The system wins
Says Sudhir Goel, former additional chief secretary (agriculture and marketing) of Maharashtra, “You need higher-quality people, and the BoM should have been implemented. Right now, you have a situation where coordination is messy in the case of multi-state UCBs.”
Gandhi — a former deputy governor of the RBI — sees it a bit differently, and points to the legal issues in the transition to a BoM: “Under the present legal framework, the BoD of a UCB performs both the executive and supervisory roles. It also has the responsibility to oversee the functioning of the UCB both as a cooperative society and a bank. The RBI’s draft guidelines in June 2018 proposed to make a provision in the UCBs’ bye-laws for setting up a BoM. This has yet to be given effect to as it is a complex issue. You need to get the states on board.”
Just how difficult this has proved to be, notes Gandhi, is the fact that even the B N Srikrishna’s Financial Services Legislative Reforms Commission (FSLRC, 2013) could not see it through. The FSLRC had gone to the extent of saying that with the implementation of a BoM, the banking arm of cooperative banks
must be granted the same privileges available to banks
under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002), and The Recovery of Debts Due to Banks and Financial Institutions Act (1993). “If this was simple enough, BoM would have been a reality,” added Gandhi.
Pramod Karnad, former managing director MSCB, is blunt: “Even the Federation (of UCBs) was against this BoM. There is a lobby against it. The thinking is it will duplicate what the BoD does.” An influential section of UCBs had written to the RBI’s Department of Cooperative Banking Regulation on July 19, 2018, vehemently opposing the BoM. Incidentally, the mess at PMC Bank
comes even as Satish Marathe sits on the board of the central bank as a part-time director; he had headed a landmark committee on UCBs in 1992.
There is yet another aspect which then deputy governor Usha Thorat had highlighted in November 2011 (‘Learning from Crises’) which has special relevance now.
The tightening of regulation over the banking and non-banking financial companies (NBFCs) sectors saw the gravitation of risk to the UCBs in the early 2000s. The stock market crash in 2002 triggered a payments problem and the nexus between Ketan Parekh and Madhavpura Mercantile Co-operative Bank led to the bank’s collapse. We are seeing a repeat with PMC Bank
— and in the backdrop is even tighter banking and NBFC regulation.
The idea of BoM may have to be brushed up again given the blowout at PMC Bank. It raises questions on the status of UCBs, and if some can morph into small finance
banks or commercial banks in future (See box: ‘Beyond PMC Bank: Points to ponder’).
If the grapevine is to believed, the central bank may fast-track the BoM, and relook at the pay-out system for depositors which gives a secondary status to large depositors (who are equally innocent as the smaller ones). And put in place a prompt corrective action framework for UCBs and tougher resolution mechanism within the current framework. And given that the Bharatiya Janata Party rules some key states, it may look to empower the central bank for implementing resolution without involving other regulators such as the state Registrars of Cooperative Societies, or the Central Registrar of Cooperative Societies (CRCS)
If all this is bad enough, what has been lost in the din over PMC Bank is the status of the Memorandum of Understanding (MoU) entered into with each state government, and the Task Force with representatives from central bank, state governments, national and state-level federations of UCBs in 2002. A similar agreement was also entered into with CRCS, the Centre in respect of UCBs under the Multi-state Co-operative Societies Act (2002). With the RBI saying it still does not have enough powers over UCBs, these MoUs may be worth only on paper.
Beyond PMC Bank: Points to ponder
No more about the aam aadmi: The business model of UCBs has changed. Nearly 60
per cent of the loans are in the largest ranges between Rs 1-5 crore and above Rs 5 crore. Hiking the withdrawal limit in PMC Bank will see over 70 per cent of depositors being able to withdraw the full amount parked by them. It means of the bank’s total deposits of Rs 11,600 crore, the bulk was made up of larger depositors lured by the higher interest rates offered. All of this goes against the very idea of UCBs
Time for a bigger say for depositors: The Y H Malegam committee was categorical that 50 per cent in value of deposits should be held by voting members to assure confidence of proper management among investors. The R Gandhi committee made mention of a feasible structure to put majority voting in the hands of contributors of funds
The road to small finance banks (SFBs):
UCBs undertake activities which SFBs as a class are not allowed to foray into. This means UCBs aspiring to morph into SFBs will have to wind down these businesses. Is this feasible?
Life beyond Rs 20,000 crore in business size: The R Gandhi committee was of the view that UCBs having total business of Rs 20,000 crore or more may be considered for conversion into commercial banks. But it also said they can continue life as UCBs with all their current businesses intact. Why should a UCB consider life as commercial bank (or even as an SFB) when they can chug along with the loophole of
Question mark over systemic data: The central bank says 36.17% of scheduled UCBs’ loans are in the largest ranges between Rs 1-5 crore and above Rs 5 crore. PMC Bank alone had an exposure to HDIL of Rs 6,500 crore, or 73% of its loan-book of Rs 8,880 crore. There is nothing to suggest that other UCBs may not have large exposures well above the range mentioned by the central bank. It is worrisome because RBI’s Report on Trend and Progress of Banking (2017-18) says the figure of 37.17 per cent was taken from the R Gandhi committee report which had compiled the data for FY15!
Inputs by Abhishek Waghmare