How dual regulation is worsening the mess at India’s opaquely run co-operative banks

India’s problematic co-operative banks may have more skeletons in the closets, waiting to tumble out. For nearly two years, there has been no proper scrutiny of the accounts of many cooperative banks, including Urban Co-operative Banks (UCBs), due to dual regulation and political involvement at state-level.

“You have a problem when you don’t have clarity on who does what and you are unwilling to own up mistakes when things go wrong. Too many cooks spoil the broth,” said an RBI official on condition of anonymity. Regulation of UCBs is split between RBI and centre/state-governments, while that of smaller co-operative banks is divided between National Bank for Agriculture and Rural Development (Nabard) and state governments.

The regulation of multi-state UCBs fall under Ministry of agriculture while that of single-state UCBs come under the ministry of finance. Punjab and Maharashtra Cooperative bank (PMC) is a multi-state co-operative bank. This is the reason why Union finance minister, Nirmala Sitharaman, in a recent tweet, passed the responsibility to the RBI saying multi state co-operative institutions do not come under ministry of finance even if they are called banks. The RBI is the regulator and they are taking action, the FM had said. But, the central bank may not fully agree with her view.

RBI or government?

RBI does regulate these banks but only partly. It does not have full powers as these entities also come under the government's purview. For instance, when it comes to taking the stock of operations, the Registrar of Co-operative Society (RCS) is the primary authority on behalf of government. Typically an IAS official on the verge of retirement, the RCS is entrusted with conducting regular scrutiny of these banks and compiling the numbers. But politicians at state-levels dominate the running of these banks, and the RCSs are either powerless or in cahoots with the powers-that-be.

According to the latest available data on RBI site, India has 1,551 urban co-operative banks (UCBs) at end-March 2018. These banks managed Rs 4.5 lakh crore deposits at end March, 2018. At state-level, there are three types of cooperative banks--primary credit co-operative banks, district level cooperative banks and state-level cooperative banks. As on end March, 2017, there were about 33 state co-operative banks with Rs1.2 lakh crore deposits and , 370 district central co-operative banks (Rs3.3 lakh crore deposits) and 95,595 Primary Agricultural Credit Societies (Rs1.15 lakh crore deposits).

PMC effect

The PMC bank which was superseded by the RBI last year after it was found that the bank was running fraudulent transactions for several years to facilitate lending to HDIL through fictitious accounts and violating single-party lending rules. The bank had Rs11,600 core deposits. RBI imposed restrictions on deposit withdrawals and superseded its board after the fraud was caught. Last week, the Bombay High Court constituted a committee to sell HDIL assets and repay depositors.

But it doesn’t stop there. Instances of co-operative banks coming under RBI scanner, mostly due to financial irregularities or poor performance, has been rising over the years. Almost every month, the RBI put some or other co-operative bank under restrictions. It was only after the PMC bank case, the RBI started taking strict action.

The RBI has now asked UCBs to report details on borrowers with exposure of Rs5 crore and above, also when the bank writes off loans worth that amount. “Banks are advised to take utmost care about data accuracy and integrity while submitting the data on large credits to the Reserve Bank of India, failing which penal action would be undertaken,” said the central bank.

After PMC, it imposed restrictions to Bangalore-based Guru Raghavendra Sahakara (Cooperative) Bank Niyamitha, on 10 January, from renewing loans and deposits. The bank was also asked not let withdrawals beyond Rs35,000 per account. Similar restrictions were imposed on Kolkata’s Kolikata Mahila Cooperative Bank Ltd with deposit withdrawal restrictions of Rs 1000 per account.

There are several other such examples.

Not just UCBs

The problem of dual regulation or lack of efficient regulation is not just limited to UCBs, but extends to rural co-operative banks as well. Even rural co-operative banks, which are regulated by RCS and National Bank of Agriculture Development (NABARD), are run opaquely. Here too, for the last two years, no data on the business of these banks are available.

“These banks are mostly run by politicians and monitored by RCS. There is often a turf war on who does the job. There are no numbers available for the last two years,” a NABARD official said.

To save India’s broken co-operative banks waiting to implode, the current laws needs to be changed to give powers to a single regulator; the RBI is most suited for the job. The sooner the government does it, the better. Else, there will be more skeletons tumbling out of the closet.