Banking Central | Do we really care about cooperative bank depositors?

Unlike major commercial bank collapses, smaller co-operative banks do not get much of the media attention.

What if you have Rs 28 lakh in your bank account but you are unable to withdraw anything out of it while a family member is in need of urgent medical care?

Jacob Paramel, a local businessman in Thrissur, has hit such a crossroads. He has Rs 28 lakh stuck in the scam-hit Karuvannur Bank. But he unable to withdraw the money for his wife’s cancer treatment because the bank doesn’t have the funds.

Karuvannur Bank, which managed public deposits of close to Rs 290 crore at one point, was hit by a scam in 2021 when details of fake loans emerged. Property documents with the bank were used illegally to borrow again by a nexus of bank officials, director of board members and some individuals belonging to the local real estate mafia.

The Kerala government later assured funds to compensate the depositors but, going by local media reports, out of the Rs 50 crore promised, only Rs 2 crore was made available till August 2023.

Read: Fake loan applications, banker-real estate nexus: The story of Rs 100-crore Karuvannur Co-op Bank scam

That leaves depositors like Jacob in cold feet. Karuvannur bank is just one instance, but it embodies a larger problem in India’s cooperative banking industry. There are several such banks and countless depositors across the country who have similar tales to tell.

No big headlines

Unlike major commercial bank collapses, smaller co-operative banks do not get much of the media attention. The amount involved is relatively small and these banks are relatively down market for the newsrooms to pursue. A case-in point could be the extensive media coverage of the Yes Bank collapse or the IL&FS and DHFL scams, while little or no mention of smaller lenders like Karuvannur Bank going broke.

But the plight of the people who trusted these banks for their life's savings aren’t any less painful than the depositors and investors of big banks.

Whether one agrees or not, the big media attention and subsequent intervention from the regulator and governments are one key reason why there is a quick resolution in cases of a (relatively) big bank collapse but not necessarily in the cases of smaller banks.

Even the 2019 collapse of Punjab and Maharashtra Cooperative Bank, which is one of the biggest banks in India’s cooperative banking sector. didn’t receive resolution for about two years, causing distress to hundreds of depositors.

Continuing cases

There is a larger problem here. While on one hand, the resolution process is slow, on the other, the count of crashing coop banks are on the rise. The trend is clearly visible from the RBI actions on cooperative banks.

As Moneycontrol reported in April, the RBI cancelled the licence of eight cooperative banks and imposed monetary penalties 114 times on wrongdoers in the financial year 2023 alone.

The banks that went defunct this year included Mudhol Cooperative Bank, Millath Cooperative Bank, Shri Anand Cooperative Bank, Rupee Cooperative Bank, Deccan Urban Cooperative Bank, Laxmi Cooperative Bank, Seva Vikas Cooperative Bank and Babaji Date Mahila Urban Bank.

A random check of the status of refunds to depositors of these banks and the ones whose permits were cancelled earlier show that in most cases, depositors are still waiting for their money. The deposit insurance guarantee covers only up to Rs 5 lakh, which means those who are outside this limit are waiting for the mercy of the banks.

So, what is the solution?

Before looking at the solutions, one needs to realise the core reasons why these banks ran into troubles in the first place. These two core reasons are bad governance and political intervention at the local level.

A closer look at the RBI actions on erring cooperative show that many cases are related to corruption involving board members and top officials who sanction loans to related parties. This situation continues even today, despite the RBI taking up the regulation of bigger cooperative banks in recent years.

There are no strict monitoring of the business or governance practices in these banks either by the regulator or state registrars (who regulate smaller cooperative banks).

Local politicians continue to run many cooperative banks through proxies on the boards.

Some numbers for the perspective: As on March 31, 2022, India had 351 district cooperative banks with a cumulative Rs 3.3 lakh crore loan and Rs 4.12 lakh crore deposits. The gross non-performing assets of these banks stood at 11 percent and total accumulated losses amounted to Rs 7,753 crore. There were about 39 banks with capital adequacy of less than 9 percent.

Similarly, state cooperative banks have total loans of Rs 2.4 lakh crore and deposits of Rs 2.4 lakh crore as on March 2022 and NPAs of around 6 percent of their total loans. Now, these are slightly old, reported numbers. The actual state of the accounts is anybody’s guess due to inadequate audit process.

Cooperative banks have indeed played a critical role in financial inclusion over the years. But bad governance standards and corruption are making these lenders ticking time bombs. If the cooperative banking mess is allowed to continue in this manner, India may have to worry more about a small bank crisis in the years ahead.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.