How Kerala’s cooperatives are planning to take on big banks

IIM professor M.S. Sriram lays down the roadmap for Kerala govt’s plan to merge state cooperative banks into one bank called Kerala Co-operative Bank


Partly controlled by the state government, cooperatives in Kerala have a long history of shaping a society where almost everyone has access to institutional credit. Photo: Mint
Partly controlled by the state government, cooperatives in Kerala have a long history of shaping a society where almost everyone has access to institutional credit. Photo: Mint

Bengaluru: Kerala’s cooperatives are planning to take on big banks by merging into a single bank called Kerala Co-operative Bank (KCB). It’s a massive project and a first of its kind in India. If all goes as planned, 15 financial institutions (14 district cooperative banks and a state-level bank), which have branches across the state, will form the largest scheduled cooperative bank in the country. Together, the structure will sit on a deposit base of Rs110,000 crore, and hold 30% market share of total banking transactions in Kerala, becoming the state’s second-biggest bank, next only to State Bank Group.

Partly controlled by the government, cooperatives in Kerala have a long history of shaping a society where almost everyone has access to institutional credit. They handle an estimated 70% of the state’s total agricultural credit, have a significant reserve of gold, and often hand out money to fuel regional development—for instance, they gave a Rs470 crore loan to build a metro service in Ernakulam district.

Tasked by the government, M.S. Sriram, a professor at the public policy department, Indian Institute of Management (IIM), Bengaluru, just developed a roadmap for the KCB project. Edited excerpts from a phone interview:

What is the potential for such a bank?

This could turn out to be a large people’s institution. Primary cooperatives (PCBs) together have a deposit of around Rs83,152 crore and a loan base of around Rs56,706 crore. So if you want to look at it from banking terms and how the public sector banks calculate their business, the total business size is around Rs1,40,000 crore at the primary level and then the District Cooperative Banks (DCBs) have another Rs52,456 crore of deposits and Rs27,946 crore of loans.

Part of it will be overlapping, in the sense that the deposits that DCBs have are from the primaries and some of the loans given are also to the primaries. Our own estimate is if we net if off and treat it as an integrated structure, the structure would have possibly an overall business of Rs1,10,000 crore as deposits and about Rs70,000 crore of loans.

And also don’t forget the touch points. The cooperative system already has nearly an equal number of touchpoints as all the commercial banks put together—around 6,000 branches and offices of primary cooperatives and district cooperative bank branches. These will be fully leveraged to touch the customers.

What will be its USP?

If you are a member of the cooperative system at the primary level, then right now you are getting possibly savings, fixed deposit and loan services, but not many value-added services. Once the 15 institutions integrate into one unit, you will be able to get many more value-added services which means that you need not go to some other place for remittances, cards and other products.

What will be the challenges?

Huge, huge challenges. First, if they want to pull it out, they need to have a completely integrated, sophisticated technology backbone. Second, there is the issue of legacy staff. They have been doing business in a certain way and there’s a certain age profile of them as well. We do not see many retirements coming up in the next 10 years. But the staff are certainly not very young.

So the staff needs to be added or reduced?

I would not say reduced. The government has assured that there will be no retrenchment. They need to be re-trained and redeployed to adopt to modern banking. Some may be deployed in the tightened supervisory, audit or regulatory function.

Post demonetisation, there is a strong buzz that cooperative banks park a lot of black money in Kerala. This is not an image an emerging bank would want to have. Your comments.

None of the rural cooperatives were allowed to exchange old notes during demonetisation, citing either the status of technology or the status of management. Both these issues need to be addressed. We have recommended that in the run-up (to create Kerala Bank), their books need to be audited afresh. Second, if there are perceptions that there is a political capture, or state capture, or even a perception that they are not professionally run, it needs to be addressed, irrespective of what the fact is. Banks are institutions that people trust and perceptions are important.

We have also recommended setting up of a “Kerala State Financial Sector Regulatory Authority” which will act like a regulator for all financial institutions that fall under the purview of the state government that are non-regulated. This way the government can signal to the world that it is not a political capture and the bank is adequately insulated from political or state capture.

Will a consolidated bank be able to retain the existing ease to access for the layman?

While doing this exercise, we should not undermine the primary cooperatives. We have recommended that the new bank should under no circumstances be competing with the primary. Whenever the primary is ready to do business, the bank should just let go the business in favour of the primary. KCB will only do that business that the primary is unwilling to do, or unable to do. KCB will remain thin, it should be a coexistence and convergence of interests, and not conflict of interests.

Has this been experimented anywhere else?

Not in India. Some states already had a two-tier structure. Jharkhand is going through a restructuring exercise, but their situation is completely different. But worldover, there is a broad trend towards knocking off one layer in cooperative banks. But it has been a challenge everywhere. The Canadians in Quebec are consolidating their cooperative system and they took seven or eight years to knock off their middle tier. Rabo (Netherlands-based multinational cooperative bank), for instance, did it very quickly, in about a year and a half or two years, and they are having their pangs. Here, it has to cross several hoops. Once we start the process and get in-principle approval from the Reserve Bank of India, we could possibly do it in a period of 18 months.

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