RBI cracks down on violations by co-operative banks

Every four-and-a-half days during this fiscal, at least one cooperative bank has been either penalized or stripped of its licence to operate, as the Reserve Bank of India (RBI) cracks down on rule violations by these banks.
Overall, 73 such banks have either been penalized or asked to shut by the banking regulator so far this fiscal, signalling its lack of tolerance for breach of norms by the institutions. The comparable figure in the last fiscal was 44 banks and in 2010, 31 banks.
Ten banks each were asked to shut down in 2011 and
so far this fiscal mainly “because the banks had ceased to be solvent”, according to RBI press releases. All efforts to revive them failed, the regulator said.
The number of banks penalized has nearly doubled to 63 so far this year from 34 last year and just two banks in 2009-10.
Penalties have ranged from Rs.50,000 to Rs.5 lakh for reasons ranging from violations of the so-called know-your-customer norms (which require them to maintain certain personal information about customers) to not preparing balance sheets in the RBI-prescribed format and giving loans to directors.
An RBI official said “stricter” oversight is “natural progression” for the sector once besieged by heavy political influence.
“Political influence has reduced but it is also a fact that some badly managed banks have become worse,” the official said, requesting anonymity because the views are his personal opinions and not necessarily those of the regulator.
RBI’s unease over cooperative banks follows many instances of misgovernance by politically powerful bank managements and also after the fall of Madhavpura Bank.
The Ahmadabad-based multi-state cooperative bank had to be rescued by the Indian government after stock broker Ketan Parekh used the lender’s money to speculate in the stock market in 2001 and lost it. In May last year, the board of Maharashtra State Co-operative Bank Ltd was superseded after sugar cooperatives and cotton spinning mills, controlled by politicians, did not repay loans.
Politicians belonging to the ruling Congress-Nationalist Congress Party (NCP) alliance in Maharashtra, as well as others from the Raj Thackeray-led Maharashtra Navnirman Sena, controlled the cooperative that defaulted on loans worth at least Rs.680.57 crore, leading to supersession of its board by RBI. There were 1,645 cooperative banks in March 2011, according to the Trends and Progress of Banking in India report of RBI published in November. Of these, 845 banks are classified as Tier I and account for 63.5% of the deposits.
Cooperative banks are graded I, II, III and IV based on their financial performance in terms of certain parameters such as capital adequacy ratio, net non-performing assets (NPAs) and history of profit/loss.
Tier I and II banks are considered as financially stronger than those under III and IV.
Shrinivas Joshi, chief executive officer (CEO) at Shamrao Vithal Co-operative Bank Ltd, the third largest cooperative bank in the country, said the message from the RBI is simple: “just follow our directives.”
“We follow RBI directives to the book and have never been fined. If you don’t, you are inviting trouble,” Joshi said, adding that the problem occurred because of a lack of professionalism at many small banks.
“Also, since there are more than a thousand such banks spread across the country compared to only about 30 private banks, this problem has been accentuated,” Joshi said.
With cooperative banks spread across the country, RBI has been keen to push for consolidation in the sector.
Between June 2011 and fiscal 2006, 95 mergers were approved, progressively reducing the number of cooperative banks. In March 2011, there were 1,645 cooperative banks, down from 1,674 in March 2010 and 1,870 in March 2005.
In 2010, 29 banks were asked to shut down.
The RBI official cited above said the bunching up of such action is because of the legal and administrative procedures involved in closing a cooperative bank.
“It involves consultations with the State Level Task Force on Cooperative Urban Banks and requires the go-ahead from the states registrar of cooperative societies,” the official said.
In March 2010, RBI signed agreements with the central government and 28 states to retain regulatory control over cooperative banks while leaving management, incorporation and registration oversight to the state governments. The task force helps resolve issues related to duality in control.
Shashikant Bugde, chairman of Pune-based Cosmos Co-operative Bank Ltd and a 40-year veteran of the industry, said holding up the business of banks while penalising them has had a negative impact.
RBI usually puts approvals for an offending bank on hold until the bank pays the fine levied on it.
There is an advisory committee, with representatives from both banks as well as RBI, that meets once in six months to review developments in the sector.
Bugde said the recent spurt in RBI action reflects the fact that the board of financial supervision of the banking regulator has become stricter.
“They do not want to take any chances and keep a close eye to ensure that the internal workings of the sector improve,” he said.
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