What ails the co-operative banking sector?

Chinubhai R Shah, President, GCCI & Gujarat Investors' Association

Co-operative banks were established to augment the banking sector and promote thrift in people. Over a period of time, a strong co-operative network made its way into rural areas with Gujarat, Maharashtra and Andhra Pradesh leading the way.

The original founders of the co-operative movement were people with integrity, foresight and vision. However, with the passage of time, there has been an erosion in the quality of leadership in this sector.

Co-op banks: Of laxity, loopholes and scams

The funds of co-operative banks were not used productively. The appraisals and recovery system also were not accurate. As a result of this, non-performing assets of these banks showed a marked increase, adversely affecting their health.

Deregulation of interest rates unleashed market forces in determining product pricing policies of banks, leading to a squeeze on business spreads. This has severely impacted co-operative banks which traditionally have been functioning on a high financial and management cost regime.

The accumulated losses of state co-operative banks has increased to Rs 566.61 crore (Rs 5.67 billion) in 2002-03 from Rs 491.80 crore (Rs 4.92 billion) in 2001-02, while those of district co-operative banks has increased to Rs 3836.48 crore (Rs 38.36 billion) in 2002-03 from Rs 3229 crore in 2001-02.

In Gujarat, co-operative banks have witnessed a Rs 161 crore (Rs 1.61 billion) decline in their deposits during 2002-03 on account of huge withdrawals of Rs 1,285 crore (Rs 12.85 billion) by depositors. An estimated three and a half lakh depositors withdrew their funds owing to a crisis of confidence.

In view of the government's agri-lending target of Rs 39,000 crore (Rs 390 billion) to co-operative banks, all co-operative banks and institutions will have to find out innovative ways of tackling the problem of NPAs, enhancing staff productivity, professional management and streamlining recovery.

It is time co-operative banks and institutions found out why their loan portfolios have an unsustainable level of NPAs than the average of industry participants and why their quality customers are moving to other banks. Co-operative banks ought to work like professional institutions with sound management systems.

Another area which required focussed attention is greater transparency in balance sheets of co-operative banks. Auditors must ensure that necessary statutory are taken care of as required in the terms of co-operative societies act/rules of the state concerned and laws of the respective institutions.

To restore confidence of the people in co-operative banks, it is necessary to have in place professional management systems. Human resource development should be the catalyst for this transformation. Directors should be made responsible for irregularities committed and penal action should be taken against them without delay.

The dual control of the RBI and the state has also played a major role in the present state of affairs. While the administrative aspects of management of co-operative banks could be monitored by the registrar of co-operative societies, the financial aspects must be monitored and controlled by the RBI.

The RBI should undertake quarterly inspection of portfolios and liquidity position of the banks and must initiate action against those which violate its norms. This will help normalise the situation to a large extent and help restore depositors' confidence.

Bring them on par with PSBs

P Adhyaru, Chairman, Nutan Nagrik Sahakari Bank

The prime reason for the state of affairs in co-operative banks is, perhaps, a strong mistrust in the system created by the misdeeds of boards and managements of few banks. This has even taken its toll on those co-operative banks that are being managed professionally and effectively.

The other big contributor towards the mess is an imbalance in the recovery laws. Take for instance, the Securitisation Act.

While the Act was framed with the aim of bypassing the long and tedious legal formalities that banks had to go through before they could auction mortgaged properties and recover dues, matters have become even worse now.

For co-operative banks, it is a huge burden to maintain a factory that is attached from a defaulter. And who will purchase it anyway? In fact, there ought to be an amendment making it a possible to freeze all the assets of a defaulter fast by the lender. Willful defaulters transfer their properties to the names of relatives and declare they have nothing left.

The media too has played its role to an extent. While small misdeeds of co-operative banks are highlighted, the media has in general remained silent on the big misdeeds of nationalised banks and government policies which have led these nationalised banks to miscreations.

The Reserve Bank of India, which controls the printing press for currency notes, goes on printing notes to cover up the misdeeds of the nationalised banks or government policies.

This has been leading to an increase in the rate of inflation. Today, there is an 8 per cent inflation while interest rate is just 5 per cent. This makes everybody lose their capital by 3 per cent.

While big institutions such as nationalised banks can cushion such imbalances, co-operative banks find it extremely difficult, even as their business volumes are smaller.

In fact, there could come a time in the next two or three years, when co-operative banks will tell the government to run the show, as things are becoming increasingly difficult.

If co-operative banks are to be revived in earnest, then dual control must go. The RBI must have the controls. The government must not intervene in the management of banks, and co-operative banks ought to be brought on a par with public sector banks.

As some say, it is not right to give a revolver in the hand of a child. That is true, but why cannot we train that child to use the revolver. Why does the government not put co-operative banks on a par with nationalised banks? If you don't do that, you are forcing the child to remain a child forever.

There are also immense contradictions between the RBI and the registrar of co-operative societies. Co-operative banks find it almost difficult to adhere to so many norms.

There should be no scope for supporting mismanagement of banks. Why should the state come up with a law that says that 15 per cent of all profit of profit making co-operative banks be put into a fund created to support weak banks? That is not a realistic solution of the problem.

After all, share holders and members of profit making banks are not working so that their funds be used to cover up misdeeds of managements of weak banks.