Express news service
NEW DELHI: Friday the 13th (August 2021) lived up to its infamy of being a day of bad luck, at least for Karnala Nagari Sahakari Bank of Maharashtra. The Reserve Bank of India (RBI) canceled its license that day for not having sufficient capital and therefore not being able to pay its depositors in full.
As a result, the cooperative bank ceased to carry out banking activities.
While the Karanala Sahakari Bank can blame its misfortune on the mythical Friday the 13th, however, cooperative banks as a whole face an uncertain future for many other reasons. So far, in 2021, the central bank has issued at least 48 directives to UCBs, either imposing new regulatory measures or extending existing ones and has canceled six licenses. Additionally, there have been 75 instances where UCBs were penalized for non-compliance, up from just 23 in 2020 and just seven in 2019, an Express analysis shows.
Most cooperative banks are uncomfortable with the heterogeneous banking structure. While the big banks continue to receive all the attention, the cooperative banks that play an important role in providing credit to the rural population and contributing to financial inclusion remain confined in an unglamorous state.
As of May 31, 2021, there are 1,531 urban cooperative banks (UCBs) and 97,006 rural cooperative banks, the latter representing 65% of the total asset size of all cooperatives taken together.
Despite the crucial role played by the cooperative sector, its asset size was only around 10% compared to that of programmed commercial banks (BSCs) at end-March-2020.
The share of rural cooperative loans in total agricultural loans has declined significantly over the years, from 64% in 1992-93 to 11.3% in 2019-20. Although the RBI has initiated consolidation among these banks and tightened the strains on UCBs in recent years, the financial strength of the sector has been of concern, reflecting operational and governance hurdles.
NPA increases, losses soar
The share of gross non-productive assets (APM) of urban cooperative banks rose to 11.3% in FY21 from 10.8% in FY20 and 7.3% in FY19, according to RBI. The financial health of rural cooperatives also remains fragile in a context of strong competition from niche players such as non-bank financial companies and small financing banks. Growth in deposits, which make up about 90% of their total resource base, plunged in the fiscal year ended March 2020. The average growth rate of deposits increased by 13% in the first decade of consolidation at 8% between fiscal years 2015 and 20.
RBI data indicates that the downward trend in deposits will continue through 2021. UCBs reported a cumulative loss of 4,806 crore in FY20, compared to a profit of 3,544 crore in FY19. , mainly due to high NPAs and lower investments. The major crisis of the Punjab and Maharashtra Cooperative (PMC) Bank in 2019 can be attributed to the gigantic amount of NPAs.
Second, the demand for credit remains anemic. After growing at an average rate of 7.8% since 2015-16, loans and advances from UCBs almost stagnated in 2019-20. The health of cooperative banks is likely to deteriorate in the post-Covid-19 days.
Anil Gupta, Vice President and Head of Sector (Finance), ICRA, explains that UCBs, like other cooperatives, depend on their members for their equity needs or internal profits to finance their growth. “Apart from that, the area of operations of most UCBs is also limited to the state where these UCBs are incorporated. Therefore, in the absence of sufficient growth capacity, the scale and service offerings of most UCBs have remained limited, ”he added.
Lax governance
For years, these banks have slipped out of control despite defaults and fraud. In FY21, for example, UCBs reported 323 frauds, while state cooperative banks witnessed 482 frauds that were much higher than FY19.
There have always been questions about who controls the cooperative banks in India – the states or the Center. As banking laws became applicable to cooperative banks, the RBI was able to exercise some control over them, but the regulation of the management of cooperatives remained the responsibility of the states. When state funding is involved, political entanglements and corruption tend to follow. For example, the BJP has enormous influence over them in Gujarat, the Congress and the NCP in Maharashtra while the cooperatives in Kerala have been dominated by leftist parties. This has led to double-checking of the sector, resulting in gaps in supervision and regulation and many such banks are bleeding.
However, the sudden collapse of the once-rich PMC Bank forced the government to make legal changes. In June 2020, the government amended the laws governing cooperative banks. The power of the RBI over a cooperative bank will now trump the power of the state registrar of cooperatives. That said, the central bank’s failures to detect scams in Yes Bank and several other major banks, where it had the power to do so, means there will still be many challenges.
Finally, the new Ministry of Cooperation with Amit Shah at its head is supposed to fix the cooperative sector in the country. Shah is no stranger to the cooperative sector. He became chairman of the Ahmedabad District Cooperative Bank (ADC) in 2000, taking control of Congress. Under his leadership, the loss-making ADC Bank made a profit of 6 crore in one year. Today, ADC Bank is the strongest bank in Gujarat.
Then, after the collapse of the Madhavpura Mercantile Bank scam, Shah proposed a stimulus package for the bank and managed to save 160 Gujarat cooperative banks from sinking in 2003. However, the bank disappeared and lost its license. in June 2012. after being unable to repay the money she owed to public depositors.
There is hope that the new ministry will help solve the problems of the cooperative bank, although many suspect it is a political decision. “The ministry, along with recent RBI reforms, will improve the functioning of UCBs and may further deepen the model of cooperation in other states,” Gupta added.
