Late on May 2, the Reserve Bank of India (RBI) pulled the plug on Mumbai-based CKP Co-operative Bank.
The announcement did not come as a big surprise for many in the bank. Over the years, the bank’s financial position had worsened beyond redemption, bad loans had spiked significantly and the timeframe given by the central bank to work out a credible revival plan had expired. It was a race against time for the bank's management.
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.
Also read: CKP Co-operative Bank has 97% NPAs; most to real estate developers
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.
But, for some of the 1.31 lakh customers of the bank, this will be their life’s savings. Once the bank goes into liquidation, depositors can claim up to Rs 5 lakh under the modified deposit insurance guarantee scheme. But, those having deposits in the bank beyond that ceiling may have a long and uncertain wait ahead.
What went wrong?
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.
Almost all NPAs on CKP Bank’s book are loans given to small real estate developers. Things were good till about 2012 when the real estate business in Mumbai was booming. Banks built its loan book to around Rs 622 crore at one point. But eventually, some of these big ticket loans turned sticky. “Things were fine till a point. But, market turned bad and defaults started coming. About 10 builders owe much of the loans to the bank ,” said the official quoted above.
Starting 2014, the RBI imposed restrictions on CKP on deposit and advance operations. According to the official, the bank managed to recover some amount in the next few years but a meaningful resolution was not in sight. At end of the April 2020, CKP Bank still had about Rs 154 crore NPAs — almost equal to the size of its loan book. With the reserve bank terminating the operations of the bank, there is uncertainty ahead.
India’s co-operative banking mess
India’s weak co-operative banks have been imploding one after the other. Almost every month, the RBI brings some or the other co-operative bank under restrictions. In most cases, the reasons for failure are financial irregularities or frauds that eventually result in huge spike in NPAs, pushing these banks to the point of collapse. The fact that co-operative banks are traditionally poorly regulated as compared to commercial banks, adds to the woes.
Consider this: 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 do not have clarity on who does what and you are unwilling to own up mistakes when things go wrong. Too many cooks spoil the broth,” an RBI official said 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 the National Bank for Agriculture and Rural Development (Nabard) and state governments. The regulation of multi-state UCBs fall under the 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.
RBI or government?
The reserve bank does regulate these banks, but only partly. 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 the state level 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 the RBI website, 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).
PMC bank, which was superseded by the RBI in September 2019, after it was 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. Last week, the Bombay High Court constituted a committee to sell HDIL assets and repay depositors.
The RBI has now asked UCBs to report details on borrowers with exposure of Rs 5 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,” the central bank said in a recent circular.
After PMC, the RBI imposed restrictions on Bangalore-based Guru Raghavendra Sahakara (Co-operative) Bank Niyamitha, on January 10, from renewing loans and deposits. The bank was also asked not let withdrawals beyond Rs 35,000 per account. Similar restrictions were imposed on Kolkata’s Kolikata Mahila Cooperative Bank Ltd. with deposit withdrawal restrictions of Rs 1,000 per account. On April 17, the RBI cancelled the license of Mapusa Urban Co-operative Bank for financial failure. There are several other such examples.
Not just UCBs
The problem of dual regulation or lack of efficient regulation is not limited to only UCBs, but also for rural co-operative banks. 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 on condition of anonymity.
Learning from the PMC episode, the government in February conferred more powers to the RBI to regulate co-operative banks through an amendment in the Banking Regulation Act. With this amendment, the RBI will have more power to audit the books of urban co-operate banks, appoint Chief Executive Officers and audit co-operative banks. But even now, the proposed changes in the Banking Regulation Act will cover only the urban co-operative banks and not the rural co-operatives.
A resolution is not in sight even after six months of the RBI superseding the PMC board. Compare this with the super-quick resolution of Yes Bank by a clutch of private banks and the State Bank of India, with the help of the RBI. There are no takers for crisis-ridden co-operative banks. The reason is that many of these entities have opaque balance sheets. CKP Bank is the latest instance of a cooperative bank failure. But, it is unlikely to be the last.(This is an updated version of a story published on Moneycontrol earlier)