Banking Central | Coop banks finally get the right cure for wounds of corruption

Strict auditing comes after a series of bank collapses and financial frauds reported in the recent past.

A number of cooperative banks in Kerala went into audits last week. The auditing is a routine exercise that takes place every year. But what was different this time was the extra caution that was visible in the process itself.

In many banks, instead of the customary single-officer audits, there were two-three executives cross-questioning the loan transactions and underlying assets. From what Moneycontrol heard from bank executives who assisted the auditing process in one of the cooperative banks in Thrissur and in other centres, the auditors also scrutinised the loan-to-value ratios in credit deals. Such a caution is unheard of in case of cooperative lenders. The increased scrutiny of cooperative banks is visible in other states as well.

Clearly, the change in approach is on account of a series of bank collapses and financial frauds reported in the recent past, including the infamous multi-crore Karuvannur bank scam where perpetrators faked signatures and land documents to draw multiple loans on the same underlying assets. In other states, the triggers include PMC Bank scam in Mumbai and such cases.

This increased scrutiny is a welcome news to clean up the deep mess in India’s cooperative banking industry plagued by multiple evils. These

organisations—a critical part in India’s banking system because of their insight and reach deep into the hinterland—have been grossly misused and mismanaged by local politicians and corrupt board members or bank executives. Such mismanagements have attracted the wrath of the banking regulator which has aggressively punished the erring ones. Yet, the menace was far from over as such cases typically don’t get much of national media unlike, say, a Yes Bank collapse of scam in IL&FS or DHFL.

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.

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.

The fact is that the RBI’s actions were never enough to address the root cause of the problem since the culture and the poor governance standards remained unchanged. Also, since the RBI doesn’t regulate smaller cooperative banks, they continued to suffer from the vested party interests.

The onus to act fell back on respective state governments which controlled the sector through the registrars of cooperative societies. The state governments, on the other hand, refused to act since many of the erring board members were their own party members. But, after a series of bank collapses, mainly the Karuvannur Bank scam, things seems to have changed a bit. Typically, the auditing process in cooperative banks, both small and big ones, aren’t conducted in a professional manner and happens with a lag of one or two years in some cases.

This makes data availability a major issue even for the regulator to make its risk assessment. Till a crisis happens, no one really knows the problem and, by then it's too late to act. In this context, the change in the auditing approach is a welcome move. Once the auditing process is streamlined, this issue will be addressed. After years of mismanagement, hopefully cooperative bank may be finally get the right cure.

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