Reserve Bank tightens leash on cooperative lenders’ ops
PremiumLax corporate governance standards have been at the centre of India’s cooperative banks, with political influence and interference rampant
MUMBAI : The Reserve Bank of India (RBI) has significantly tightened the screws on cooperative banks, enforcing powers granted by legislative changes last year to clean up a system bogged down by corruption.
Lax corporate governance standards have been at the centre of India’s cooperative banks, with political influence and interference rampant.
A striking recent example is the financial scandal surrounding Punjab and Maharashtra Cooperative (PMC) Bank, where just one borrower, Housing Development and Infrastructure (HDIL), reportedly took away over 70% of the bank’s aggregate loans. The bank misrepresented the violation of prudential norms for a long time.
RBI is now enforcing a series of guidelines on the appointment of managing directors and chief risk officers while imposing fines for shortcomings and mandating stricter reporting norms. In the six months to 30 June, RBI imposed penalties on 51 cooperative banks compared with 23 in 2020 and just seven in 2019, according to data compiled by Mint.
These penalties are for a range of violations, from know-your-customer (KYC) norms to frauds in inoperative accounts. The fines in 2021 range from ₹5,000 on Walchandnagar Sahakari Bank Ltd, Pune, to ₹1.12 crore on Andhra Pradesh Mahesh Cooperative Urban Bank Ltd, Hyderabad.
Experts said these efforts may allow professional managers to run these banks, wresting control away from political overlords. “There were instances of mismanagement and lack of proper corporate governance in some of these banks. Before the amendment to the Banking Regulation Act last year, there was lack of clarity on the regulation and supervision of cooperative banks despite failures and frauds at their end," said Girish Rawat, partner, L&L Partners.
At the end of March 2020, there were 1,539 urban cooperative banks (UCB) and 97,006 rural cooperative banks, showed data from RBI. Concerns around the financial health of the two sectors are many: urban cooperative banks reported an aggregate return on assets and return of equity of -0.79% and -9.72%, respectively, in FY20.
“In the recent period, we have been taking measures to improve their governance structure, implement system-based asset classification norms, bring them into the central repository of information on large credits reporting infrastructure and under the supervisory action framework. Last month, we set up an expert committee to examine these issues and provide a road map for strengthening the UCB sector," RBI governor Shaktikanta Das said on 25 March.
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Historically, the problem arose from the dual control of these lenders by the central bank and state cooperative societies. Under the Constitution, these banks are a state subject, but during the mid-1960s, banking laws were made applicable to these lenders for RBI to exercise some control over them.
In September last year, the government notified the amended Banking Regulation Act, reducing the regulatory arbitrage between commercial banks and cooperative banks.
The effect of this change was visible in the central bank’s recent rescue of PMC Bank by allowing Centrum Financial Services and BharatPe to set up a small finance bank and later take over the cooperative bank.
On 25 June, RBI notified guidelines for appointments at these banks, insisting on only “fit and proper" managing directors and whole-time directors.
“The way I understand, most of the current heads of India’s cooperative banks might find them ineligible to continue as many may not satisfy the conditions stipulated by the Reserve Bank. Commercial failures do happen, but these banks must ensure that decisions are taken based on prudential guidelines, and that would lead to an improvement of the cooperative banking system," said Rawat.
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