By Arvind Pinto

THE Mapusa Urban Co-operative Bank Ltd had its license cancelled by the Reserve Bank of India under Section 22(4) of the Banking Regulation Act 1949, for the failure of the former to adhere to banking norms. This was the final straw, paving the way for its total closure or liquidation, since several attempts for merger with another more financially strong bank has failed. This bank, once the pride of Mapusa town was set up in 1965, a few years after Goa became part of the India. It was promoted by a few prominent townsmen, to cater to the banking needs of people in Mapusa. It was the bank, for several commercial establishments in the North of Goa. Prominent on the board of directors was a yesteryear politician, Ramakant Khalap. With the RBI sanction the entire board directors had to be disbanded and a new board was elected. Now with the cancellation of its license on the April 20, 2020 the bank has effectively had to close shop.
Similarly, financial restrictions have been placed on the Madgaum Urban Co-operative Bank, while the bank has been on the look out for a merger with another more financially sound bank. But it is not only the Goan co-operative banks that have felt this pressure. Co-operative banks the country over have come under the scanner!

Co-operative banking in India is known for having a loose regulatory norm and this is compounded by the fact that several of these banks do not have the requisite professional persons on their board of directors, while the management did not have the requisite professional or commercial skills. Thus, many of these banks have found themselves in crises and they have been forced to shut shop.
A few of you would have heard of the Madhavpura Mercantile Co-operative Bank in Gujarat; that one of its main financiers was Ketan Parekh, the stockbroker who shook the stock market at the beginning of this century. This bank would lend funds to stock brokers who would then speculate in the market. With the fall of the market these stock brokers unable to pay back their borrowings, lead to the collapse of the bank. The bank has since shut shop since its license was cancelled. On the September 24, 2019 the Reserve Bank of India placed curbs on withdrawals from the Punjab Maharashtra Cooperative Bank (PMC), while initiating a probe into the defaulting loans and accounting practices that were being followed. This was followed by the arrest of the managing director and some of the directors of the board. Efforts are being made to merge the PMC with another financially sound bank. On the April 30, 2020 the RBI cancelled the registration of the CKP Co-operative Bank, effectively shutting down the operations of a 105 years old bank. Yes, the heat is on the co-operative banks and its shareholders and customers all over the country as also in Goa are a worried lot!
The co-operative sector especially the banking segment is in doldrums. The Reserve Bank of India continues to oversee it and it has now stepped in to regulate the activities of these banks.
India has several co-operative banks where the administrative supervision lies with the co-operative department of the respective states, while banking regulations are overseen by the RBI. The State authorities, overburdened with a multitude of co-operative societies, have neither the time nor the expertise to deal with these financial institutions. The Registrar of Co-operative Societies plays a limited role, primarily during the elections to the Board of Directors. Therefore, it is the Reserve Bank of India that performs both a supervisory as well as a regulatory role in the working of these banks.

What Ails the Co-operative Banks?
Many of the co-operative banks functioning under dual regulatory authorities were neither controlled or supervised by either of these authorities. A majority of the co-operative banks were founded by individuals or personalities who were either politically connected or associated with a particular sector and most of the deposits as also lending was to the people or concerns associated with the particular sector. With loose regulatory overseeing, lending was based on personal contacts than any risk analysis. When the particular sector did well in the market, there was no problem with repayment; but if the sector was stagnant, the loans turned from sticky to default. The borrowers generally known to the directors, made it difficult for the management to apply stringent methods to recover these monies. In several of these banks, the loan book was skewed in favor of a few big borrowers, could be a particular company or industry and if these failed, the entire bank collapsed.
Co-operative banks face a twin challenge. Firstly, there is competition not only from the big scheduled banks by now from a host small finance and payment banks that have grown in the last few years. Secondly many of the co-operative banks do not have the internal and regulatory controls to deal with frauds and mismanagement that is often rampant in these banks that often survive on the basis of their personal relations with their customers.
In order to deal with the issue of professionalism in the board of directors, the RBI has instructed all co-operative banks with a paid-up capital of 100 crore, to constitute a Board of Management to advice the Board of Directors. The mandate of the Board of Management is similar to that of the Board of directors; indicating that the RBI is of the opinion that the Board of Directors are often persons who do not have an intimate knowledge of banking procedures. Further co-operative banks are expected to raise lending to the priority sector to 75% as against the present limit of 40%. This directive would compel these banks to direct their energies to sectors where risks are greater and the chances of default more likely. Would the co-operative banks be able to

However not all co-operative banks are going down under. The Citizencredit Cooperative Bank that has 4 branches in Goa at Vasco, Madgaon, Panaji, Porvorim and Mapusa. It has achieved an after-tax profit of Rs 14.76 crore on a relatively small share capital base of Rs 15.10 crore. Its total deposits stood at 3168 crore and advances at 1488 crore at the end of the last financial year. Its net non-performing asset position is only 0.87% with a provision coverage ration of 81%. While Citizencredit Co-operative bank is comparative small, it is professionally run and its service its excellent.
But sadly, the majority of our co-operative banks are struggling with a bad loan book, increasing non performing asset position and poor managerial skills to enable them to thrive in the recessionary economy of today! Would this year 2021, see many more co-operative banks fading into history. It’s time you took care of your money!

(Arvind Pinto is a former Income Tax Commissioner, now retired and living in Mumbai.)

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