The truth is sinking in: for depositors in
Punjab & Maharashtra Cooperative (PMC) Bank. Of the Rs 11,800 crore of deposits, Rs 6,500 crore was handed over to one real estate company Housing Development Infrastructure Limited (HDIL). That company filed for bankruptcy on August 21, and as if the story was scripted, exactly a month later, a whistleblower squealed to RBI that the bank has been cleaned out.
A week later RBI supersedes the board, puts the bank under an administrator and restricts withdrawals – too late for the gullible small depositor to realise his life savings have gone. Despair turns to anger when he realises that the bank’s chairman Waryam Singh is a family friend of the Wadhawans, the promoters of HDIL and DHFL having served on the boards of both these companies for many years. The confession of the
managing director Joy Thomas only adds insult to injury as he shamelessly blames himself and even Reserve Bank of India (RBI) for this brazen daylight robbery. Deposit Insurance
Some good news: About 44 percent of PMC’s deposits by value are insured, maybe another 30-35 percent can be recovered from SLR and CRR deposits, from its good loans and its landed assets. This means 70-75 percent of the deposits may be recoverable, but the good news ends here. It may be years before the entire legal process of liquidation works itself out.
History of Cooperative Banks Cooperative banks were historically a socio-political answer to the absence of a proper banking system. In Maharashtra, the cooperative movement grew in sugar cane and sugar mills and then spread to credit. In Gujarat, the movement began with milk and then spawned cooperative banks. The Anatomy of Cooperative Banks
The structure of cooperative banks is a recipe for disaster. Depositors are shareholders and vice-versa. Almost always, therefore, the most prominent depositors, shareholders and borrowers are the same groups.
Cooperatives belonging to one state are regulated by the registrar of cooperatives of the concerned state, while multi-state cooperatives are regulated by the central government. The respective government departments make rules for the appointment of senior personnel, their emoluments etc.
There are 1,551 urban cooperative banks and 96,612 rural cooperative credit entities according to recent RBI reports. Urban and rural co-operatives account for 4 percent each of the total deposits in the country.
Similar Incidents In The Past
The rate of mortality of cooperatives is high. On an average about 16 default and die annually. The last time a large cooperative bank sank was Madhavpura Mercantile Cooperative Bank in Gujarat which had lent 90 percent of its deposits to broker Ketan Parekh and who could barely return anything after the market crash of 2001.
Why is it that no lessons are learnt: because cooperative banks are usually very local and the pain of their depositors doesn’t move the needle politically. Nor does it worry RBI beyond a point since they usually don’t lead to systemic risk.
RBI literature shows that the central bank has always worried about the potential for abuse in cooperative banks and the inadequacy of its own staff to supervise thousands of these tiny, far-flung entities. Savour this paragraph from the April 2000 monetary policy statement by Dr Bimal Jalan on the even of the Madhavpura disaster:
“In the light of the recent experience, one of the options that deserve to be seriously considered is the setting up of a new apex supervisory body which can take over the entire inspection/supervisory functions in relation to scheduled and nonscheduled urban cooperative banks (UCBs). This apex body could be under the control of a separate high-level supervisory board consisting of representatives of the central government, state governments, RBI as well as experts and it may be given the responsibility of inspection/and supervision of UCBs and ensuring their conformity with prudential, capital adequacy and risk-management norms laid down by RBI…. RBI proposes to consult the central government on the above suggestion, and if found acceptable in principle, the proposal could be pursued further in consultation with State Governments and others concerned. RBI will be prepared to provide manpower and other assistance to the new apex supervisory body.”
This quote shows how RBI was unwilling to take charge of cooperative banks and wanted an inter-government body to take over supervision of cooperatives because it always believed it doesn’t have the wherewithal to supervise these entities.
A former RBI official who was instrumental in drafting this Jalan statement said that post this speech, RBI formally requested the central government to take away cooperative bank supervision from its gamut and give it to a new intergovernmental body. The request was rejected by the government. This RBI official reckons the government too knew these entities are prone to abuse but wanted someone other than itself to be the fall guy. So the responsibility was shoved on an unwilling RBI.
Under Y V Reddy, the RBI signed MOUs with many state governments to appoint a committee comprising state government officials, RBI executives and members of the cooperative federation to frame tighter rules and even close down unviable ones. But the progress was tardy and the problem is forgotten as it continues to fall between stools: abused by state politicians, ignored by the central government and blindsided by RBI.
Long Wait For Depositors
As in previous cases, PMCs depositors may also find some sympathetic mentions for a few weeks. Thereafter, as other events take over headlines, these depositors will suffer the slow grind of the liquidation process. The wait can break the back of many a retiree lured into these banks with their slightly higher interest offering. The average labourer, nurse, maid, rickshaw driver or small shopkeeper who has squeezed out precious savings from his or her tiny income can’t be expected to know the fine distinction between commercial and cooperative banks. For her, the UCB looks like a bank, feels like a bank and is hence a bank like any other.It is imperative that the efforts to clean up that began after Madhavpura, are resumed. State and central governments must completely overhaul legislation governing the UCBs and the RBI must increase its supervisory cadre to bring the UCBs on par with commercial banks or simply close them down.