How to make Co-operative Banks more safer?

1.1.1 FINANCIAL MARKETS & INSITITUTIONS

Table of Contents
 Introduction
 Co-operative banks and its types
 Challenges faced by co-operative banks
 Legal & Financial implications
 Reforms
 Conclusion

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 Introduction

This paper presents current situation of co-operative banks in India and specifies role of co-operative
banks in nations economic development. It enlists the challenges faced by the co-operative banks and
suggests remedial measures to overcome the challenges which indicates better future prospects of the
co-operative banks.

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WHAT ARE CO-OPERATIVE BANKS?

A co-operative bank is a financial entity which belongs to its members, who are at the same time the
owners and the customers of their bank. It is often established by people belonging to the same local or
professional community having a common interest. Co-operative banks operate in both urban and non-
urban areas. All banks registered under the Cooperative Societies Act, 1912 are considered co-operative
banks. These are banks run by an elected managing committee with provisions of members’ rights and
a set of “communally developed and approved by laws and amendments." The geographic and
demographic outreach of the co-operative banks plays a vital role in credit delivery and inclusiveness
in the financial system.

The Banks in India are regulated by Reserve Bank of India under the Banking Regulation Act, 1949
and Banking Laws (Application to Co-operative Societies) Act, 1965.

Structure of Cooperative Banks in India

The co-operative banking structure in India is divided into Short term structure and Long-term structure.

Short term structure has three levels

 A State Co-operative Bank works at the apex level (i.e. works at the state level).

 The Central Co-operative Bank works at the Intermediate Level (i.e. works at district level).

 Primary Co-operative Credit Societies at a base level (i.e. works at village level).

Long term structure has two levels

 State Co-operative Agriculture and Rural Development Banks (SCARDBs) at the apex level.

 Primary Co-operative Agriculture and Rural Development Banks (PCARDBs) at the district
level or block level.

Types of Co-operative Banks

 Primary Co-operative Credit Society.

 Central co-operative banks.
 State co-operative banks
 Land development banks
 Urban Co-operative Banks

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Features of Co-operative Banks are stated as follows:-

 Banks are organized and managed on the principal of co-operation, self-help, and mutual help.
They function with the rule of one member, one vote.

 Function on "no profit, no loss" basis. Co-operative banks, as a principle, do not pursue the
goal of profit maximization.

 Co-operative bank performs all the main banking functions of deposit mobilization,
supply of credit and provision of remittance facilities. Co-operative Banks provide limited
banking products and are functionally specialists in agriculture related products. However, co-
operative banks now provide housing loans also.

 Urban Co-operative Banks (UCBS) provide working capital loans and term loan as well.

 Co-operative bank do banking business mainly in the agriculture and rural sector. However,
UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also.

 Co-operative banks are perhaps the first government sponsored, government-supported, and
government subsidised financial agency in India. They get financial and other help from the
Reserve Bank of India NABARD, central government and state governments.

 It is an integral source for credit to agriculturalists.

 It confirms to the requirements of democratic planning and economic progress.

 It provides support to small and marginal farmers for buying inputs, storage and marketing
assistance.

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Present day the question arises about the deterioration in the co-operative banking sector, the
mismanagement and large-scale sinking of the public money into ailing co-operative.

THE FACTORS CAUSING CORROSION OF THE CO-OPERATIVE BANKS:-

 lending of funds without adequate collaterals;

 units with weak financials or negative net worth were given loans;
 sanction of loans to companies whose promoters were connected with the bank;
 directors drove down the price of a co-operative by posting repeated losses and then used the
bank’s loans to buy cheap.
 recovery performance of the banks continues to be unsatisfactory which contributes to the
growth of non-performing assets (NPAs)

The political nexus is unmissable

The board members of the co-operative banks or loss-making co-operatives that received state
government doles happened to be powerful MLAs or ministers in the state cabinet. A classic case of
one hand giveth, the other taketh with the embezzlement of the funds.

“The post-liberalization years saw co-operatives move towards privatization, which yielded handsome
profits. They began to place this in financial markets, even violating RBI guidelines," said Vishwas
Utagi, a Mumbai-based banking sector analyst and unionist. “When the markets collapsed during the
Ketan Parekh scam, co-operative banks got bailed out if they had a powerful politician backing them.
We know the Madhavpura Mercantile Co-operative Bank case," he added.

REFORMS

The poor financial health of the banks prompted the Reserve Bank of India to conceive a Vision
Document in 2005, which envisaged a multi-layered regulatory and supervisory strategy aimed at
shoring up the banks viability. The ensuing mergers/amalgamations/exits led to reduction in number of
co-operative banks in India.

In 2014 the newly minted Fadanvis government’s early decision was to amend the Maharashtra Co-
operative Societies Act, 1960 to appoint independent experts to the boards of the all co-operatives
including banks.

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ISSUES REQUIRED TO BE ADDRESSED

Lack of Corporate Governance

Corporate governance in its broad sense is regarded as the system by which companies are directed
and controlled. Its structure involves a set of relationship between the boards, the shareholders &
stakeholders; it specifies the distribution of rights and responsibility among them and spells out the
rules and regulations for making decisions on corporate affairs. The practices, methodologies,
framework and mechanisms in India had been recently subjected to intense scrutiny, which a opened a
door for the voluntary corporate governance reforms. It is imperative for every code of governance to
reflect the fundamental responsibility and goal of co-operative banks to operate in a manner that
provides quality yet affordable financial service to everyone.

The lethargy of the Watchdogs

The Punjab & Maharashtra Bank Crisis substantiates how the watchdogs, the bank auditors, the RBI
and government were lousy in performing their duties. The supervision of RBI is not as stringent on co-
operative banks as compared to commercial banks. RBI inspects the books of these banks only once a
year.

Dual Control

Co-operative banks are controlled under the dual system i.e. by RBI and by their respective State
Government which poses the problem in coordination and management. Clear and unambiguous
specification of the role and functions of the regulators and the rights and obligations of the member
shareholders carrying voting rights equivalent to the shareholding right would not brook any further
delay. Most banks have multiple regulatory compliances to attend. As long as there is clarity of roles
of the regulators and the regulators perform their roles effectively there should not be any problem.

Prolongation in addressing the Depositor’s woes

Liquidators are always in the process of investigation and bringing back of the invested amounts of the
property attached on record by selling the assets which have in certain cases taken decade/s.

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PLAUSIBLE SAFEGUARD TO PREVENT THE DOOM OF THE CO-OPERATIVE BANKS
AND ITS CONSUMER

Robust external governance

All the co-operative banks regardless of type shall have to comply with basic standards of transparency,
auditing and financial report. In order to generate public confidence co-operative banks must exercise
the standards of :-

Transparency & Public Accountability :- The actions of the Board Members shall be visible to all
depositors and they shall be constantly aware of the responsibilities towards public. In so far as the
appointment of directors to the board of co-operatives is concerned, it is imperative that these should
be cleared by RBI after carrying out the due diligence exercise as is done for a private commercial bank
or the local area bank.

Compliance:- The default in compliance of existing laws and regulatory standards shall be stringently
monitored. In case of failure in the compliance same shall be met within the stipulated timeframe and
deficiency on the part of banks shall be actionable and punishable under the law imposing deterrence.

Sound lending policies and effective measures for recovery:- There shall be time-bound programmes
and special recovery drives to curb the unsatisfactory level of overdues and most importantly banks
shall ensure to take adequate security against the loans.

Implement RBI panel recommendations

In 2015, an RBI panel under R. Gandhi, former deputy governor at the central bank, had proposed
several reforms for the cooperative banking sector, which included creating an umbrella organisation
for cooperative banks and instituting a board of management. A board of management, over and above
the board of directors, would bring the bank under greater RBI control, it is felt. Other suggestions are
amendment of the Banking Regulation Act to give more powers to the RBI over cooperative banks,
empowering the RBI to wind up and liquidate banks independent of other regulators under the
cooperative societies' laws, and allowing urban cooperative banks to be converted into small finance
banks under the RBI's supervision.

There is no end to scams in the Indian financial space, where, in a matter of years, public sector banks,
private banks, non-banking financial companies, and now cooperative banks have been caught on the
wrong foot. The inherent follies in their operations need to be addressed effectively if the public has to
continue placing its trust in the banking system.

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CONCLUSION

Cooperative banks play an integral part in the implementation of development plans and are important
for the effective functioning of the banking system in India. How is it possible that every time a scam
in Banking and Financial system comes to light the findings and authorities concerned aver that the
auditors were fooled, the regulators are blind-sided and the government was oblivious to the violation
of rules. Then it can be contended that government and regulators are failing to anticipate the possible
problems that may arise and its consequences. In such circumstances there shall be a well convinced
action program to provide specific guide points to the co.-operative banks, systematic training on
mobilization of the resources and enhancing participation of members and consumer in decision making
process making the banks independently viable.