Banking Central | 2021 is no different for co-operative banks, where is the end to this mess?

After a gap, once again co-operative banks are back in the news. Last week, the Reserve Bank of India (RBI) cancelled the licence of United Co-operative Bank Ltd, Bagnan in West Bengal citing its poor financial condition. However, the good news this time was that all the depositors will receive the full amount of their deposits from Deposit Insurance and Credit Guarantee Corporation (DICGC).

The bank does not have adequate capital and earning prospects, the RBI said the continuance of the bank was prejudicial to the interests of its depositors. Further, public interest would be adversely affected if the bank is allowed to carry on its banking business any further, the RBI said.

Before this, on May 11, the RBI slapped fine on two co-operative banks--Siddheshwar Sahakari Bank, Latur and Shankar Nagari Sahakari Bank Limited--again citing rule violations.

The story is not new. The RBI has clamped down on several co-operative banks in the recent years for rule violations or citing deterioration in financials. On April 22, the RBI cancelled the licence of Maharashtra-based Bhagyodaya Friends Urban Co-operative Bank Limited due to inadequate capital. In February, the RBI Imposed a withdrawal limit of Rs 1,000 per borrower on customers of Deccan Urban Co-operative Bank for a period of six months ‘considering the bank’s current liquidity position’.

This was the second major instance of major RBI action on co-operative banks this year. In the case of Deccan bank, the regulator specified that the punitive measures should not be ‘construed’ as cancellation of the banking licence by RBI, while also stating that 99.58 percent of the depositors are fully covered by the Deposit Insurance scheme.

In 2020, the RBI had u leashed a big clampdown on co-operative banks. In the recent past, the central bank had cancelled the license of four co-operative banks. These are Vasantdada Nagari Sahakari Bank, Karad Janata Sahakari Bank, CKP Co-operative Bank and the Mapusa Urban Co-operative Bank of Goa.

Essentially, 2021is no different so far for co-operative banks. In 2020, (as Moneycontrol earlier reported) the RBI had issued almost 106 directives 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 a monetary penalty. As the details mentioned above shows, the RBI crackdown on co-operative banks continues in 2021 as well. In most of these cases, the findings point to poor governance and dubious deals.

While the RBI has been prompt in taking actions on erring/failing co-operative banks, the resolutions aren’t happening as quick as expected in many cases. In the case of PMC Bank, there is no resolution yet. In a recent affidavit in Delhi High Court, the RBI said the financial condition of the PMC Bank continued to be precarious and its liquidity position. The RBI has consistently maintained that most of the depositors of the PMC Bank have got their money back. But, the fact is there are still a number of depositors who are awaiting resolution. These are mainly high value depositors.

Enough is written about the plight of co-operative banks. Poor governance, light-touch regulation, local political intervention and a change in the composition of the banking industry leading to tight competition are all factors impacting the co-operative banking industry. Rural c-ooperative banks, larger in number, are facing the brunt more while post the PMC-episode, Urban co-operative banks, which are the bigger ones, have got some regulatory attention (RBI has more powers to govern these banks now). But the issue of dual regulation with respect to smaller co-operative banks still persists.

Back-to-back penalties and licence cancellations have eroded trust of common depositors in co-operative banks. These banks have played an important role in financial inclusion over years and need to be given a helping hand. Beyond the crackdown, the RBI will do well in preparing an action plan to restore the customer trust in co-operative banks. The RBI can consider merging or converting poorly-run co-operative banks with well-run lenders wherever there is a synergy. The RBI can also promote suitable candidates to small finance banks.

There are successful examples. On January 6, 2020, the RBI issued in-principle approval for Shivalik Mercantile Co-operative Bank Limited for transition into a small finance bank under the “Scheme on voluntary transition of Urban Co-operative Bank into a Small Finance Bank” issued on September 27, 2018. On 26 April, the RBI said Shivalik Small Finance Bank has commenced operations as a small finance bank with effect from April 26, 2021. The Reserve Bank has issued a licence to the bank under Section 22 (1) of the Banking Regulation Act, 1949 to carry on the business of small finance banks in India, the RBI said. This is a good model to follow since SFBs are more tightly regulated by the RBI compared with co-operative banks.

In the current regulatory structure, the future of the co-operative banking industry doesn’t look good. There needs to be change in the approach and none, other than the RBI, can take the big step.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.