From Madhavpura to Nagpur, and beyond

Likewise, Osmanabad Central Co-Operative Bank has a Rs 29 crore exposure to alleged G-Secs transactions with Home Trade. Wardha Bank has filed a criminal complaint against Home Trade for the same offence and the amount stuck is Rs 25 crore. “The number of scandals in a host of co-operative banks in the last three years shows that something is wrong with the co-operative banking system in the country. Political interference and dual regulatory control make effective monitoring difficult,” said an RBI official.

What’s really serious for investors, even those who for instance don’t have their money stuck in the Home Trade-struck banks, is that the saga of collapsing co-operative banks seems to be a continuing one. Last year, it was the Madhavpura Mercantile Co-operative Bank from whom Rs 800 crore was ripped off by Ketan Parekh, then there was the Krushi Co-operative, Charminar Bank … the list of scandal-hit co-operative banks is expanding. The scam brigade has been ripping off the markets and banks year after year despite the so-called tight regulations and vigilance by the regulators, making lakhs of investors and depositors poorer by hundreds of crores of rupees.

The Reserve Bank of India’s report itself shows that the health of co-operative banks leaves much to be desired. The ‘Report on Trend and Progress of Banking in India’ says that on account of fragile financial position, orders were issued for liquidation of 15 urban co-operative banks (UCBs) between July 2000 and June 2001. As at end-June 2001, 118 UCBs were under liquidation. There are 261 ‘weak’ UCBs in the country. A weak bank is one whose net worth has been eroded by 25 per cent, or is a bank whose overdues (interest and loans not paid on time) are more than half its total advances.

Profits of the urban co-op bank sector have also fallen dramatically this year, from a profit of Rs 310 crore in 1999-2000 to a huge loss of Rs 910 crore in 2000-01. This was almost single-handedly due to the fact that the Madhavpura Mercantile Co-op Bank had to make provisions of a whopping Rs 1,255 crore to take care of the Ketan Parekh episode. With several other banks collapsing, as in the ongoing Home Trade case, the provisioning in the future is certain to increase dramatically. So be prepared for sharp deterioration in the balance sheets of co-op banks.

The problem lies in the fact that most co-operative banks — except a handful of well-managed ones — are controlled by politicians. As a result, there is hardly any professional structure in such banks and they violate existing banking procedures and manuals at will. Also, while the RBI is free to inspect these banks and issue directions to them, the real power is that of the Registrar of Co-operative Societies — this is the only authority which can, for instance, supersede the board of a co-op bank. So, even if the RBI discovers a problem, it can do precious little about it.

In the case of the Charminar Bank, the rot within came to light after its chief shot himself in his car, last February. The fact, however, is that as early as September, the RBI had recommended to the Registrar of Cooperatives that the management of Charminar be superseded. For reasons best known to it, the Andhra Pradesh government sat on it, leaving investors with over Rs 400 crore of deposits in the bank in the lurch.

The government, meanwhile, is going ahead with its plan to recapitalise co-operative banks to the extent of Rs 7,000 crore. Will this money go down in the drain? More than that, is depositors’ money safe in co-operative banks? Right now, the answer does seem quite obvious — it’s safe only as long as the government is there to bail out banks that collapse from time to time.