Last week, yet another co-operative bank came on the Reserve Bank of India (RBI) radar. 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 is the second major instance of RBI crackdown on co-operative banks this year. On January 11, the central bank had cancelled the licence of Maharashtra-based Vasantdada Nagari Sahakari Bank. 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. The language indicates the deterioration in the financials of the bank may be serious in nature.
These are not isolated instances. In recent years, RBI crackdown on co-operative banks-- imposing withdrawal restrictions and even cancellation of licenses—have become regular events. Such announcements, logically, worry the customers who deposit money in these banks.
The resolution in most cases takes years. Take the case of biggest co-operative banking failure of recent past—Punjab and Maharashtra Co-operative bank. The RBI superseded the Board of PMC Bank in September 2019, after imposing a deposit withdrawal limit of Rs 1,000 in September that year. A year and a half later, the resolution is still pending. Of course, the withdrawal limit has been increased to Rs 100,000 in June 2020. According to the RBI, this will enable 84 percent of the depositors to withdraw their entire money from the bank. But, that still leaves out some depositors who have bigger amounts stuck in the bank. Indications are that the PMC Bank will soon get an investor. But, the fact remains that for around a and a half, the suffering of the PMC Bank depositors continues. At the time of crisis, PMC Bank had over 9 lakh depositors. Several suicide cases have been reported in connection with PMC collapse.
In the last year itself, the RBI has issued 106 directives on different co-operative banks, It cancelled four bank permits since last year—Karad Janata Sahakari Bank, CKP Cooperative Bank, Mapusa Urban Co-operative Bank of Goa and Vasantdada Nagari Sahakari Bank. The central bank typically begins with the imposition of business restrictions and caps withdrawals. Cancellation of licence happens in rare cases.
But why do depositors choose co-operative banks to park their money when there are commercial banks that are better regulated and offer more safety? There are two reasons. One, co-operatives are seen as more friendly neighbourhood banks that are easily accessible and process transactions much quicker compared to commercial banks. Second, most co-operative banks offer higher interest rates on deposits than bigger banks.
But, as the data shows, co-operative banks are often more susceptible to local political influence, financial irregularities and imprudent lending practices. The central bank wants to address this problem.
On February 15, the RBI announced setting up of an expert committee on Primary Urban Co-operative Banks (UCBs) that will review rules to examine the issues in the sector and provide a future roadmap. The eight-member committee is chaired by Deputy Governor NS Vishwanathan. The panel will review the current regulations and recommend suitable measures and changes to strengthen the sector, taking into account recent amendments to the Banking Regulation Act, 1949. Besides, it will also suggest effective measures for faster rehabilitation and resolution of UCBs and assess the potential for consolidation in the sector and consider the need for differential regulations, according to a central bank release.
Co-operative banks have undoubtedly played an important role over years to promote financial inclusion. They continue to be popular in the semi-urban and rural areas. The co-operative banking sector has long suffered the problem of dual regulation—by the RBI and the NABARD/State Co-operative Societies Act. This lack of clarity on actual regulatory authority has caused problems in their regulations and periodical scrutiny. But, these banks continue to grow their books, albeit at a slower pace. A recent change in law gives more power to the RBI to govern bigger co-operative banks but not the smaller rural co-operatives.
According to RBI’s report on Trend and Progress of Banking in India, the deposits of UCBs grew by 3.5 percent in 2019-20 compared with 6.1 percent in the previous year. Loans and advances grew by just 0.8 per cent in 2019-20 compared to 8 percent in 2018-19. The borrowings grew by just 4.9 percent in FY20 compared with 39.2 percent in FY19. The reserves and surplus contracted by 9.2 percent compared with a growth of 5.6 percent in the previous fiscal.
Growth in deposits, which constitute 90 percent of the total resource base of UCBs, slipped in 2019-20 after a revival in the previous year. The average growth rate of deposits declined from 13.1 percent in the first decade of the consolidation drive to 8 percent during 2014-15 to 2019-20, in line with the growth in balance sheet size. The repeated cases of cooperative banking failures have impacted the trust of customers in these banks. Can the RBI panel bring in regulations to revive the sector and regain the customer trust? Only time will tell.(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)