In 2020, RBI has put 44 co-operative banks under watch. How deep is the rot?

In April alone, the RBI acted on nine co-operative banks. This included the cancellation of licence of Mapusa on April 17 on account of the weak financials of the bank. The RBI found that the bank does not have adequate capital and earning prospects and its continuance will be prejudicial to the interests of its depositors. The RBI granted the scheduled bank status to Mapusa on January 30, 1998. The bank had a network of 24 branches. According to the 2018 annual report of the bank (the last available report), the bank had a deposit of Rs 378 crore in 2017-18 and Rs 100 crore advances.

Mapusa bank has all along contested the RBI’s action since 2015. “The financial position as on March 31, 2015 was sound enough to run the bank profitably. But in spite of this growth the RBI in a sudden move imposed directives u/s 35A of Banking Regulation Act, 1949 on 24.07.2015 at close of the business prohibiting us from undertaking the normal banking business,” the bank said in the 2018 annual report. A good chunk of the loans had turned to non-performing assets (NPAs).

CKP Bank bites the dust

There were eight cases in May where the RBI announced some kind of actions on crisis-ridden co-op banks. On 2 May, the RBI clipped the wings of another bank. This time, the Mumbai-based CKP Co-operative Bank. As on April 30, only about Rs 4 crore out of the Rs 158 crore loan book was remaining standard on the lender's books, Moreshwar Dhaimodkar, General Manager of CKP Bank, told Moneycontrol. In other words, CKP Bank’s gross non-performing asset (GNPA) level had zoomed to 97 percent of the total loans.

Founded in 1915, and headquartered at Matunga, Mumbai, the bank has eight branches spread across Mumbai and Thane districts. CKP Bank's mistake was no different from that of many other failed cooperative banks — it built its business around a few large borrowers in the real estate sector. The strategy helped the small co-operative bank grow its loan book quicker than rivals, but backfired badly when the tide turned.

As per the latest available details, the bank’s net worth had eroded to negative Rs 239 crore. At the last count, total deposits stood at Rs 486 crore, a relatively small amount compared to other bank failures.

PMC remains unsolved

In fact, the CKP Bank closure was the third since PMC Bank clampdown by the regulator in September 2019. The action of the Mumbai-based bank was a big shocker because of the sheer nature of the fraud that happened in the bank. The RBI found that the bank was allegedly running fraudulent transactions for several years to facilitate lending to HDIL through fictitious accounts and violating single-party lending rules. The bank had Rs 11,600 crore in deposits. The RBI imposed restrictions on deposit withdrawals and superseded its board after the fraud was caught. Even though many depositors got their money under the deposit insurance scheme, even now the large depositors, which include two RBI employee cooperative societies, are yet to get their money back. On March 21, the RBI said that in the interest of the depositors and the stability of the cooperative banking sector, the RBI is trying to work out a scheme for revival of the bank. But even after nine months, the RBI is yet to find a solution to the PMC crisis. No bank has shown willingness in taking over the scam-ridden bank.

More banks face the wrath

Besides PMC, the RBI imposed restrictions on Bengaluru-based Guru Raghavendra Sahakara (co-operative) Bank Niyamitha on January 10 from renewing loans and deposits. The bank was also asked to not allow withdrawals beyond Rs 35,000 per account. Similar restrictions were imposed on Kolkata’s Kolikata Mahila Cooperative Bank with deposit withdrawal restrictions of Rs 1,000 per account. In June, four more co-op banks received the RBI’s directions on restrictions on business activities. On June 11, the RBI issued directions to People’s Co-operative Bank Ltd., Kanpur, Uttar Pradesh, asking the bank not to give any fresh loans or take fresh deposits without the central bank’s prior approval.

With more co-operative banks coming under the scanner of the RBI and their business activities restricted, there is a question on how deep is the mess in co-op banks. Every time the RBI clamps down on individual banks, there is panic among depositors to get their money back. This is evident in the cases of those co-operative banks, whose operations have been restricted by the RBI (such as PMC Bank) for financial misconduct.

What is ailing these banks?

The co-op banks have for long suffered from issue of dual regulation, intervention by local politicians and financial mismanagement. Also, the process of the RBI's supervision and periodical scrutiny of the books of these banks are not as stringent as in the case of commercial banks. All these create issues in their running.

"There is a lack of clarity between the RBI and the government on who does the regulation. This confusion has contributed to the present plight of the co-op banking industry," said an RBI official. He didn't want to be named.

According to the latest data, India had 1,551 urban co-operative banks (UCBs) by March-end 2018. These banks managed Rs 4.5 lakh crore deposits at that point of time. At the 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 March-end 2017, there were about 33 state co-operative banks with Rs 1.2 lakh crore deposits, 370 district central co-operative banks (Rs 3.3 lakh crore deposits) and 95,595 Primary Agricultural Credit Societies (Rs 1.15 lakh crore deposits).