Banking Central | What does New India Coop Bank's case tell us about state of industry

The New India Coop bank scam came into light in 2022

The latest decision of a Mumbai court to declare former New India Cooperative Bank chairman Hiren Bhanu and his wife Gauri Bhanu proclaimed offenders in the Rs 122-crore misappropriation case has once again thrown the spotlight on the rot within India’s cooperative banking sector.

The case involves alleged siphoning of funds from the vaults of the bank’s Prabhadevi and Goregaon branches in Mumbai, the suspicious loan deals and alleged collusion of auditors.

This is the latest such case around India’s cooperative banks. This shouldn’t be seen in isolation.

For decades, India’s cooperative banking industry has been plagued by a peculiar combination of vulnerabilities. At its core is a governance deficit.

These banks were brought into existence to democratise access to credit for small borrowers and to ensure financial inclusion in areas underserved by commercial banks.

Yet, over time, as this writer has written repeatedly, the model has been captured by local political interests and influential individuals. Cooperative banks, unlike their commercial peers, operate in a hybrid regulatory space, subject both to the Registrar of Cooperative Societies and the Reserve Bank of India.

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In practice, this has meant divided oversight, regulatory arbitrage, and plenty of room for mischief.

The Bhanu case is not an isolated aberration but part of a long trail. One only needs to recall the collapse of Punjab and Maharashtra Cooperative (PMC) Bank in 2019, which left thousands of depositors stranded.

Before that, there were the scams involving Madhavpura Mercantile Cooperative Bank, Kerala-based Karuvannur cooperative bank and a number of smaller urban cooperative institutions.

Although these cases look different, the modus operandi is strikingly similar each time—fund diversions, sweetheart loans to favoured entities, creative accounting to mask rising bad loans, and regulatory red flags ignored until it is too late.

Why do these stories repeat themselves? The answer lies in the political economy of cooperative banking. Many of these banks are effectively controlled by state-level politicians who treat them as personal fiefdoms.

The boards are packed with loyalists, elections are manipulated, and managerial appointments are often made on considerations other than merit. In such an environment, prudence and professionalism are the first casualties. That widens the trust deficit among customers.

Successive attempts at reform have only scratched the surface. The Reserve Bank of India, stung by the PMC debacle, has in recent years sought to tighten its hold over cooperative banks, especially urban cooperatives.

There has also been talk of forcing weak players into mergers with stronger ones. Yet, these steps are piecemeal and reactive. The fundamental flaw of conflicted governance remains unresolved.

As long as cooperative banks remain tethered to political patronage rather than professional standards, the likelihood of more scandals is high.

That said, these cooperative banks still serve an important role in India’s financial landscape. In smaller towns and among lower-income groups, they continue to be the first port of call. Their grassroots reach is undeniable. But the very communities that rely on them are the ones most hurt when scams erupt.

It is the small saver, not the well-connected promoter, who bears the brunt of misgovernance. The law may eventually catch up with errant officials, but by then the damage is often irreparable.

What the Bhanu case underscores is not just individual culpability but systemic failure. It took years of siphoning before investigators caught on and auditors could allegedly give clean ratings despite glaring irregularities.

Note that the court has now moved to declare the accused proclaimed offenders after a long delay (the case was unearthed in 2022) --all of this points to layers of negligence and complicity. The malaise runs deeper than one institution or one family.

The Bhanu episode should serve as a wake-up call, not merely a headline for a few days.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers)