches are locals. There is a sense of comfort for the borrower when the staff knows him,” says Thakur. Some UCBs are also appealing to people because of their long history. One of the reasons why Chandrashekhar Lad decided to open an account with CKP Bank in the late 2000s was that the bank had been around since 1915.
“I had never kept money in a cooperative bank but this was a 100-year-old bank and their branch was close to my house,” says Lad, a 61-year-old chartered accountant in Mumbai. But now he is not sure if he is going to get his Rs 35 lakh back from the bank.
PMC Bank also has an administrator now. Its suspended managing director Joy Thomas, its former chairman Waryam Singh and the promoters of HDIL Rakesh and Sarang Wadhawan have been arrested. “People’s trust in co-operative banks is broken after this,” says Kiran Tare, a retired design engineer in Thane who has Rs 3 lakh in PMC Bank. For Tare, this is a double whammy of sorts, having earlier lost `6 lakh to the freeze on CKP Bank. He says he closed his accounts with various co-operative banks but decided to continue with PMC Bank. “The bank’s balance sheet was good and it was giving good dividends. We had no clue what was really happening.”
PMC Bank’s losses from not declaring some of the loans given to HDIL as non-performing assets (NPAs) even after they had turned bad have been pegged at Rs 4,355 crore.
“Any UCB that is under directions of the RBI is either merged with another bank or is liquidated,” says Vidyadhar Anaskar, vice-president of the National Federation of Urban Cooperative Banks and Credit Societies. In case of liquidation, only deposits up to Rs 1 lakh are insured. As of March 2019, Rs 4,822 crore had been paid on insurance claims on deposits in 351 co-operative banks, compared with Rs 296 crore in 27 commercial banks.
Though UCBs perform better than commercial banks on NPAs, return on assets and return on equity, 46 of them have negative net worth, according to the RBI. “Even those UCBs which are fine now may become problematic later,” says S Mahendra Dev, director of the Indira Gandhi Institute of Development Research.
A committee headed by Gandhi in 2015 suggested that multi-state UCBs with a business of more than Rs 20,000 crore convert into commercial banks and that smaller UCBs become small-finance banks. “Once they cross a certain threshold, greater discipline is needed,” says Gandhi. This would bring these UCBs completely under the control of the RBI. But, not surprisingly, there is resistance from the sector. “There are only 5-6 big UCBs. If they convert to commercial banks, depositors will pull out and the sector will collapse,” says Anaskar, who is also chairman of Pune-based Vidya Sahakari Bank, a UCB.
The RBI did not respond to ET Magazine’s questions.
UCBs are just one part of the co-operative banking system. Rural co-operative banks account for two-thirds of all co-operative banks’ assets. The short-term rural co-operative credit consists of three tiers in most states — state co-operative banks (StCBs), district central co-operative banks (DCCBs) and primary agricultural credit societies (PACs).
Diminishing Role
Till the nationalisation of commercial banks in 1969, co-operative banks were the primary institutional source of agricultural credit. But with the expansion of commercial banks and the advent of regional rural banks in 1976, the role of co-operative banks has waned. Their share of agricultural credit has declined from three-fourths in the mid-1970s to 12% in 2018-19, according to the RBI and the National Bank for Agriculture and Rural Development (Nabard), which has been delegated the power to inspect StCBs and DCCBs by the RBI. PACs, however, are not regulated by the central bank.
Despite their diminishing contribution to farm credit, co-operative banks and societies are still crucial in villages. Somnath Satras, a sugarcane and onion farmer at Uralgaon village in Pune district, needed a loan of Rs 12 lakh to instal lift irrigation in his farm in 2015.
He first went to a private bank, which kept him waiting for two months before turning him down. Then he went to the PAC near his village and his loan was processed within eight days. “There is not much paperwork and everything happens quickly at the credit society,” he says.
PACs borrow from DCCBs and StCBs to lend to farmers. Satras is not averse to borrowing from commercial banks. He has an account with Bank of India and has borrowed from HDFC Bank to buy a car and a motorcycle. “But for farm loans, co-operative banks are the best option.” There are 33 StCBs, 364 DCCBs and around 95,600 PACs in India.
Days after the Union government scrapped Rs 500 and Rs 2,000 currency notes in November 2016, the RBI said DCCBs could not accept these notes, as commercial banks were allowed to do, ostensibly because the RBI feared unaccounted money was being laundered through these banks. Despite the pernicious influence of politicians on rural cooperative banks, they are important to the rural economy, according to B Subrahmanyam, MD, National Federation of State Cooperative Banks. “They service a lot of small and marginal farmers who don’t go to commercial banks.” Small and marginal farmers constitute 70% of PACs’ members.
While there is consensus on the need for more regulation of co-operative banks, there are some who advocate a different approach to co-operative banks than to commercial banks. “Because co-operative banks are people’s institutions, they should have more flexible norms. The amount of profits they can make from banking activities is severely limited. The norms for UCBs can be a little more stringent than for rural co-operative banks,” says R Ramakumar, professor at the Tata Institute of Social Sciences in Mumbai. He adds that co-operative banks’ time has not passed.
Gandhi concurs: “One advantage with having a large number of UCBs is their local focus and they develop the habit of banking among people.” And it is true that irregularities are hardly restricted to co-operative banks, as the Nirav Modi scam at Punjab National Bank has shown. Nonetheless, it’s clear that there is an urgent need to implement checks and balances to make sure ordinary depositors aren’t left at sea.