The decision to place all city and multi-state cooperative banks – indeed the big ones – under the direct supervision of the Reserve Bank of India (RBI) should have been taken long ago. Its aim is to secure the interests of depositors who currently number 86 million and who have a whopping Rs 4.8 lakh crore – 2.5% of GDP – of their money in these banks.
The cooperative movement in India, under which these banks originated, dates back to the early 20th century. It was supposed to offer short and long term credit – mainly in rural areas – to those at the bottom of the pyramid. As they are cooperatives, they are owners and also customers. The fact that pawn shops still abound, both in rural areas and in urban slums, indicates that the cooperative movement has not delivered all that it expected.
The immediate trigger is the problem that the Punjab and Maharashtra Cooperative Bank (PMC) encountered last year, which led to the replacement of its board of directors and the imposition of a moratorium on withdrawals. The depositing public has had to live with the well-publicized periodic failure of cooperative banks dating back three decades. Harshad Mehta and Hiten Dalal sank Mumbai-based Mercantile Cooperative Bank in 1991 and Ketan Parekh did the same with Ahmedabad-based Madhavpura Cooperative Bank in 2001. At PMC Bank, over 70% of loans went to a single borrower, HDIL, which defaulted.
The action of the government puts these cooperative banks on an equal footing with the programmed commercial banks, that is to say the ordinary banks whose branches can be seen everywhere. The main problem in ensuring that co-operative banks of all sizes were managed responsibly was that they had so far come under dual control: the Registrar of Co-operative Societies in the States and Central and the RBI.
While the RBI was responsible for ensuring that banking operations were conducted in a sound manner, the Registrar of Co-operative Societies oversaw the process by which the members of the co-operative institutions, in this case the banks, selected the directors who ran the bank and also supervised its verification.
Few members of the large cooperative banks come to vote at annual general meetings and these banks have become run by small groups which, in turn, have compelled a few powerful borrowers. This compromised the quality of governance of these banks. And when one of these big, powerful borrowers got into trouble, it defaulted on the cooperative bank and jeopardized its future, putting a question mark over the fate of deposits in the bank.
Cooperative credit societies were born when a small homogeneous group of people were able to pool their savings and lend to each other. But the caring and cooperative nature of the whole exercise waned as organizations became large and impersonal.
Today, the whole idea of cooperation has had its day. Over the years, new institutional structures have emerged in the space originally reserved for cooperatives. Now, there is a whole hierarchy of institutions that take care of the little savings of little people. At the bottom are the self-help groups, often linked to banks, which pool their members’ savings and allow them to borrow.
Next to it, there is the pyramid of microfinance institutions (MFIs) which have the same job of lending to those who are at the bottom of the pyramid. Over time, the larger ones came under the supervision of the RBI by registering as Non-Banking Financial Companies (NBFCs) and the stronger ones were allowed to become small banks. financial. And right at the top is Bandhan Bank, a former MFI that is now a full-fledged commercial bank.
The very idea of a co-operative – a group pooling its resources to accommodate members – has declined and the individual is seen as an economic agent in a neoliberal market-oriented configuration. Given the changing world, the RBI gave the big cooperative banks the opportunity to transform into small corporate banks, but they showed little interest.
Over the decades, the RBI has come up with several innovations for large cooperative banks. Most distinctive is the creation of an additional layer – a management board made up of able and appropriate people, other than the board of directors, who actually control operations. But that has not happened and crises continue to occur.
Ending the duality of the past and bringing the large cooperative banks fully under the supervision of the RBI is an improvement over the past, but the question is whether the RBI has the time or the human resources to take on this additional burden of supervision of a large number of establishments distributed throughout the territory.
In the case of scheduled commercial banks, the RBI has been accused of stepping in too late, as with Yes Bank. It was found that the RBI had not listened enough to the ground when it came to agents in major financial centers in the country to be able to spot the dark clouds before they were fully visible to all. From now on, he will have to listen to the financial space across the country since no less than 1,540 cooperative banks will be under his supervision – on the other hand, there are 32 regular commercial banks, 12 of which belong to the public sector. It’s a big challenge!