Banking Central | When will small co-operative banks get rid of political strongmen?

Karuvannur Cooperative bank scam shook up Kerala's small banking industry at one point

Another Karuvannur Bank-like scam is in the making, the Enforcement Directorate got the whiff, and informed the Kerala High Court last week. The probe agency has gathered information on similar fashion of money laundering through fake loan applications and financial irregularities through political nexus.

The ED stated that the involvement of political parties, mainly politicians from the ruling Left, was found evident in the questioning of those linked to the case.

The development, involving at least 12 service co-operative banks, brings back the focus to a larger issue. In India, as per the current laws, only bigger cooperative banks come under the regulation of the Reserve Bank of India (RBI). Here, the regulator has been acting against the wrongdoers. So far in 2024 alone, there have been 20 instances of the RBI slapping monetary penalties on cooperative banks and revoking the licences of three, shows data gathered by Moneycontrol.

Shree Mahalaxmi Mercantile Co-operative Bank, Hiriyur Urban Co-operative Bank, and Jai Prakash Narayan Nagari Sahakari Bank have lost their permits. The RBI actions, in most instances, came from weak capital ratios and poor corporate governance standards followed by the banks. The amount of monetary penalties imposed ranged from Rs 25,000 to Rs 3 lakh.

But, as far as smaller cooperative banks are concerned, there is no strong regulatory scrutiny yet. These small lenders continue to be under the rule of state governments through the registrar of cooperative societies, which throws open enough room for local politicians to play a role. The money collected from society members are often spent on personal benefits with or without the knowledge of the political parties. This needs to be stopped.

If one looks at the recent Karuvannur Bank scam in Kerala, there is clear evidence of micromanagement by local politicians who dominated the lender’s administrative panel. There are many other cases of similar patterns.

Until there is a clear framework and mechanism to avoid political involvement in co-op banks, it is unlikely that there will be a fresh beginning. These banks need professionally run boards and management, which are lacking in most cases. Political leaders, at local levels, should be kept away from the business of co-operative banks.

The question is whether the RBI has enough tools at hand to keep such politicians at bay from these banks, which they often use for their political gains.

If it doesn’t, a legal shield needs to be provided to ring-fence the co-operative banks. If these banks have to grow and earn customer trust, politicians have to steer clear with their vested interest. Political parties or any group of persons acting in consortium should be banned from controlling a co-operative banking entity.

India's smaller cooperative banks have played a crucial role in expanding the banking services in areas where bigger banks do not have a reach or refuse to go. These banks need to be protected through adequate regulation and need to be freed from the clutches of local strongmen.

Question, as well, remains who will bell the cat!

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