Regulatory gaps, lax governance have precipitated a crisis in co-operative banking

| Updated on May 05, 2020 Published on May 05, 2020

Given the sheer presence of these banks, particularly in the hinterlands, reforms to strengthen the corporate governance structure will have to be undertaken on a war footing

Seven months after the Punjab and Maharashtra Co-operative (PMC) Bank fiasco, and barely two months into the YES Bank crisis, the news of yet another co-operative bank going under is hardly comforting to Indian savers. The RBI cancelling the licence of Mumbai-based CKP Co-operative Bank is hardly surprising, given the steady deterioration in the bank’s financials, since the RBI first placed restrictions on the bank in 2014. After incurring huge losses, the bank’s networth eroded to negative ₹239 crore as of November 2019. Unlike the PMC Bank crisis, where depositors were jolted by the RBI’s sudden freeze on deposits of a seemingly healthy bank, the writing was long on the wall for depositors of CKP Co-op Bank (deposits of ₹485 crore as of November 2019).

The RBI’s move, citing unsustainable financials and the absence of a concrete revival or merger plan, brings the focus back on the festering issue of frauds and irregularities that lie hidden within the banking system at large and the co-operative banking sector in particular. CKP’s exposure to a few large borrowers in the real estate sector appears to have led to its downfall. Reports suggest that about 97 per cent of the bank’s loans were non-performing. The wilful defaulter’s list, too, reveals the bank’s exposure to large real estate accounts, a tale remarkably similar to the PMC Bank saga. What is of grave concern is that these are not isolated one-off cases. During 2018-19, the DICGC had settled claims in respect of 15 co-operative banks; in 2019-20, it settled main claims with respect to six co-operative banks. Recently in April, the RBI had cancelled the licence of Goa-based Mapusa Urban Co-operative Bank. The list runs long.

Aside from the vulnerability that stems from internal weakness, lax dual regulation by the RBI and the Registrar of Co-operative Societies has constrained timely regulatory action against weak banks in the past. After the PMC Bank crisis, the RBI and the government have taken some steps to address some of these challenges. The RBI has mandated urban co-operative banks to report large exposures and has laid down guidelines for the constitution of the Board of Management (BoM). The Centre in February, through an amendment in the Banking Regulation Act, conferred more powers on the RBI to audit the books of urban co-operate banks and appoint CEOs. But all of these measures cover only about 1,544 urban co-operatives and not the 96,000-odd rural co-operatives that constitute about 65 per cent of the total assets of co-operatives. Also, among the rural co-operatives, Primary Agricultural Credit Societies (about 95,000 in number as of March 2018) are outside the purview of the Banking Regulation Act. Given the sheer presence of these banks, particularly in the remote hinterlands, reforms to strengthen the corporate governance structure will have to be undertaken on a war footing. After all, unlike commercial banks — a consortium of banks stepped in to rescue YES Bank, for instance — reviving crisis-hit co-operative banks is a herculean task, as there are few takers.

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Published on May 05, 2020
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