Banking Central | The wait for own money

Last week, Moneycontrol kicked off a series of stories under the name ‘India’s cooperative mess' to highlight the plight of depositors whose hard-earned savings are stuck at failed cooperative banks across the country. While the deposit insurance and credit guarantee corporation (DICGC) cover has helped to cover majority of depositors, others (those with deposits above Rs 5 lakh limit) are still waiting to get their money back. There are a number of cooperative banks that are in crisis and unable to pay back their depositors.

One such example is Karuvannur Cooperative bank in Kerala. The CPM-run bank was hit by a Rs 100 crore fraud last year. At that point, the bank had a deposit base of Rs 290 crore and a loan book of Rs 270 crore. The audit by the Joint Registrar of Cooperative Societies found that these property documents were used illegally to borrow again by a nexus of bank officials, director board members and some individuals belonging to the local real-estate mafia.

Subsequently, the bank put restrictions on deposit withdrawals leaving depositors in a state of crisis. Recently, a borrower death linked to financial stress due to their inability to draw money from the bank for medical treatment made headlines. This has put political pressure on the state government which is now considering a hurried bailout using money collected from other cooperative banks. At the national level, there are several such cases. Even in the case of Punjab and Maharashtra Cooperative Bank (PMC), where a resolution has happened, some depositors have a long wait time, many of them retirees.

There are a number of cases where depositors have parked a major part of their life savings, if not the entire amount, in cooperative banks eyeing higher interest. These are the depositors who have been impacted most by such recurring cases of frauds. In that sense, carelessness in choosing the institutions and greed have played a major role in leading to their current situation. However, the absence of a proper regulatory and supervisory framework with respect to cooperative banks too has played a key role in letting the wrongdoers thrive.

The increasing number of cooperative bank failures over years have been startling. According to government data, a total of 27 small-sized cooperative banks were liquidated in the past five years, while 42 cooperative banks were closed on account of mergers during this period. One major reason why cooperative banks have been collapsing is the local political involvement and corruption. The regulation of these banks is divided between state-level authorities and the Reserve Bank of India (for bigger cooperative banks). Audits are not happening in the way they should.

Recurring instances of cooperative bank failures have shaken the trust of depositors in cooperative banks. Traditionally, these banks have played a key role in bringing poor households into the fold of formal finance. Compared with the past, the RBI has a much bigger role now in cooperative bank regulation but its powers are still limited due to political involvement. At least now, the status quo needs to be changed and cooperative banks need to be saved from the clutch of local politicians.

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