It is almost two months now, that the scam-hit Punjab and Maharashtra Cooperative (PMC) Bank’s normal functfioning has been suspended by the banking regulator - Reserve Bank of India (RBI). The issue of Rs6,500 crore fraud-hit bank’s case almost faded out of public memory but it resurfaced once again when the Economic Offences Wing (EOW) of Mumbai Police made its ninth arrest in the case. This time it was one more director Rajneet Singh, son of Mumbai-based BJP leader, Sardar Tara Singh, on Saturday November 16.
The investigation may take its own course but the fate of lakhs of depositors and their hard-earned money parked with the bank in the form of Fixed Deposits (FDs) exceeding Rs11,500 crore, is not yet known. The stress created by this scam has taken at least 10 lives and if the probe takes longer time, this toll may rise. We analysed the state of the sector across the country - why every few months, banks fall prey to some irregularity and depositors are left in the lurch.
“It’s not only the PMC Bank’s fate but all the other banks, who were earlier put under administrator by the regulator,” says Vishwas Utagi, Co-convener, Trade Unions Joint Action Committee and Convener, PMC Bank Depositors’ Association. “Kapol Cooperative Bank suffered the same fate on March 31, 2017 with withdrawal limit set at `3,000 per depositor. The day-to-day operations of the bank will remain under “administrator” till January 2020. Rupee Cooperative Bank came under administrator on February 22, 2013. The depositors don’t have access to their money but the staff gets salary. Though, the RBI has allowed the bank to release some money for exceptional cases,” he says.
Utagi, who wears many hats as far as safeguarding bank customers’ interest is concerned, adds, “CKP Cooperative Bank, more than a century old, was put under section 35 of the Banking Regulation Act, on May 2, 2012. The administration managed the bank till April 2015. The new board was elected thereafter as a part of restructuring. Some shareholders also agreed to convert a part of their deposit into share capital in 2015. However, all those attempts to revive the bank did not materialise and it has been once again put under administrator.”
The list of cooperative banks under RBI’s “directions” is long and includes Pen Urban Cooperative Bank, Life Cooperative Bank, Kolhapur-based Youth Development Coopeative Bank, Shivam Sahakari Bank of Ichalkaranji, The City Cooperative Bank, Mumbai, Maratha Sahakari Bank and Karad Sahakari Bank. All these banks are from the state of Maharashtra, informs Utagi, a banking expert and former leader of All India Bank Employee Association.
However, it is not true that all cooperative banks that fail are left in lurch at the frenzy of administrators. There are some instances where failed cooperative banks have been merged with a sound public sector bank. Suvarna Cooperative Bank with three to four branches in Pune district of Maharashtra, was merged with Indian Overseas Bank (IOB) during 2007-2008. During 2011, Mumbai-based Memon Cooperative Bank failed and was merged with Bank of Baroda (BoB), Utagi recalls.
The process laid down by the government and the regulator to handle the situation once a bank hits some mishap, harms the interest of the depositors who suffer for no fault of theirs. They become the victims of fraudulent activities carried out by a third party. Another important aspect of the cooperative banking sector is the influence of political class in the day-to-day affairs of the bank. What the government and the RBI can do to restore confidence in the co-operative banking sector?
Utagi, who is spearheading the protest of PMC Bank depositors came down heavily on RBI. He retorts, “By incentivising the cooperative banking sector, government and the finance ministry have pushed the smaller depositors to earn a higher rate of interest. The regulator has failed to flag off the risk associated with such institutions, as compared to Scheduled Commercial Banks (SCBs).”
Moreover, the central bank has failed to convey to the customers and depositors that it does not regulate such banks, he complains.
Bringing co-operative banks at par with SCBs with respect to providing services, the RBI, instead, allowed customers to feel that these banks are “fit” and “proper” entities.
To understand the issues gripping the sector we need to understand its three tier functioning structure.
Sayali Bhoir, Secretary and CEO, Federation of Maharashtra Urban Cooperative Banks explains, “In any state it is Apex Cooperative Bank (Apex bank) of that state remains on the top in the three-tier structure, followed by District Cooperative Banks (DCBs) and Primary Agriculture Credit Societies (PACs). The credit flows from National Agriculture Bank for Rural Development (NABARD) to Apex Bank in the form of refinance and from there it flows downward.”
The target audience of such banks in rural India are basically farmers - large and small - associated with allied activities like dairy sector, animal husbandry, cooperatives in the cotton sector, poultry, fisheries. When cooperative banks target Small and Medium Enterprises (SMEs) in urban-semi urban areas and extend loans, they are called Urban Cooperative Banks (UCBs), she clarifies.
While throwing more light on the spread of the sector, Utagi explains, “Cooperative banking has grown very well in states like Maharashtra, Karnataka, Gujarat, Tamil Nadu and Kerala. The sector is very deep-rooted in Maharashtra. These banks are lifeline for the rural sector as they provide easy access to credit to rural masses and keep them away from private money lenders.”
Inspite of such a good structure of banking, developed in the rural India, why is 70 per cent of India’s population residing in the hinterland still facing rural distress?
One of the biggest reasons is that we have a strong agrarian economy in rural India, which still relies on monsoon. A bad monsoon leads to a vicious circle of debt. When a farmer is unable to service old loans, his access to the bank too is denied. This is when private money lenders are approached where mortgages are made and loans are disbursed at an interest rate, three to four times higher than that one offered by cooperative banks, he explains.
Surveys to measure the rural distress show farmers are perennially in debt and hence vulnerable to high suicide rates. They face credit problems in both demand and supply. It is a social crisis, wherein the farmer fails to get the right remuneration for his produce and all benefits are whisked away by the middlemen, who only invests in marketing infrastructure.
These middlemen thrive on credit facilities extended to them by cooperative banks, who are supposed to serve the interest of the farming community. The management of these banks - PACS and DCBs and even Apex Banks - are handled by people with a political clout, who are least bothered about the farmers’ interest.
Citing an interesting point Utagi says, in certain states like Maharashtra, where cooperative banking has deeper roots, there is cut-throat competition in providing access to credit to the rural population. There are PACs, DCBs, SCBs, PSBs, private sector banks. In some districts foreign banks and Non-banking Finance Companies (NBFCs) have joined the bandwagon.
With such easy availability of credit from all the corners, farmers are at a risk of servicing loans at higher interest rates ranging from 24 to 36 per cent, Utagi explains..
Some of the flourishing rural areas are exploited by the private sector banks to meet their target of priority sector lending mandated by the RBI. This is one of the prime reasons of their presence, feel experts. The regulator has put lending against gold under the priority sector lending, which is completely unproductive for lending. Policymakers need to urgently rethink on this aspect of the monetary policy, they point out.
Cooperative banks play an integral role in the implementation of development plans and are important for the effective functioning of the banking system in India. The country is often termed as an under-banked. After so many scams, it is important to take necessary measures and boost people’s confidence in the system.
“If one bank in the sector is hit by third-party malpractice, we should not paint the entire cooperative sector as useless or inefficient. Other forms of banking have witnessed more scams compared to cooperative banks. We hardly see any hue and cry,” argues Bhoir.
However, Utagi warns the confidence crisis in UCBs may spill over to SCBs. But since these banks are owned by the government the surety exists that they will not be shut down but might be merged with stronger banks. “The PSBs’ amalgamation is perceived by the general public as closing down of banks (actually branches); whereas this exercise is rationalising from the bank’s point of view,” he argues.
What is the solution? Experts suggest removal of three-tier structure of cooperative banking sector. They are of the view that credit should be made available to the farmers directly.
“This will reduce the cost of borrowing and help them absorb more shocks if any, and increase their holding capacity to stay put in the sector,” Utagi points out.
This is easier said than done. At least some beginning can be made and technology can be put at use in dealing with this situation, which can act as a facilitator.