106 directives, three bank closures — how RBI cracked down on erring cooperative banks in 2020

On December 7, when the Reserve Bank of India (RBI) pulled the plug on Karad Janata Sahakari Bank citing poor financials, it marked the third such instance this year. Earlier, the regulator had cancelled the licences of two co-operative banks — CKP Co-operative Bank in Maharashtra and the Mapusa Urban Co-operative Bank of Goa — citing largely similar reasons.

Co-operative bank failures, such as the PMC Bank episode, have impacted thousands of poor depositors across the country, who approach these banks for higher returns and avoid the hassles of longer processing time that is typical in a commercial bank. But, when the institution fails, these depositors are left in dark.

It’s not just cancellation of permits.

In 2020, the RBI has issued a total of 106 directives to co-operative banks either restricting their business operations or extending the period of existing directions. About 60 of them were in the second half of the year. In other cases, the regulator imposed monetary penalty. Even in the cases of three banks where licences were withdrawn, the RBI had imposed business restrictions previously.

The list of cooperative banks which have been under closer watch of the regulator (where directions have been issued) is long and include lenders from across the states. A large number of them were from Maharashtra. The names include The Needs of Life Co-operative Bank, Mumbai, The City Cooperative Bank, Dr. Shivajirao Patil Nilangekar Urban Co-operative Bank Ltd, Bhagyodaya Friends Urban Co-OP Bank, Shivam Sahakari Cooperative Bank and so on. In 2020, the regulator cracked the whip on Tamil Nadu-based Thiruvaikuntam Coop Bank, West Bengal-based Kolikata Mahila Coop Bank, Mudhol Cooperative Bank, Hindu Cooperative Bank, Punjab and Sikar Urban Cooperative bank among others.

Karad, CKP and Mapusa bite the dust

Karad Janata Cooperative Bank closure didn’t come as a surprise to anyone. The RBI had issued three directives to the bank this year itself before finally deciding to cancel the bank’s licence. Announcing its closure, the RBI said more than 99 per cent of depositors will get their money back from the deposit insurance scheme. Explaining the regulatory action, the RBI said the co-operative bank does not have adequate capital and earning prospects. “As such, it does not comply with the provisions of section 11(1) and section 22 (3) (d) read with section 56 of the Banking Regulation Act, 1949,” the RBI said.

Further, the continuance of the bank is prejudicial to the interests of its depositors and the bank with its present financial position would be unable to pay its present depositors in full, the RBI said

On May 2, curtains fell on Mumbai-based CKP Co-operative Bank. As on April 30, only about Rs 4 crore out of the Rs 158 crore loan book was remaining standard on the lender's books, Moreshwar Dhaimodkar, General Manager of CKP Bank, told Moneycontrol. In other words, CKP Bank’s gross non-performing asset (GNPA) level had zoomed to 97 percent of the total loans.

Founded in 1915, and headquartered at Matunga in Mumbai, the bank has eight branches spread across Mumbai and Thane districts. CKP Bank's mistake was no different from that of many other failed co-operative banks — it built its business around a few large borrowers in the real estate sector. The strategy helped the small co-operative bank grow its loan book quicker than rivals, but backfired badly when the tide turned. As per the latest available details, the bank’s net worth had eroded to negative Rs 239 crore. At the last count, total deposits stood at Rs 486 crore, a relatively small amount compared to other bank failures.

The licence of Mapusa was cancelled on April 17 on account of the weak financials of the bank. The RBI found that the bank does not have adequate capital and earning prospects and its continuance will be prejudicial to the interests of its depositors. The RBI granted the scheduled bank status to Mapusa on January 30, 1998. The bank had a network of 24 branches. According to the 2018 annual report of the bank (the last available report), the bank had a deposit of Rs 378 crore in 2017-18 and Rs 100 crore advances.

PMC unresolved

The PMC Bank case, which marked the collapse of one of the major Mumbai-based co-operative banks, still remains unsolved. At the post-monetary policy presser this month, RBI Governor Shaktikanta Das said the initial response from potential investors for PMC Bank “looks positive” and the bank’s management is in touch with investors to evaluate the interest.

The deadline for investors to submit binding offers for PMC Bank is December 15. The deadline for submitting the expression of interest expired on November 30. Though the RBI could rescue two crisis-ridden banks—Yes Bank and Lakshmi Vilas Bank—in a very short period after the Boards were superseded, the regulator hasn’t got success yet in finding a rescuer for PMC Bank even after a year.

The RBI superseded PMC Bank board in September 2019. About 70 percent of its total loan book of Rs 8,383 crore as on March 31, 2019, had been taken by real estate firm HDIL. The bank had Rs 11,600 crore in deposits. The police arrested Joy Thomas, former managing director of PMC Bank, in October. The investigators have since made a few more arrests. In an advertisement on its website on November 3, the Maharashtra-based multi-state co-operative bank invited interest from potential bidders for the reconstruction of the bank. The details of the response received to this are not known yet.

Depositors at the receiving end

With more co-operative banks coming under the scanner of the RBI and their business activities restricted, there is a question on how deep is the mess in co-op banks. Every time the RBI clamps down on individual banks, there is panic among depositors to get their money back. This is evident in the cases of those co-operative banks, whose operations have been restricted by the RBI (such as PMC Bank) for financial misconduct. RBI directives often accompany restrictions on deposit withdrawals.

For instance, when the RBI imposed restrictions on Bengaluru-based Guru Raghavendra Sahakara (co-operative) Bank Niyamitha on January 10, it barred the bank from renewing loans and deposits. The bank was also asked to not allow withdrawals beyond Rs 35,000 per account. Similar restrictions were imposed on Kolkata’s Kolikata Mahila Cooperative Bank with deposit withdrawal restrictions of Rs 1,000 per account. In June, four more co-op banks received the RBI’s directions on restrictions on business activities. On June 11, the RBI issued directions to People’s Co-operative Bank Ltd., Kanpur, Uttar Pradesh, asking the bank not to give any fresh loans or take fresh deposits without the central bank’s prior approval.

What’s failing these banks?

The co-op banks have for long suffered from issue of dual regulation, intervention by local politicians and financial mismanagement. Also, the process of the RBI's supervision and periodical scrutiny of the books of these banks are not as stringent as in the case of commercial banks. All these create issues in their running. "There is a lack of clarity between the RBI and the government on who does the regulation. This confusion has contributed to the present plight of the co-op banking industry," said an RBI official. He didn't want to be named.

At the state level, there are three types of cooperative banks — primary credit co-operative banks, district-level cooperative banks, DCCBs, and state-level cooperative banks. As on March-end 2018, there were about 33 state co-operative banks with Rs 1.2 lakh crore deposits, 363 district central co-operative banks (Rs 3.47 lakh crore deposits) and 95,238 Primary Agricultural Credit Societies (Rs 1.19 lakh crore deposits). According to the latest data, India had 1,544 urban co-operative banks (UCBs) by March-end 2019. These banks managed around Rs 4.5 lakh crore deposits at that point of time, according to RBI data.

Even now, there is an issue of dual regulation of banks. While UCBs are under the purview of the RBI, primary credit cooperative societies are outside the purview of the Banking Regulation Act, 1949. The NABARD has been given power under Section 35 (6) of the Banking Regulation Act to conduct inspections of State Cooperative Banks and DCCBs. The NABARD also conducts voluntary inspections of State Co-operative Agriculture and Rural Development Banks.