• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

BANK FRAUDS SEEM to have acquired a regularity about them and, worse, are spreading to one of the least manned sectors such as the co-operative banks suggesting a sure pattern. From Madhavpura in Gujarat to the Home Trade-Nagpur District Central Co-operative Bank (NDCCB), securities swindles have, in one fell swoop, dragged down the entire co-operative banking structure. No firm numbers on the size of the scam are available though some put it at over Rs 400 crore. Gilt trading has to largely conform to the Delivery-versus Payments system put in place after the 1992 scam. At the RBI's Public Debt Office every sale or purchase of gilts gets squared with the funds in the accounts of the players and any mismatch triggers a gridlock.

But the Home Trade-NDCCB securities transaction did not go through the system. NDCCB paid a few crore rupees to Home Trade against government securities which the broker never delivered. Home Trade had to physically deliver the gilts when there was a system in place to ensure delivery against payments. Similar deals seem to have been struck between Home Trade and over 20 other co-operative banks. After the Madhavpura incident, the RBI could have made it mandatory for co-operative banks to trade through the Public Debt Office. Today, the RBI has issued circulars banning all physical deliveries and disallowing co-operative banks from dealing directly with brokers. There are suggestions that the central bank was in the know of the transactions but was possibly held back from taking action as the co-operative banks in trouble were run by top politicians. Could the scams not have been averted by the RBI, Nabard or SEBI, at least on the regulatory side, as Home Trade did not enjoy a strong market reputation?

Any quick RBI action is ruled out as co-operative banks come under the Registrar of Co-operatives of the States. Boards of some co-operative banks in Maharashtra have been scrapped and administrators appointed by the Registrar at the behest of the RBI. The Maharashtra Government is pushing for a probe of the entire co-operative banking structure. Similar action has followed every scam in recent years. But the reports are never made public and the delays of the legal system allow scamsters enough space to be around. Some of the co-operative banks, owned by individual shareholders, may need capital infusion. With the government (the States and the Centre) not holding any stake in the co-op banks, it is going to be tough to come by recap funds. Over the last two-three years, the RBI has been arguing for an apex supervisory body to oversee co-operative banks. But this has not found favour with New Delhi. In the latest Credit Policy, the central bank has suggested a separate supervisory authority.

Co-operative banks have no active treasury and can fall easy prey to sweet promises of profits by any passing sharper. Their ills are well chronicled by the Madhava Rao report on urban co-operative banks and the Jagdish Capoor task force report on co-operative credit. But, as usual, action has not followed. After years of financial sector reforms, the ordinary depositor is most comfortable today holding his rupees in his pocket rather than placing them in banks, mutual funds or the stock market.

Send this article to Friends by E-Mail

Stories in this Section
Co-op bank mess

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line