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Saving Cooperative Banks

There is need for stringent RBI regulation of cooperative banks

AN increasing number of cooperative banks are being placed under severe restrictions by the Reserve Bank of India. The restrictions are imposed after it comes to the notice of the RBI that a particular cooperative bank has not maintained transparency and flouted several norms in their operations, leading to huge accumulations of non-performing assets, threatening its collapse. The latest to join the list of defaulting cooperative banks is Punjab and Maharashtra Cooperative Bank, which till recently was considered among the top five performing cooperative banks in the country. Incidentally, the restrictions were imposed after the bank management approached RBI seeking its help and pointing out several deviations in banking norms on its own.  The RBI has imposed severe restrictions on PMC Bank, which include banning extension of loans or accepting deposits. Even withdrawal from the bank was restricted initially to meagre Rs 1,000, which was increased after widespread protests by depositors to Rs 10,000 for six months. The PMC Bank has presence in seven states and around 51,000 customers with deposits worth over Rs 11,500 crore.

Depositors in PMC branches in Goa are suffering too as a result of the restrictions. However, Goan depositors have suffered not only in the PMC Bank case but also in other cases of cooperative banks too which were put under restrictions. The RBI had put restrictions on two major cooperative banks – Mapusa Urban Cooperative Bank and Madgaum Urban Cooperative Bank – that have operations in Goa. The restrictions barred the bank managements from normal banking activities and restricted withdrawals from the banks, creating distress among customers. The two banks have been directed to merge with any other cooperative banks. Incidentally, the managements and shareholders of the two banks were in the process of passing resolutions to facilitate their merger with the PMC Bank, which till recently had a good reputation. Luckily for the customers of Mapusa Urban Cooperative Bank and Madgaum Urban Cooperative Bank, who were hoping to benefit from the merger, the RBI restrictions on the PMC Bank were announced before merger. The delay in passing resolutions for merger was seen as a blessing in disguise by shareholders of the two cooperative banks – though the problems of the two banks are far from resolved. The customers of two banks have been facing major problems as they cannot withdraw funds. This situation has prevailed in the Mapusa Urban Cooperative Bank for quite some time.

It is strange to note that the RBI – which regulates cooperative banks along with state governments – did not give any reason initially for putting restrictions on withdrawals from the PMC Bank by account holders. The PMC Bank has released its annual statement of account in which it showed a profit of over Rs 100 crore. Even its auditors had not found any irregularities. The RBI came up later with a statement that major financial irregularities, failure of internal control and wrong or underreporting of its exposures under various off-site surveillance had come to its notice. The banking regulator, however, stopped short of cancelling the licence of PMC Bank. As cooperative banks offer higher rates of interest for fixed deposits, a number of people especially from salaried class and small businesses deposit their money in their accounts. However, managements of several cooperative banks have not kept their trust with the customers and misused their powers to indulge in financial irregularities.

That all is not well with the cooperative banking system can be gauged from the fact that hundreds of cooperative banks have ceased to exist over the past decade or been put under various restrictions. The number of cooperative banks fell from 1,926 in 2004 to 1,551 in 2018. The latest data released by RBI on March 31 this year shows the number dipping to 1,542. Cooperative banks were encouraged to allow access to finance for persons who found the requirements of commercial banks stringent. The cooperative banks were, however, seized by elements that saw the power in controlling their management and the ease with which they could get themselves elected as leaders of the cooperatives. The RBI’s supervision of cooperative banks has not been as stringent as that of commercial banks. This must change if we have to save the cooperative banks.

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