Bringing co-operative banks under RBI may not really help

The Banking Regulation (Amendment) Bill was passed in the Lok Sabha the other day. It replaces the Ordinance 2020 that amended the Banking Regulation Act, 1949 as applicable to cooperative banks. The Bill seeks to protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with the RBI in respect of other banks to co-operative banks as well.

The amendments do not affect existing powers of the State Registrars of Co-operative Societies under State co-operative laws. The amendments do not apply to Primary Agricultural Credit Societies (PACS) or co-operative societies whose primary object and principal business is long-term finance for agricultural development, and which do not use the word “bank” or “banker” or “banking” and do not act as drawees of cheques. The Ordinance also amends Section 45 of the Banking Regulation Act, to enable making of a scheme of reconstruction or amalgamation of a banking company without moratorium.

In a nutshell, the cooperative banks are brought under the RBI’s close supervision and regulation for improved governance and protection of depositors’ interest.

It is reported that there are more than 8.6 crore depositors in over 1,500 urban and multi-state cooperative banks across the country and that their money, amounting to ₹4.84 lakh crore, in these cooperatives banks will stay safe with this initiative. Bank failures have been an integral part of Indian financial history. It is not for nothing that in 1913, John Maynard Keynes after surveying the state of banking in the country, wrote in Indian Currency and Finance , “In a country so dangerous for banking as India, it should be conducted on the safest possible principles”.

All over the world, central banks were established specifically to take care of bank failures. The US Federal Reserve was established in 1913, and the RBI came into existence on April 1, 1935.

Between 1935 (the year of establishment of Reserve Bank of India) and 1947 nearly 900 banks failed. This was followed by 665 bank failures between 1947 and 1969 (the year of bank nationalisation). Between 1969 and 2019, 37 banks failed.

From 1969 onwards, 36 private banks have been put under moratorium in public interest, due to mismanagement and have gone out of existence. Several of them were merged with healthy PSBs — for instance, Global Trust Bank with Oriental Bank of Commerce in 2004.

From this it is clear that the RBI has not been able to avoid many bank failures even after regulating and taking complete supervision of them.

Urban cooperative banks failures occur with alarming regularity. Their numbers fell from 1,926 in 2004 to 1,551 in 2018, as per RBI data. The DICGC settled claims of 351 co-operative banks amounting to ₹4,822.33 crore. The RBI has tools such as the Cash Reserve Ratio and the Statutory Liquidity Ratio to ensure that the entire deposit money is not lent and part of it is invested in government securities and kept with the RBI. It monitors the operations of banks on a continuous basis by obtaining statutory statements and also conducting regular inspections. It places its representative on bank board too.

Yet, the RBI has failed to spot mega frauds and irregularities in time. There were stock market scams in 1992 and 2001 arising out of fraudulent banking. Then there was the Indian Bank scam in 1996. Global Trust Bank, a new high profile private bank played a major role in the 2001 stock market scam. Then there were bad loan crises in 1980s and 1990s.

And, more recently, there is the Punjab National Bank case , which relates to issue of fraudulent letters of undertaking worth ₹11,356.84 crore, and the YES Bank case, where a revival plan is being arranged.

The RBI has adopted a policy where whenever a private bank fails, it is merged with some public sector bank. When any public sector bank is under stress, it is put under corrective action and the government is forced to infuse capital to bail it out. The government has already pumped in ₹3.5 trillion ($45.91 billion) in the last five years to rescue beleaguered banks. Weak PSBs are also merged with stronger peers.

So, it is clear that even with all the powers, the RBI has failed in safeguarding banks. Most banks are surviving only because they are bailed out periodically out of taxpayers’ money. It is surprising that nowhere accountability is fixed on the RBI.

Now, will bringing cooperative banks under the RBI’s ambit make any difference? Enhancing the credibility of the RBI is required to avoid bank failures.

The writer is a retired banker

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