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 97th 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.
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