In 2000, Ahmedabad’s Madhavpura Mercantile Cooperative Bank went bust after stock broker Ketan Parekh used it to route money into stock market operations that didn’t really work out as planned. That landed another 210 urban cooperative banks that kept money with Madhavpura Mercantile in trouble and some of them had to be liquidated. The Deposit Insurance and Credit Guarantee Corp. (DICGC) that offers insurance cover to individual deposits up to Rs1 lakh had to pump in thousands of crores to rescue stranded depositors. Since then, the Reserve Bank of India (RBI) has launched a clean-up operation to revive the health of cooperative banks. It has merged many banks and liquidated many more. In a free-wheeling discussion with Mint, RBI deputy governor Usha Thorat, who oversees this sector, outlines the developments. Excerpts:
Mergers and acquisitions finally seem to have arrived in the cooperative banking sector. How many banks have merged and how many more mergers are on the cards?
Nineteen mergers have taken place thus far and nine more no-objection certificates have been issued—these mergers are yet to take place.
The DICGC has spent crores of rupees over the last few years to compensate depositors of cooperative banks. Is the worst over?
The DICGC paid Rs181 crore in 2004, Rs440 crore in 2005, Rs565 core in 2006 and Rs539 crore in 2007. The latest figures are unaudited. Since its inception, the corporation has released payment of claims to the extent of Rs2,299 crore up to 31 March 2007, in respect of 176 cooperative banks. The urban cooperative banks (UCBs) are unique in terms of their client mix and channels of credit delivery. They are organized with the objective of promoting thrift and self-help among the middle-class and lower middle-class population and providing credit facilities to people with small means in urban and semi-urban centres.
The UCB sector is characterized by a high degree of heterogeneity in terms of geographical spread, size, strength, levels of professionalism and performance of the banks. In terms of the legislative framework for UCBs, certain powers related to incorporation, registration, elections, management, merger and amalgamation, reconstruction and liquidation of these banks are vested in the Registrars of Cooperative Societies while RBI is entrusted with matters relating to interest rates, loan policies, investments, prudential norm, issue and cancellation of licences, etc.
The absence of clear-cut demarcation between the functions of state governments and RBI have been largely responsible for most of the difficulties in implementing regulatory measures. It also impedes effective supervision.
We are focusing on consultation and co-ordination among significant stakeholders—government, UCBs and RBI. We have signed a memorandum of understanding (MoU) with nine state governments. Following this, task forces for UCBs have been constituted in these nine states. These identify potentially viable and non-viable UCBs and suggest revival paths for the former and non-disruptive exit routes for the latter. The exit of non-viable banks could be through merger with stronger banks, conversion into societies, or, as a last resort, liquidation. New business opportunities are sought to be created by permitting eligible banks in states that have signed MoU to convert existing extension counters into full-fledged branches, open ATMs, distribute mutual fund products and maintain currency chests in their banks. Further, banks in such states are also now considered eligible to apply for becoming authorized dealers in foreign exchange.
Which states have signed the MoUs so far?
Gujarat, Andhra Pradesh, Karnataka, Madhya Pradesh, Uttarakhand, Rajasthan, Chhattisgarh, Goa and Maharashtra, which collectively account for 1,428 out of 1,853 banks as on March 2006 , 77% of total number of UCBs and 64% of total deposits of the sector. An MoU has also been signed between RBI and the ministry of agriculture, Government of India, in respect of multi-state UCBs that account for 25.5% of deposits of the sector (multi-state cooperative banks are those that are present in more than one state.)
So, overall, a total of 78.9% of UCBs accounting for 89.5% of total deposits are covered under the MoUs. The MoUs are not to make the states accountable for running the banks. They are a way of addressing the problem of dual control?by?establishing a mechanism for coordination among significant stakeholders.
You have stopped giving fresh licences to new banks and are also busy liquidating weak banks...
It has been RBI’s endeavour to ensure soundness of the urban cooperative banking sector in order to protect the interests of the depositors. Between May 1993, when we revised the licensing policy, and June 2001, 823 licences were issued and it was observed that 31% of the newly licensed UCBs became financially unsound within a short time.
As at the end of December 2003, out of 2,104 UCBs, 176 banks were under liquidation and 636 banks had turned sick.
RBI would like to review the existing policy of licensing of new UCBs once the health of the urban cooperative banking sector improves and the sector regains the confidence of the public.
What is the latest status?
At the end of March 2006, 226 UCBs were under liquidation. The total number of UCBs, excluding those under liquidation, stood at 1,853. Of these, 677 were classified as weak.
It looks like you are out to kill the sector.
There is no intention to kill the sector. On the other hand, we recognize that urban cooperative banks represent community-based banking and render useful banking services to the local communities. In particular, they meet credit needs of small businessmen and small borrowers.
The objective of the Reserve Bank is to ensure that UCBs are financially viable while serving the needs of its members/customers. RBI has a system of classifying UCBs into four grades based on an on site inspection exercise.
While Grade I banks are considered sound and Grade II banks have minor deficiencies, the Grade III and Grade IV categories signify weakness and sickness, respectively.
In three states, Andhra Pradesh, Gujarat and Karnataka, more and more banks are being upgraded. Simultaneo-usly there is a consistent decline in the number of weak and sick banks. We believe that some of the cooperative banks are becoming technology savvy and are ready to give the commercial banks a run for their money.
Some of the large co-operative banks have deployed sophisticated IT systems. Several banks have installed ATMs and have implemented core-banking solutions. Some banks even have a data centre that some commercial banks do not. However, at the other end of the spectrum are some small cooperative banks that do not yet have PCs and therefore, there is still a long way to go for the sector, as a whole.