Cooperative Banks move to a single regulator

Cooperative Banks move to a single regulator - RBI

PMC Bank failure triggered the action on the part of Union Government to amend Banking Regulation Act 1949 bringing the Cooperative Banks in the direct regulatory ambit of the RBI, putting a full stop for dual regulation of the Cooperative Banking sector. The ordinance does not include Primary Cooperative Societies, the principal constituents of the State Cooperative Banks (StCB) District Cooperative Central Banks DCCBs). Urban Cooperative Banks and Multi State Cooperative Banks and the rest of Rural Cooperative Credit structure falling in the ambit of NABARD supervision will all be subject to such amended regulation.

The preamble of the Ordinance on Banking Regulation Act 1949 Amendment makes us understand that the cooperative banks are not well managed; not properly regulated; and the affairs conducted are detrimental to the interests of the depositors. They also lack professionalism, good governance and sound banking practices. The objective of the amendment is to correct all of them. It is important to view this ordinance in the backdrop of the latest Report on UCBs chaired by R.Gandhi, when he was Dy.Governor.

R.Gandhi (2015) Report says: “As UCBs form an important vehicle for financial inclusion and facilitate payment and settlement, it may be appropriate to support their growth and proliferation further in the background of the differentiated bank model. However, the question remains whether unrestrained growth can be allowed, keeping in view the restricted ability of UCBs to raise capital, lack of level playing field in regulation and supervision and absence of a resolution mechanism at par with commercial banks.” UCBs now have high aspirations of competing with commercial banks and they expect RBI to provide relaxations in various regulatory restrictions.

In countries like Canada, Cooperative Banks pose a formidable challenge to commercial banks and the former follow the capital regulations of Basel, conduct elections regularly, Associations of Cooperatives conduct induction courses and retreats for Board members on governance. Without harming the principles of cooperatives the Cooperative Banks pose a stiff competition to the commercial banks.

A study was conducted on behalf of Gandhi committee to ascertain the range of loans granted by scheduled and non-scheduled UCBs. The study shows diametrically opposite trends in the range of loans granted by the two types of co-operative banks. While the scheduled banks granted 59.6% of the total loans in the largest loan size ranges of Rs.1-5 crore and above Rs. 5 crore, non-scheduled banks catered to the small loan segments up to Rs.10 lakh in a substantial way as this segment constituted 59.5% of the loans granted by this component of UCBs. The study further supports the premise that large MS-UCBs have aligned their business models and goals with those of commercial banks while availing of the concessions granted to the sector. Even this study could not bring out the frauds and maleficence of Bank like PMC because the fraud has been traced to even earlier period.

“The Report says; major considerations to be kept in mind are the aspirations of large UCBs, conflicts of interest, decline in cooperativeness, regulatory arbitrage, limitations on raising capital, limited resolution powers of RBI, the capital structure of UCBs and opportunities for growth that will accrue after such conversions.” The UCBs are subject to annual inspections by the RBI. Yet it could not hold accountable for the large scale frauds in UCBs.

In so far as StCBs and DCCBs are concerned, they are under the supervision of NABARD and the Board appointments are supposed to be done as per the ‘fit and proper’ criteria fixed by RBI. Elections to the Cooperative Societies are conducted by the Registrar of Cooperative Societies. Cooperative Societies as per cooperative statute are member-driven, member-controlled and member-protected. If members who are large in numbers choose to abdicate their responsibilities or do not take enough interest in their activities, jeopardising the interests of other stakeholders and particularly the non-member depositors, the remedy rests only with the Registrar.  In so far as banking is concerned, it is only RBI that regulates all and all UCBs are subject to inspections by the RBI annually or whenever any aberration comes to their notice even during a year. Depositors’ constituency for long has been asking for a representation on the Board and this can be done only by amendment to the Cooperative Act.

The latest report on Trend and Progress of Banking in India from RBI (December 2019) has highlighted the importance of cooperative banks in India lies in their grassroots’ integration into the life and ethos of the widest sections of society and effective instruments of financial inclusion. They account for about near 10 percent of total assets of scheduled commercial banks in 2017-18. It also clarified that the combined balance sheet of UCBs witnessed robust expansion underscoring the effectiveness of measures taken to strengthen their financials.

Although 89.5% of the UCBs’ resource base happens to be Deposits, their growth is muted and remains well-below the average of 13.9 per cent achieved during 2007-08 to 2016-17.” A CAMELS (capital  adequacy;  asset quality; management; earnings; liquidity; and systems and control) rating model is used to classify UCBs for regulatory and supervisory purposes. UCBs in the top-ranking categories— with ratings A and B—accounted for 78 per cent of the sector. Only 4to 5 percent are in D category for the last five years. And yet, the well-rated UCBs have defalcated with immunity for years. Will this ordinance rectify this malady?

UCBs are under the regulation of RBI and Registrar of Cooperatives of the State Government where they were situated. The regulatory conflicts were being resolved through TAFCUB during the last ten years to the satisfaction of both banks and the regulators at the altar of RBI.

During the last two decades, Marathe Committee, Madhava Rao Committee, Malegam Committee, Gandhi Committee and RBI’ Vision of UCBs have gone on record on the measures to be taken for strengthening them in the face of a series of frauds and maleficence and even closure of several UCBs in Gujarat, Maharashtra, Andhra Pradesh etc.

GoI even brought out a comprehensive 97^th Amendment to the Constitution of India in 2011 as a Model Cooperative Act to be enacted by the State Governments. None except the Government of Orissa showed interest. Had this Act been passed and implemented in letter and spirit there would have been no need for the Ordinance now.

No State is keen on legal reforms to cooperatives. Cooperatives are the seedbed of politics and every prominent politician of the country, barring some Rajya Sabha or Legislative Council Members, everyone started his/her political career with Cooperative Society as the base. To borrow an acronym, cooperatives without politics is lame and politics without cooperatives is blind. Viewed from this perspective, this ordinance makes a great difference. It sets at naught all political interferences beyond the primary cooperative societies.

Several Commercial Banks, fully under the regulation of the RBI since 1949 have also been victims of frauds and maleficence. Several Banks, both in the public and private sector like SBI, ICICI, PNB etc continue to hit the headlines on such count.

The difference is that in all such cases, the interests of depositors have been protected. There were mergers or amalgamations but there were very few occasions where the affected Banks were closed or deposits barred from withdrawal. It should be worthy to recall that even in case of commercial banks the deposits are secured to the same extent as UCBs/MSCBs, viz., Rs.1lakh earlier and recently enhanced to the extent of Rs.5lakhs per depositor. 

Several UCBs are already part of the National Payments System. Financial inclusion demands customer centricity and smart technology applications apart from financial learning at the institutional and client level.

Rural Credit Cooperatives have been in the throes of change: accounting practices,  (from single entry book keeping to double entry book keeping), technology change; regulatory changes and structural changes. They have come into the mainstream of financial inclusion agenda of the country.

When NABARD has a new guard, it would have allowed scope to the new management to carry out the required improvements to the Short Term Cooperative Credit Structure instead of clubbing them with the UCBs. All the DCCBs have already been brought under the regulation of RBI notwithstanding the ordinance. Further, RBI invested in computerization of both the UCBs and Rural Coop Societies and banks with the allocation of Rs.4lakhs per UCB and maintenance cost of Rs.15000 per month for a period of 3 years post implementation. Government of India in their 2017-18 Budget allocated Rs.1900cr towards computerization of PACS. This initiative should have been properly monitored to ensure transparency, better accounting practices and better customer service on par with commercial banks. To search for a solution of lost opportunity in the ordinance does not reflect a good governance practice.

Though the organization may introduce appropriate strategies, it is the culture of the organization and governance that would require to be looked at in cooperatives. They can improve the bottom lines through reduced costs; enhance the customer experience; and strengthen security and compliance through state-of-the art encryption practices, audit trails and security certifications. Customers always need their data to be safe and secure.

When the problem rests with regulator – lax inspections, lack of transparency in dealing with the Banks and improving governance, the remedy is sought through a legislative amendment!!     This may perhaps provide a better lever to the RBI to  merge weak UCBs with strong ones and disable closures as a  solution to protect the interests of depositors. Will the PMC depositors now get fully all their deposits and interest?  We should wait and see.

Development of cooperatives is no longer an option, but a compelling necessity to achieve financial inclusion. Implementation of the Ordinance should only strengthen the cooperative system and not eliminate them in the guise of regulation.

https://www.moneylife.in/article/cooperative-banks-move-to-a-single-regulator-rbi-and-not-a-day-too-soon/60767.html 

Proportionate Regulation helps MSMEs

Huge NPAs in corporate sector of the order exceeding Rs.10trillion and the increasing credit outflow for MSMEs from the NBFCs, on the verge of taking away the meat our of the portfolio have woken up the commercial banks to lend to this sector more responsibly. Banks like SBI, Canara Bank, Indian Bank, Syndicate Bank, and PNB are in the lead while the others are still in wait and watch approach. This context demands an inquest of the present status. Definition of the sector matters when we want to measure the MSME credit growth.

SIDBI defines MSMEs having credit outstanding of less than Rs.1cr as micro; 1cr-25cr as small and Rs.25cr-100cr as medium and beyond Rs.100cr as large for measuring credit growth while the MSME Development Act 2006 defines manufacturing MSMEs by way of investment in plant and machinery as of now: Less than Rs.25lakhs as micro; Rs.25lakhs-500lakhs as small; and Rs.500-1000lakhs as medium. An amendment is awaiting Parliament’s nod for changing the measure to turnover to make the sector ‘globally’ competitive and investment friendly. The new definition keeps micro enterprises at Rs.5cr annual turnover. SIDBI’s analysis follows neither the impending change nor the existing pattern for analyzing the MSME credit growth.

MSME Pulse April-June 2018, an arm of SIDBI measures growth in the sector by credit exposure mentioned above: MSME with a portfolio of Rs.12.6trn is pitched at 22.2% for micro and 12.8% for small Y-o-Y at the end of March 2018. Medium and large industry has recorded 7.2% and 5.9% correspondingly. The market share of new private banks and NBFCs has been growing at 30% and 10.9% respectively. NBFCs are now permitted the CGTMSE cover as well and this measure would see further growth in lending by these enterprises.

RBI Bulletin June 18 puts the micro and small, medium (as defined under MSMED Act) and large enterprises’ credit growth Y-0-Y at 1%, 0.3% and 3.6% respectively while in the financial year so far (up to end April), -1.8%,-2.7% and -0.9% correspondingly. Manufacturing enterprises under micro and small segments registered just 0.3% Y-o-Y reflecting the poor risk perception of the banks of these enterprises. Viewing from the risk perspective, even according to MSME Plus, NPAs of micro enterprises have been stable and range bound at 8.8% while for SME segment it is 11.2%. NPAs of MSMEs have a cascading effect of the NPAs in the corporate sector to which they act as vendors.

The Corporate entities issue cheques for the bills payable to the MSMEs before the last date of the quarter only to ask them not to present during the first week of the following month lest their order book shrinks. This measure will help conformance to the rule that above Rs.2lakhs dues to the MSMEs should be reflected in their quarterly balance sheets. No MSME can complain openly as they are in captive markets.

Most of the PSUs and Government departments do not honor the bills on time and the MSEs approaching the MSE Facilitation Council gets hardly a reprieve. The lender is a government owned bank; the defaulter is a government department or PSU; the arbitrator is a Government Executive. With such deep rooted conflict of interest, the MSEs hardly got justice. Even the disputed claims are not followed up with deposit of 75% of the amount settled by the Council. Even if deposited such amount would be in the Court but would not go for credit of the judgment debtor MSE that is reeling under NPA. Banks left with no option are proceeding under SARFAESI Act provisions even against the only dwelling house of the entrepreneur. They hardly have capacity and financial muscle to fight legally. Many capable of producing to capacity close their shutters prematurely.

Trade related electronic discounting system (TReDS) has on board only 34 PSUs. Several Government departments are yet to register on the exchange. This is a platform created for facilitating payment of 75% of the bill amount traded through this exchange for MSMEs that also register on the exchange and sell their goods to the registered members. Only a few banks registered on the exchange. Several state run firms did not register on this exchange. To swear by this instrument as a big boon to MSMEs will be  unrealistic.

Banks have not been putting their Board approved policy on their websites either for MSME lending or OTS or Revival and Restructuring. Banks are also reported to be charging huge penalties at no less than 18% p.a., on irregularities in the accounts and collecting inspection charges for inspections they rarely did. So is the case with SME Exporters. Banks have been mandated in June 2016 itself to set up zonal committees to ensure conformance to put in place corrective action plan, revival and restructuring and as a last resort recovery. But these instructions are sparingly implemented. The recent amendment to NPA recognition at 180days is hard to implement as the systems do not allow.

In the current environment of trust deficit, proportionate regulation by the RBI should help. RBI should move away from its stance of distancing from micro management since banks are failing the MSMEs. They levy inspection charges for visits to the units that were not made; debit interest and penal interest on the overdue amount fully knowing that the account became overdue not because of willful default but due to the cascading effect of the corporate NPAs. RBI should therefore prescribe boundaries of penalties for the irregular accounts; charges on forex dealings; modifying the IRAC norms and better monitoring of the revival and restructuring processes. Instances are staring at us where the proprietor or proprietrix falling terminally sick and unable to run the industry seeks exit but has no exit route. Government of India would do well to amend the SARFAESI Act 2002 provisions exempting the only dwelling house offered as collateral and not recognizing collateral going concurrent with the CGTMSE thresholds on par with the agricultural lands.

*The Author is Adviser, Government of Telangana, Telangana Industrial Health Clinic Ltd., The views are personal.

http://knnindia.co.in/blog/blogdetails/msme-credit-on-the-banks-radar-again-proportionate-regulation-helps

 Published on 12.07.2018

Seeking Opportunities in Adversity

Seeking Opportunity in Adversity

Adversities could be opportunities for cleansing the system. The ghastly bus accident on the Bangalore-Hyderabad Highway has exposed the vulnerabilities in implementing the Motor Vehicles Act and Rules.

Have mobile phones of the passengers’ added fuel to fire when the diesel tank caught fire?

Each accident may have its own tale to tell but the latest has many tales of distress. Earlier also buses fell into the gorge or had hit the pavements and got into fire accidents. But never it was so instantaneous flame that left no passenger spared except the lucky five. On earlier occasions, several were able to jump out to safety and had burn injuries or fractures and a few died while undergoing treatment due to the intensity of burns on the body. Not this time.