Cooperative banks need a single regulator

PMC episode and the role of state govts underscores the need for this, need to amend relevant laws

The Vishwanathan committee will soon come up with ways to rehabilitate UCBs and also assess the potential for consolidation; the recommendations will leverage the amendments made to the BRA.

Thanks to the efforts of the Reserve Bank of India (RBI), the insolvent Punjab and Maharashtra Co-operative (PMC) Bank should soon find itself a couple of new owners. It has taken RBI a little under two years to sort out the mess at the multi-state cooperative lender, primarily because the dual regulation left it somewhat hamstrung.

The fact that neither of the sponsoring states came up with a concrete solution is not surprising, and if it appears that RBI has settled for second-best, it is because it was left with no other options; no strong lender made an offer for PMC. Winding it up was not politically feasible nor fair to the depositors since it was entirely a regulatory lapse.

As it stands, Centrum Financial Services and Bharat Pe have managed to jump the long queue for a Small Finance Bank licence simply because they have agreed to take over PMC.

Although there have been several casualties in the financial sector, with banks and NBFCs going belly up or teetering on the brink of a collapse before being bailed out—GTB, Centurion Bank of Punjab, IL&FS, DHFL, Yes Bank and Lakshmi Vilas Bank—the regulations for cooperative banks haven’t been tightened nor the oversight stepped up. It took a fraud of the magnitude of PMC—over 70% of its loan exposure was to real estate firm HDIL—to jolt the government out of its stupor. The amounts were not small; PMC’s exposure to HDIL was over Rs 6,500 crore. Clearly, there was much more to it than some minor mismanagement and, evidently, whoever was in charge was looking the other way.

Nevertheless, some good came of it, with several amendments made to the Banking Regulation Act (BRA) in September 2020. These allowed the central bank to initiate a scheme for reconstruction or amalgamation of a bank without placing it under a moratorium. Moreover, they allowed RBI to supersede the board post consultation with the concerned state government. However, the changes, while important, need to go much further. Cooperative banks come in all hues, but we probably need a single regulator—whether it is RBI or another one—with the heft to oversee all of their activity.

This entity needs to be given a free hand to be able to be able to make sure they are being run properly. Sharing responsibilities cannot work; one regulator must assume all powers and be held accountable. Ideally, further amendments should be made, even to the Constitution, to create one regulator to oversee co-operative banks. The state governments will likely oppose the powers being taken away from them but, unfortunately, they are on slippery ground. While there are some cooperative banks that are well run and profitable, many are in trouble. While moving the Bill to amend the BRA in Parliament, the finance minister noted at the time the government had been compelled to come out with an ordinance since the financial situation of urban cooperative banks was grave with as many as 227 banks reporting losses for 2018-19.

The Vishwanathan committee will soon come up with ways to rehabilitate UCBs and also assess the potential for consolidation; the recommendations will leverage the amendments made to the BRA. But it must call for sweeping changes in the way these lenders are run. Else, it will be hard to prevent more of them from collapsing. And it will be even harder to revive them because there may be no serious buyers.

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