Party over, it’s the morning after for cooperative banks

B S Srinivasalu Reddy

The spectre of the Madhavpura Mercantile Cooperative Bank (MMCB) continues to haunt cooperative banks. Tougher regulations on the part of the Reserve Bank of India (RBI) following la affaire MMCB episode is seen leading to a major consolidation drive over the next couple of years.

Post-MMCB ‘pay order’ scam, public perception about cooperative banks are at the boot-lace level. If at all it has improved, the costs have been high. Higher interest rates as compared to state-run banks make their deposits attractive, but will put pressure on their bottomlines. Again, even high rates have not given a fillip to deposit mobilisation drive of these banks. Growth in deposits of commercial banks has been at 20 per cent from the usual 15 to 16 per cent. These banks have posted only 14 to 15 per cent growth in deposits despite the higher rates on deposits.

"Many cooperative banks have been served notices under section 11(1) of Banking Regulation Act due to the alarming levels of NPAs, high cost of funds leading to lower profitability and low productivity. The need of the hour is consolidation of cooperative banks," says Maharashtra State Co-operative Bank Ltd’s (MSCB) managing director R Chandrasekharan.

"Earlier, cooperative banks were allowed to invest in state and district cooperative banks to meet statutory liquidity ratio (SLR) requirements. But RBI has made it mandatory for cooperative banks to invest in government securities (G-secs) in its monetary and credit policy in April 2001. This is likely to deprive the SCBs and DCBs of Rs 7,000 crore of funds," Mr Chandrasekaran adds.

The move will also lead to loss of interest income for these banks as the G-Secs offer 1.5-2 per cent less rate of interest than SCBs/DCBs. Besides, the lack of professionalism and transparency is affecting the performance of these banks, and makes it imperative for section 11 (1) banks to merge with stronger cooperative banks.

Says veteran cooperative banker and founder-chairman of Model Co-operative Bank Ltd, John D’Silva: "Three years from now, cooperative banks must be able to be on equal footing with commercial banks in terms of regulatory oversight, and forget about special concessions."

Captial adequacy norms have come into force. SLR and cash reserve ratio (CRR) is applicable albiet with a little concession. "Changes in income recognition norms will make it mandatory to identify a loan defaulted for 90 days as a non-performing asset (NPA) from 180 days now. Other international best practices like monthly charging of interest instead of quarterly at present are likely to hit all cooperative banks, including scheduled ones," Mr D’Silva says.

However, Abhyudaya Co-operative Bank Ltd managing director, Madhukar S Chavan, is of the view that "regulatory requirements per se will not affect scheduled cooperative banks as they are capable of meeting the reporting and transparency requirements prescribed by RBI".

The other fallout of MMCB episode on the sector is in the form of big banks boycotting the honouring of pay orders, letters of credit and guarantees, says Mr Chavan.

And even in the call market. Six months have elapsed since the MMCB episode came to light, but these banks (counter-parties) are still charging a high fee for honouring instruments issued by the cooperative banks, Mr Chavan wails.

Lamenting on the MMCB episode, Mr D’Silva says that the episode has brought to light blatant violation of basic norms suggested by RBI earlier like corporate and individual exposure limits.

"The intensity of violations also makes one see that kickbacks were involved in dishing out unlimited advances to a few... just because no bar has been prescribed on lending to captial market does not mean that one can take liberties," Mr D’Silva points out.

However, Mr D’Silva is not in favour of application of all international best practices to the Indian cooperative sector. Mr Chandrasekaran and Mr Chavan were of the view that dual control on cooperatives should give way for total RBI control to impart professionalism and transparency to the sector. Interference of politicians in the day-to-day running of cooperative banks is an old problem afflicting the sector as a whole.

The MMCB episode has also brought to the fore the ineffectiveness of the state oversight on the sector. Officials of registrar of cooperative societies in Gujarat have given a clean chit to MMCB even after the RBI had alerted them to the dismal situation.

This laxity has proved costly for cooperative banks: over Rs 500 crore of investment by other players in the sector and over Rs 1,200 crore to the depositors plus credibility.

The worsening scenario for the cooperative sector today could be considered a warning signal for players to pull their socks up or else they may have to ship out of business in due course.