Given the present government wants to eschew “phone-banking”, it should now stop political interference in co-operative banks.
It now turns out that co-operative banks, primarily intended to lend to smaller enterprises and individuals, have been loaning money to big companies, and probably industrialists in their personal capacity. The fault lies with the country’s lawmakers, who have not thought it necessary to increase oversight of these lenders; clamping down on Punjab and Maharashtra Co-operative (PMC) Bank is like bolting the stable door after the horse has bolted.
RBI may have allowed PMC’s depositors to withdraw Rs 10,000—compared with the earlier Rs 1,000—and, on the face of it, net NPAs are just 2.19%, but one needs to scratch the surface, which is what RBI is doing. The PMC matter is a wake-up call for the government, regulators, the banking system and, the biggest stakeholders—lower-middle-income households that put all their savings in these banks.
It isn’t as though RBI hasn’t been cognisant of co-op bank failures; of the 1,542 urban co-op banks operational till FY19, 46 had a negative net worth, and 26 were under RBI administration. Nabard, too, has been highlighting financial irregularities in co-operative banks for quite some time now. Earlier this year, a special investigation team from the Economic Offences Wing started a probe into Maharashtra State Co-operative Bank. The problem is that co-operative banks are regulated by both RBI, and the Registrar of Co-operative Societies of a state. This dual oversight leaves co-op banks free from RBI scrutiny in several aspects of functioning. Amendments have been proposed, including one to convert UCBs to Small Finance Banks (SFBs), and some large UCBs into banks. That the proposal has not seen the light of day is not surprising; the state governments don’t want to give up control over these lenders. A report by the NGO Sampark to UNDP in 2015 noted that in Assam and Maharashtra, politicians had often used the government’s share capital to exercise control, and push through their agendas, influencing appointments, and advances.
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However, it is time the government took a firm view, and brought all co-operative banks under the sole oversight of RBI. Converting these banks into larger lenders—by merging them—would bring in economies of scale, allow access to RBI’s liquidity support facilities, and enable capital-raising. Today, the co-operative bank model is inherently flawed, and vulnerable to insolvency. UCBs can undertake a host of lending activities while being subject to a capital requirement of just `25 lakh while SFBs with a `100-crore net worth and a CRAR of 15% are not permitted to do so. Given the present government wants to eschew “phone-banking”, it should now stop political interference in co-operative banks. That will help prevent a PMC-type crisis.