Modi Govt Takes Historic Milestone by Bringing Co-operative Banks Under Full RBI Oversight through Ordinance


On June 24, the Union government issued a arrangement bring 1,482 urban cooperative banks and 58 multi-state cooperative banks under the direct supervision of the Reserve Bank of India (RBI). This big step further advances his unsuccessful attempt to do so through an amendment to the banking regulation law just before the outbreak of the COVID-19 pandemic.

The ordinance will give the RBI the same supervisory powers over cooperative banks as it does over scheduled cooperative banks and also oversight over key appointments. This means that the RBI will now be fully liable if cooperative banks continue to fail with the same frightening regularity that they have, under regulations shared with the Registrar of Co-operatives, over the past decades.

Most cooperative banks are controlled by powerful politicians, which explains their weak leadership and the lack of political will to change things, despite the regular losses suffered by innocent depositors. The argument to remember status quo has been that these banks cater to underbanked rural India and, therefore, need more leeway and leniency. This excuse is still invoked, decades after a combination of microfinance, the spread of non-bank and fintech companies has made it possible to better reach the target customers claimed by under-capitalized and poorly supervised cooperative banks.

Life of money has repeatedly warned savers to be wary of cooperative banks that fail on average at least once a month. On a case-by-case basis, the RBI imposes restrictions on loans and withdrawals, years after the warning signs and weaknesses are evident. The banks then remain in a zombie state for years before they are liquidated and their licenses canceled. Depositors are often denied even the pitiful deposit insurance of Rs1 lakh for several years, until the bank is finally wound up. Since no previous regime wanted to change this, we can only applaud the government’s action, whatever the motivation behind it.

Remember, this government led by the Bharatiya Janata Party (BJP) itself started its sleeves with the most cheeky support for these poorly supervised banks. In November 2014, it was the first government to even legitimize unlicensed cooperative banks (yes, RBI had discovered that there were at least 23 banks operating unlicensed) with a massive bailout of Rs2,375.42 crore. The political protection of these banks is so powerful that in 2011 it was discovered that up to 28 of them continued to operate despite a negative net value.

Political pressure was not the only reason for this state of affairs. The RBI itself is notoriously reluctant to do anything that increases its work and oversight responsibility. Although hundreds of cooperative banks have gone bankrupt in recent years, as a category they still constitute the largest chunk with over 1,400, compared to just over 100 regular commercial banks.

Placing cooperative banks under the exclusive supervision of the RBI increases its accountability and it would not be surprising if there is a lot of internal resistance to this move. In fact, RBI has a notorious record of refusal to act even when whistleblowers of cooperative banks – such as Bombay Mercantile Cooperative Banks – denounced corruption and looting, with documentation.

In September 2018, the government authorized cooperative banks convert to small financing banks. But with just one bank having received “in principle” approval to become a small fundraising bank in January 2020, it’s clearly a wet firecracker.

The failure of the Punjab and Maharashtra Cooperative Bank (PMC Bank), a turning point for the supervision of cooperative banks? Probably. Although the Ministry of Finance has consistently ignored the plight of the depositors, their sustained campaign is certainly a political embarrassment for the NDA government, especially the BJP leaders in Maharashtra who have cold casualties from the PMC Bank. There is a lot of anger within the RBI itself, as its own officials have lost nearly 200 crore rupees invested by two separate co-operatives of RBI officers and clerical staff.

Meanwhile, after the formation of a tripartite coalition government in Maharashtra, the Nationalist Congress Party (NCP) is playing from the podium on PMC Bank. In February this year, he proposed a merger with the Maharashtra State Cooperative Bank (MSCB), controlled by the big guns of the NCP.

MSCB has been extremely controversial. RBI had ordered an investigation and cleanup in 2010-11. a investigation by the National Bank of Agriculture and Development (NABARD) had revealed that the former management of MSCB was guilty of exactly the same kind of fraudulent activity that brought down PMC Bank. Can the RBI possibly consider that MSCB is “fit and appropriate” to acquire PMC Bank? Does MSCB really have the financial strength to take on PMC Bank’s massive losses, which are said to be over Rs 6,000 crore, even though it appears to have reversed, registering a profit of Rs 251 crore for the fiscal year ended March 31, 2019?

Following a directive from the Bombay High Court (HC), the Economic Crimes Wing of the Mumbai Police Force had to file a lawsuit in August 2019 against the current Deputy Chief Minister Ajit Pawar and 70 others. people in what was billed as a 25,000 crore rupee scam. Not surprisingly, the investigation lost momentum after the NCP became a key member of the ruling triumvirate. But the political stampede on the banks continues and the ruling coalition has taken on Axis Bank and forced many government and police accounts to walk away from the bank, alleging it was favored by the bank. former Chief Minister Devendra Fadnavis, since his wife worked with the Bank.

RBI could have avoided this embarrassing and politically sensitive situation if it had acted quickly and appointed a strong administrator with a mandate to find buyers for PMC Bank. Indeed, it was part of the suggestions made to the government by Life of money shortly after the collapse of the PMC bank. The COVID pandemic has made it more difficult to find a suitor for PMC Bank and, at the same time, exacerbated the difficulties for depositors who lost their jobs as well as their savings during the lockdown.

The NCP’s political ploy of proposing a merger with the MSCB is embarrassing the leaders of Maharashtra BJP. PMC Bank depositors don’t care about MSCB’s track record or NCP’s motivation, as long as they have access to their own hard-earned money. They also feel very disappointed with the leaders of the BJP who, probably drawing inspiration from the central leadership, have done nothing to help or even facilitate a dialogue with the authorities.

The order to consolidate all the cooperative banks gives new life to the events. It places all of Maharashtra’s political-controlled cooperative banks under the supervision and scrutiny of the RBI. But will we really see a cleanup? Maharashtra, along with Gujarat and Andhra Pradesh, has the greatest concentration of politically controlled countries, poorly regulated cooperative banks. In Maharashtra, it was the NCP and Congress that had a strong hold over these banks as well as the cooperative institutions.

As part of the MSCB scandal, the government of Maharashtra even had to to spit over Rs 1,000 crore, following a Supreme Court order, due to loans guaranteed on behalf of politically controlled sugar factories, spinning mills and agricultural units. But, let’s not forget, some powerful politicians in this industry defected from the BJP ahead of the Maharashtra state elections.

The ordinance is, indeed, a very positive movement; but is this only part of a political game or will it lead to a cleansing and reduction of political control over cooperative banks? How will the conflicting interests of heads of state newly acquired by the NDA affect the process? No one seems to have the slightest idea.

We can only hope that he also helps end the plight of PMC Bank depositors and finds a better suitor for the Bank. RBI Governor Shaktikanta Das has always maintained that he is working on a resolution. With the lockdown ending and the stock markets rising, maybe RBI didn’t completely miss this opportunity.


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