The Hindu Business Line : `No credit' for co-op directors

THE DEMAND BY the urban cooperative banks that their directors be allowed access to loan funds against the security of their own deposits is, on the face of it, unexceptionable. After all lending against one's own deposits is arguably the safest form of lending for a bank. But, all the same, the Reserve Bank of India ban on such lending must be allowed to remain in place, given the structural infirmities plaguing the cooperative banks.

Cooperative banking institutions have suffered from duality of supervisory control, by the RBI and the State level regulatory mechanism. This, in itself, would not matter so much if the two regulators were in harmony with each other in matters of disciplining errant managements. But the regulatory apparatus at the State level is so vitiated by politics as to render any well-meaning initiative by the RBI a non-starter. Instances are not lacking of RBI decisions on such issues as superseding of the board of directors, and endorsed also by the Registrar of Cooperative Societies, being annulled by State governments for what are clearly political reasons. The democratic character of most cooperative banks is also distorted by bogus membership or, if real, with no stake in its functioning. In the circumstances, there can be no genuine arm's-length relationship between the banks and those who constitute its board.

Public interest is further jeopardised by the regulator not having timely information about the financials of the cooperative banks to subject their functioning to any effective on/off-site supervision. It has only provisional figures of their financial situation to go by even long after their financial year has ended. This would not have been a serious problem if public stake in these institutions were minimal. But that is not the case. With deposits provisionally estimated in excess of Rs 100,000 crore as of March 2003, it is a significant part of the country's financial system. To compound matters, there has been a significant erosion of net owned funds of these institutions in recent times when their asset base has actually gone up. There is no doubt that urban cooperative institutions have a place in the larger scheme of improved credit access to small and medium borrowers. But, unfortunately, public confidence in these institutions has been badly dented by the failure of Madhavpura Mercantile Cooperative Bank after the 2001 stock market scam.

The country can ill-afford the recurrence of the crisis of confidence that engulfed the industry. There is a need to put in place a superior regulatory infrastructure eliminating the duality of control which hinders effective supervision. The RBI may quite possibly have gone beyond the recommendation of the Joint Parliamentary Committee, which went into the stock market scam, and the role of urban cooperative banks in this context. But any claim of members of the boards of such institutions to a level playing field in credit access must necessarily await regulatory reform. Till then, they must choose between an active role in the management of these institutions and the status of ordinary borrowers in them.

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