As per the experts and critics, Co-operative banks are facing specific supervisory challenges as they are coming under the dual regulations of both RBI and State Registrars.
What was the Issue?
- Punjab and Maharashtra Cooperative (PMC) Bank is one of the largest urban cooperative lenders.
- In September, Reserve Bank of India (RBI) imposed restrictions on withdrawals from the bank by putting it under the directions. Imposing directions means
- Taking over the operations of that bank.
- The bank's management is superseded and the board is dissolved by the RBI.
- The RBI has imposed lending restrictions on PMCB, at Rs 10,000 per customer for six months.
- This created a situation of panic among the customers of the bank.
- PMC has become the largest cooperative bank to be put under RBI watch since the 2001 Madhavpura Bank crisis that was linked to a stock market scam.
- Although RBI has provided a provision of granting an exception on a case-by-case basis, in case of emergency expenses like hospitalization, etc.
Why PMC was brought under the regulation? RBI can put a bank under regulation when there are doubts regarding the functioning of a bank and there is a need to safeguard the interest of borrowers. In the case of PMC following were the causes behind it:
- Irregularities in lending
- Under-reporting of non-performing assets
- Higher than permitted exposure (about 2/3rd) to a single entity (HDIL group) in the real estate sector
- Notably, RBI defines Both real estate and the stock markets as ‘sensitive’ sectors.
- This exposure was four times the mandatory cap fixed by RBI and camouflaged under a whole lot of dummy accounts.
Madhavpura bank crisis As mentioned earlier, Madhavpura Bank crisis that took place in 2001, was linked to the stock market scam. Following is the background of it:
- Madhavpura Bank started lending out large sums of money to stockbrokers in gross violation of Reserve Bank of India (RBI) rules and regulations in 1999-2000.
- At the time banks in India were not allowed to lend more than ₹15 crores (US$2.2 million) to stockbrokers.
- But in violation of rules, bank issued pay orders worth ₹1,200 crores (US$170 million) to stockbroker Ketan Parekh, which he discounted at Bank of India.
- The bank had also lent money to Mukesh Babu and Sirish Maniar of the brokerage firm Maniar Group.
- In 2001, when the stock market started falling rapidly, Ketan Parikh lost money in the stock market crash and news became public.
- After a huge panic among the depositors of the bank, it was taken under regulation by RBI
Steps were taken by RBI post-Madhavpura bank crisis
- Bar on new licenses: There was a proliferation of licenses issued to cooperative banks between 1991 and 1998. RBI issued a vision document in 200405 and stopped all licenses of new branches and new bank entities.
- Memorandum of Agreement: Under the vision document, a Memorandum of Agreement was entered into by the RBI with each of the States, where the State accepted an audit by professional auditors and constituted a Task Force for urban cooperative banks.
- Task Force: Constituted Task Force was co-chaired by the RCS(Registrar of Cooperative Societies) and the RBI Regional Director and was required to provide a bank by bank solution to those banks that were not maintaining minimum capital ratios.
- Scheme for Merger with SFBs: Merging and converting some of the cooperative banks to small finance banks. The RBI has announced a scheme for the voluntary transition of urban cooperative banks into small finance banks as per the recommendations of former Deputy Governor of the RBI, R. Gandhi.
- Not giving any new licenses or new branches also pushed existing cooperative banks to come forth to take over the weak ones. This worked very well and a number of cooperative banks were delicensed, merged or liquidated.
- By 2017-18, as stated in the RBI Financial Stability Report, there were only four urban cooperative banks with capital adequacy ratios below the regulated threshold.
- RBI prescribes prudential norms for capital adequacy, income recognition, asset classification and provisioning, loans and advances, investments and liquidity requirements.
Cooperative banks in India
- Together, UCBs accounted for 4% of deposits and 3% of outstanding loans in the banking system in 2018
- As per the RBI report,” Co-operative institutions play a significant role in credit delivery to unbanked segments of the population and financial inclusion within the multi-agency approach adopted in India.”
- As per the RBI-appointed Gandhi Committee on UCBs:
- Small loans up to a limit of Rs 5 lakh accounted for over 53% of the total loan accounts of 50 scheduled UCBs and
- Another 27% of the accounts comprised of loans between Rs 5 lakh and Rs 10 lakh.
- In contrast, the share of loan accounts of Rs 1 crore and above was less than 1%.
Governance of Cooperatives
- UCBs(Urban Cooperative Banks) are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the state concerned or the Multi-State Cooperative Societies Act, 2002.
- They are regulated and supervised by the Registrar of Cooperative Societies (RCS) of State concerned or by the Central Registrar of Cooperative Societies (CRCS).
- The Reserve Bank regulates and supervises the banking functions of UCBs under the provisions of the Banking Regulation Act, 1949(AACS). Within the Reserve Bank, a separate department, viz. Urban Banks Department, has been entrusted with these functions.
- RBI regulates co-operative banks from the financial aspects, the management supervision is done by state and central governments i.e.
- RBI can prescribe the best practices to run a bank but cannot make any changes in the bank management unless in an emergency situation.
Challenges Tough competition from commercial banks: Cooperative are facing tough competition due to the expansion of scheduled commercial banks and payment banks, small finance banks, and NBFCs (non-banking finance companies). Due to this competition, finding related issues are also arising.
Cross holding of accounts: Madhavpura used to provide liquidity to many other banks, so a huge number of cooperative banks had deposited with Madhavpura. So, a closure of that bank would have meant the closure of several other banks too. Like Madhavpura bank, PMC bank holds accounts of 1,754 cooperative credit societies, 216 urban cooperative banks and 15,000 cooperative housing societies and cooperative entities. That means any fraud in these banks will have a domino effect.
Dual regulation of RBI and State Registrars: Cooperative banks came directly under the RBI’s radar in 1966 but faced the problem of dual Regulation. The Registrar of Cooperative Societies (RCS) is in control of management elections and many administrative issues as well as auditing. Though RBI regulates the banking functions, a system of ‘dual regulation’ requires RBI to approach the State to sack the CEO or chairman of a troubled UCB.
Board of management: At present Directors are elected by members and very often the borrowers get to nominate their own persons, while depositors are not really represented as these banks accept deposits from nonmembers. An elected board of management can get away after fraud. Moreover, as higher rates attract more deposits, UCBs comes under pressure to lend to high-risk borrowers. Unless a UCB has a strong board, a skilled CEO and a credible credit committee, it will either face business failure or land in the hands of scamsters
Violation of Depositors Interest: Every time a bank scam erupts, investigation process starts and progress very slowly. Depositors normally have to wait long before they are able to get their money back. In the case of the Madhavpura Mercantile Cooperative Bank scam in 2001, some 45,000 depositors had to wait till last year to get an assurance that they will get their money back.
- Merger with or conversion into Small Finance Banks. This would enable them to have most of the products available with commercial banks, and help get a pan-India presence.
- Hold on the cross-holding of accounts: It is time to review whether an urban cooperative bank should accept deposits of other urban cooperative banks. Because this means depositors of smaller banks may also suffer due to the domino effect.
- Implementing the recommendations of a high powered committee chaired by former Deputy Governor of the RBI, R. Gandhi. Like;
- Creating an umbrella organization for cooperative banks. RBI has also allowed banks to create an umbrella organization promoted by the banks themselves to raise capital as a joint-stock company can from the markets.
- Instituting a board of management: A board of management, over and above the board of directors, would bring the bank under greater RBI control
- Amendment of the Banking Regulation Act to give more powers to the RBI over cooperative banks, empowering the RBI to wind up and liquidate banks independent of other regulators under the cooperative societies' laws.
- Depositors as voting members: It was concluded that depositors ought to have a say on the Boards of UCBs. For this, a majority of the board seats be reserved for depositors by making suitable provisions in the bye-laws.
Issue of fresh licenses: The Committee unanimously recommends that licenses may be issued to financially sound and well-managed co-operative credit societies having a minimum track record of 5 years which satisfies the regulatory prescriptions set by RBI as licensing conditions.