The failure of the Punjab and Maharashtra Cooperative Bank (PMC) prompted the Union government to take action, which resulted in the amendment of the Banking Regulation Act 1949, placing cooperative banks in the direct regulatory scope of the Reserve Bank of India (RBI), putting an end to the dual regulation of the cooperative banking sector. The ordinance does not include primary cooperative societies, the main constituents of state cooperative banks (StCB) and central cooperative district banks (DCCB). Only urban cooperative banks (UCB) and multi-state cooperative banks (MS-UCB) and the rest of rural cooperative credit structures that come under the supervision of the National Bank for Agriculture and Rural Development (NABARD) will be subject to such amended regulations.
The preamble to the Ordinance on the Amendment of the Banking Regulation Act 1949 makes it clear that cooperative banks are not well managed; not properly regulated; and the business conducted is prejudicial to the interests of depositors. They also lack professionalism, good governance and good banking practices. The purpose of the amendment is to correct them all. It is important to consider this ordinance in the context of the last UCB report chaired by R Gandhi, when he was vice-governor.
R Gandhi’s report (2015) states: “Since UCBs are an important vehicle for financial inclusion and facilitate payment and settlement, it may be appropriate to further support their growth and proliferation in the context of the model. differentiated banking. However, the question remains whether unbridled growth can be allowed, given the limited ability of UCBs to raise capital, the lack of a level playing field in regulation and supervision, and the lack of a resolution mechanism at the same level as commercial banks.
UCBs now have strong aspirations to compete with commercial banks and expect the RBI to ease various regulatory restrictions.
In countries like Canada, cooperative banks represent a formidable challenge for commercial banks and the former follow Basel capital rules, hold regular elections, cooperative associations organize induction courses and retreats for members. of the board of directors on governance. Without undermining the principles of cooperatives, cooperative banks pose stiff competition to commercial banks.
A study was carried out on behalf of the Gandhi committee to determine the range of loans granted by programmed and unscheduled UCBs. The study shows diametrically opposed developments in the range of loans granted by the two types of cooperative banks. While programmed banks made 59.6% of total loans in the largest loan size ranging from Rs1 crore to 5 crore range and the above Rs5 crore segment, unscheduled banks responded to smaller segments of loan up to Rs10 lakh in a way since this segment accounted for 59.5% of loans granted by this component of UCB.
The study further supports the hypothesis that the large MS-UCBs aligned their business models and objectives with those of commercial banks while taking advantage of concessions granted to the sector. Even this study was unable to uncover fraud and malevolence from banks like PMC, as the fraud dates back to an even older period.
The report says; “The main considerations to keep in mind are the aspirations of large UCBs, conflicts of interest, declining cooperation, regulatory arbitrage, limitations on raising capital, limited resolution powers of the RBI , the capital structure of UCBs and the growth opportunities that will accumulate after such conversions.
UCBs are subject to annual inspections by the RBI. Yet he could not hold them responsible for the large-scale fraud in UCBs.
As regards the StCBs and DCCBs, they are under the supervision of NABARD and appointments to the board of directors are supposed to be made according to the “fit and proper” criteria set by RBI. Elections to cooperative societies are carried out by the registrar of cooperative societies. Cooperative societies according to the cooperative statute are managed by members, controlled by members and protected by members. If many members choose to abdicate their responsibilities or do not take sufficient interest in their activities, jeopardizing the interests of other stakeholders and in particular of non-member depositors, the remedy lies only with the registrar. .
When it comes to the banking industry, only the RBI regulates everything, and all UCBs are subject to annual inspections by the RBI or whenever an aberration is reported to them, even within a year. The constituency of depositors has been asking for board representation for a long time and this can only be done through an amendment to the Cooperatives Act.
The latest RBI India Banking Trends and Progress Report (December 2019) stated that the importance of cooperative banks in India lies in their ‘grassroots’ integration into the lives and ethics of strata. the broadest parts of society and in the fact that they are effective instruments. financial inclusion. They represent around 10% of the total assets of commercial banks listed in 2017-18. The report also specifies that the combined balance sheet of UCBs have experienced strong expansion, highlighting the effectiveness of measures taken to strengthen their finances.
Although 89.5% of the UCB resource base happens to be deposits, their growth is moderate and remains well below the average of 13.9% reached from 2007-08 to 2016-17. Capital adequacy; asset quality; management; earnings; liquidity; and the Systems and Control Rating Model (CAMELS) is used to rank UCBs for regulatory and supervisory purposes. The top-ranked UCBs – with A and B ratings – accounted for 78% of the sector. Only 4 to 5% have been in category D for five years. And yet, well-rated UCBs have tampered with with impunity for years. Will this prescription correct this disease?
UCBs are regulated by the RBI and the Registrar of Cooperatives of the state government where they were located. Regulatory disputes have been resolved by the Urban Cooperative Banking Task Force (TAFCUB) for the past 10 years to the satisfaction of banks and regulators on the altar of the RBI.
Over the past two decades, the Marathe Committee, the Madhava Rao Committee, the Malegam Committee, the Gandhi Committee and RBI ‘Vision of UCB have reported on steps to be taken to strengthen them in the face of a series of fraud and malfeasance and even the closure of several UCBs in Gujarat, Maharashtra and Andhra Pradesh.
The Indian government even issued a 97th Comprehensive Amendment to the Indian Constitution in 2011 as a model cooperative law to be enacted by state governments. None, with the exception of the government of Orissa, has shown interest. If this law had been passed and implemented in letter and in spirit, the ordinance would not have been necessary now.
No state is in favor of legal reforms for cooperatives. Cooperatives are the breeding ground for politics and every prominent politician in the country except some members of the Rajya Sabha or the Legislative Council, everyone started their political career with a cooperative society as their base. It can be said that cooperatives without policies are lame and that politics without cooperatives are blind. Seen in this light, this ordinance makes a big difference. It eliminates all political interference beyond the primary cooperative societies.
Several commercial banks, fully regulated by the RBI since 1949, have also been victims of fraud and malicious intent. Several banks, both public and private, such as SBI, ICICI, PNB etc. continue to make headlines on this subject.
The difference is that in all of these cases the interests of the depositors have been protected. There have been mergers or mergers, but there have been very few occasions where affected banks have been closed or deposits prohibited from withdrawal. It should be remembered that even in the case of commercial banks, deposits are guaranteed to the same extent as UCB / MSCB, namely Rs1 lakh earlier, recently increased to Rs5 lakh per depositor.
Several UCBs are already part of the national payment system. Financial inclusion requires customer centricity and smart technology applications, apart from financial learning at the institutional and customer level.
Rural credit cooperatives have undergone changes: accounting practices (from single-entry to double-entry accounting), technological change; regulatory changes and structural changes. They entered the country’s financial inclusion program.
When NABARD got a new guard, it would have allowed the new management to make the necessary improvements to the short-term cooperative credit structure instead of clubbing them with the UCBs. All DCCBs have already been subject to RBI regulation notwithstanding the ordinance. In addition, RBI has invested in the computerization of UCBs and rural cooperative societies and banks with the allocation of Rs4 lakh per UCB and a maintenance cost of Rs15,000 per month for a period of three years after the start-up. artwork. The Indian government, in its 2017-2018 budget, allocated 1,900 crore rupees for the computerization of primary agricultural credit societies (PACS). This initiative should have been properly monitored to ensure transparency, better accounting practices and better customer service on par with commercial banks. Seeking a solution of opportunity lost in the ordinance does not reflect good governance practice.
Although the organization can introduce appropriate strategies, it is the organizational culture and governance that should be examined in cooperatives. They can improve results through reduced costs; improve the customer experience; and strengthen security and compliance through leading encryption practices, audit trails and security certifications. Customers always need their data to be safe and secure.
When the problem lies with the regulator – lax inspections, lack of transparency in relations with banks and improved governance, the remedy is sought by a legislative amendment! Perhaps this could provide better leverage for the RBI to merge weak UCBs with strong ones and disable closings as a solution to protect depositors’ interests. Will PMC depositors now receive all of their deposits and interest? We should wait and see.
The development of cooperatives is no longer an option, but a pressing need to achieve financial inclusion. The implementation of the ordinance should only strengthen the cooperative system and not eliminate them under the guise of regulation.
(The author is an economist and specialist in risk management.)
