The Big Crisis in Cooperative Banks Of India

Earlier, this week, the Reserve Bank of India ( RBI), ordered that the Punjab & Maharashtra Cooperative ( PMC) Bank must stop doing business for the next six months. RBI’s order stated that depositors can withdraw only 1000 rupees or less every six months from the PMC bank.

The fact, that deposits of up to 1 lakh are protected under the Deposit Insurance & Credit Guarantee ( DICGC ) Cover is small consolation to the thousands of depositors.

In this case, the PMC bank itself approached RBI to place restrictions on itself so that PMC could come out of the crisis it is facing now. This is strange, considering, that it is the RBI, which initiates action, in case, it feels the bank /s is/ are floundering. Rumours are that the PMC bank had lent crores of rupees to the now-bankrupt real estate firm, Housing Development & Infrastructure Ltd ( HDIL). PMC bank Chairman, Wyram Singh was on HDIL board earlier.It is also being said, that data filed with RBI by PMC & data maintained by PMC was different.

There have been umpteen cooperative banks who have been ordered likewise by RBI. Some of them are Vasant Dada Nagari Sahakari Bank, Maharashtra, Padmashree Dr Vithalrao Vikhe Patil Cooperative Bank, Maharashtra, Karad Janta Sahakari Bank, Maharashtra, Bidar Mahila Urban Cooperative Bank, Karnataka, & many more. As a matter of fact, RBI can extend the curbs beyond the initial period of six months if RBI feels that the crisis continues. And in many cases, the RBI has done so. And it so happens that, the banks may never recover & close down.

Politicians run the banks as if they are their personal fiefdoms disbursing loans to friends & relatives towards nonviable projects thus exposing the banks & the depositors to great risks. Soon enough, the banks cannot manage anything & close down.

It has emerged that PMC bank has connections with the netas of the ruling party though denials have been quick & forthcoming.

And before the ink had dried on the RBI order on PMC bank, there was news, that Sharad Pawar,the NCP leader will be summoned by the Enforcement Directorate for his role in a money laundering case at the Maharashtra Cooperative bank.

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There is also news that more than 200 cooperative banks & cooperative societies in the small state of Goa have incurred losses of nearly 800 crores.

Cooperative Housing Societies which are the norm, in Mumbai, Pune & many cities have to open accounts at the nearest Cooperative bank.This is as per Rule 113 of the model bye-laws ( 2014 ).

PMC bank has many such deposits of numerous cooperative housing societies.Even credit cooperative societies have crores of deposits with PMC bank. And all deposits are locked up as per RBI order on the PMC bank. There must be many housing societies which have deposits with other cooperative banks as well.

The cooperative housing societies can pass resolutions at their Annual General Meeting ( AGM ) that as there is no cooperative bank nearby, they are allowed to open an account with another Bank like a Public Sector Bank or a Private Bank. This resolution must be presented to the Registrar of societies to seek permission to open an account at a Public Sector Bank or a Private Bank.

There is some good news now, that the RBI has said that depositors can withdraw up to a maximum of 10, 000 rupees from their accounts at the PMC bank.

Cooperative banks are subject to the same norms as other banks.

Cooperative banks come under the supervision of RBI. The cooperative banks have to maintain a Cash Reserve Ratio ( CRR ) of 4 % like other banks. Cooperative bank has to invest 18.75% of its deposits in Government securities which can be easily sold or pledged to raise money.

The failings of cooperative banks are because corporate governance is absent & they are reluctant to adopt the technology. Also, they are run unprofessionally.

Some things need to be checked before the higher interest rates on deposits by the Cooperative banks tempt the public to deposit money in cooperative banks. First is the capital of the bank. The bank’s capital is the capacity of the bank to withstand losses. Since coop banks have deposits which need to be paid, banks need to have adequate capital. Coop Banks need to have a minimum Capital Adequacy Ratio ( CRAR ) of 10.875 %.

Secondly, profitability which is determined by Return on Assets ( ROA ) 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.

Thirdly, the bad loans where borrower / s are unable to repay the loans indicate that the bank’s finances are failing. The banks have to classify these bad loans as Non-Performing Assets ( NPAs ) & keep aside a part of their earnings for the NPAs. In the case of PMC, there was a sharp rise in NPAs which reduced its profitability & brought the present crisis.

The need of the hour is stricter regulation as also implementation by authorities like RBI & prudent action by depositors which will save their money. Maybe, another regulator can be brought in, to keep a check on cooperative banks, which can, in turn, report to the RBI. This will lessen the load on the RBI & make for effective supervision of Cooperative banks.

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