Amanath Co-operative Bank Ltd, Karnataka’s first scheduled urban co-operative bank, is being taken over by public sector Canara Bank.
Amanath Co-operative Bank’s operations were suspended on 6 April 2013 when the Reserve Bank of India (RBI) decided that the bank’s 272,000 depositors would be at risk if it continued operations. After a lot of wrangling, Canara Bank agreed to take over Amanath Co-operative Bank. Typically, in such a rescue act, the stronger bank suffers some losses and the banking regulator looks the other way. This time, while clearing the merger scheme, RBI stipulated that the loss incurred by Amanath should not be transferred to Canara Bank.
The only way this loss could be made up is by making Amanath Co-operative Bank’s depositors sacrifice 18% of their deposits. Indeed, up to ₹ 1 lakh deposit enjoys insurance cover and the 18% haircut would be applicable to the amount over and above ₹ 1 lakh.
This is a classic example of bail-in before a bail-out. Typically though bail-in refers to bondholders forfeiting part of their investment in a bank before taxpayers are called upon to bail it out. In this case, the depositors are being made to sacrifice to save the bank and the rescuer, Canara Bank, will not have to bear any loss.
Many Indian cooperative banks have gone bust in the past and many more will probably go bust in future but this is the first instance where the banking regulator has forced the depositors to make a sacrifice. Protecting depositors has all along been the unstated policy in a nation where about two-third of the adult population does not have access to formal banking services.
Will this be the norm for all future mergers of cooperative banks? Before we look for an answer, let’s trace Amanath Co-operative Bank’s history first. Mumtaz Ahmed Khan and K.Rahman Khan founded Amanath Co-operative Bank in January 1977; by 2000 the bank got the status of Karnataka’s first scheduled urban cooperative bank and the largest urban cooperative bank in the southern state. With growth, like in many other cooperative banks, Amanath Co-operative Bank had its problems of governance. For the first time in November 2009, a Bangalore paper had reported that the bank’s top brass—prominent community leaders—were accused of swindling ₹ 300 crore. Both the state government as well as the banking regulator had swung into action and by October 2013 it was decided that Amanath Bank Co-operative Bank would be merged with Canara Bank.
The merger proposal was discussed at a special meeting of the Amanath board and the high court was informed of the decision accordingly. However, former Union minister C.K. Jaffer Sharief and a few others had filed a petition challenging the merger of Amanath Co-operative Bank with Canara Bank; they also sought a Central Bureau of Investigation probe into the issue. The Karnataka State Minorities Commission had also filed a complaint with the Lokayukta, or anti-corruption ombudsman, seeking a probe into the ₹ 300 crore scam. Upset with the haircut proposal, the depositors’ association too filed a petition.
The cooperative banking industry, which has gone through a lot of turmoil, is a cesspool of politics. The cooperative movement in India started with the enactment of Co-operative Societies Act in 1904. In the same year, in south India, the nation’s first co-operative bank—Conjeevaram Urban Co-operative Bank—was set up to cater to the needs of small businessmen as an alternative to moneylenders. A banking crisis in 1913-14 which saw the collapse of 57 joint stock banks led to a flight of deposits from joint stock banks to urban cooperative banks. In 1966 when the Banking Regulation Act was made applicable to urban co-operative banks, there were about 1,100 of them with deposits and advances of ₹ 167 crore and ₹ 153 crore, respectively. The next four decades saw phenomenal growth with their deposits rising to ₹ 1.12 trillion and advances to over ₹ 70,000 crore. With the business growth, the politicization of the sector also rose even though the urban co-operative banks are regulated and supervised by both the state governments, through the Registrars of Co-operative Societies, and the Reserve Bank of India. In 2005, the banking regulator stopped issuing fresh licences to the urban cooperative banks and since than it has cancelled the licences of many.
In the case of Amanath Co-operative Bank, had the depositors not been asked to bear the brunt of the losses, Canara Bank would have ended up paying the price for the merger but that would have been unfair to the stakeholders in the state-run bank. At the same time, if the depositors are expected to bear the risk for any bank’s failure, shouldn’t RBI make mandatory for all banks getting their deposits rated and warn the depositors against keeping money in weak banks?
Bank deposits are the easiest financial product for all classes of public and generally the most risk-averse people keep their money in banks’ vaults. They are not equipped to understand all kinds of risks that banks take. Mutual funds are a riskier asset class and the market regulator now mandates that each mutual fund scheme be colour-coded to indicate the level of risks even though the investors in this asset class are far more investment-savvy. Shouldn’t RBI too put in a place a system to communicate to public about relative standing of various banks to explain the risk that the depositors are undertaking while keeping their money with banks?
Also, it is high time the insurance cover on deposits was raised. Set up in 1961, the Deposit Insurance and Credit Guarantee Corp initially offered cover to ₹ 1,500 per person. It was raised to ₹ 5,000 in January 1968, ₹ 10,000 in April 1970, ₹ 20,000 in January 1976, ₹ 30,000 in July 1980 and ₹ 1 lakh from May 1993. After adjusting for inflation, the cover offers peanuts to depositors.
Tamal Bandyopadhyay, consulting editor of Mint, is advisor to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to email@example.com