Co-operative banks: Is dual regulation the problem? (What to do with wrongly managed Co-op banks)

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 Co-operative banks: Is dual regulation the problem? (What to do with wrongly managed Co-op banks)

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• FIRST PERSPECTIVE - Dr Usha Thorat

1. Co-operative banks came under RBI in 1966, but dual regulation problem began, as Registrar of Cooperative Societies (RCS) controls mgmt. elections and auditing.
2. RBI brought them under Banking Regulation Act & controlled licesing, cash reserve, SLR and CAR, and inspection.
3. Madhavpura Mercantile Co-op Bank scam became huge due to Ketan Parekh, and as it provided liquidity to many other coop banks. Its collapse would've been dramatic. So, a package was worked out that paid out moneys (to depositors) in a staggered manner.
4. After that, RBI issued new guidelines in 2004-05, and stopped all new branch licences. 
5. All states entered into a MoA (memorandum of agreement) with the RBI committing to professional audits. A Task Force was set up to clean things up.
6. Major overhaul was done, and by 2017-18, only 4 Urban Coop Banks had CAR below regulatory threshold.
7. The PMC bank issue is a clear scam – one entity got most of the loans, masked by a huge number of fake accounts. Fraud reports were prepared. It's not a regulatory problem.
8. H Malegam Committee recommended that a Board of Management be elected in addition to Board of Directors, which would control  real operations. (as Directors are elected by borrowers mostly, not depositors)
9. This 'fit and proper management' rule must be applied immediately.
10. Most of the cooperative banks are doing a good job of meeting needs of small businesses and rural credit too. Of the 1500, only 50 to 60 are large. 
11. RBI has given the option to UCBs (Urban Coop Banks) to convert to Small Finance Banks. Those with > Rs.50 cr capital and 15% capital adequacy can go for it. 
12. It will help UCBs as raising capital is their biggest hurdle. They may then issue shares at a premium (and raise capital).
13. What happened in PMC Bank was a criminal act, that can happen anywhere. All directors are liable, though may or may not be involved.
14. Deposits in one UCB of other UCBs may be reviewed from here on.

• SECOND PERSPECTIVE - S Mahendra Dev

1. Co-operative institutions, in general, play a big role in credit delivery to unbanked citizens of India. They grow financial inclusion.
2. As technology has grown, their role has diminished.
3. Even the UCBs are competing with (i) payment banks, (ii) small finance banks, (iii) NBFCs etc.
4. India has 1500 UCBs and 96000 rural banks and credit societies.
5. Rural coop societies play a role in agriculture, though the volume is going down.
6. PMC faced three problems - (1) financial irregularities, (2) failure of internal controls, and (3) exposure under-reporting. {it had extended 73% of assets to one firm - HDIL}
7. Dual control between RBI and RCS is a problem, for sure. States get to play a role, and politics enters.
8. Merge and convert some of the UCBs into Small Finance Banks. The RBI Committee (R. Gandhi) had recommended it.
9. Benefits would be wider product range, and pan-India presence.
10. Many deposit money in UCBs due to higher interest rates. India now needs confidence-building measures for entire financial sector, not just UCBs.

• Summary : Two perspectives on the whys and hows of the scandal at the Punjab and Maharashtra Cooperative Bank (PMC Bank), one of the largest UCBs (urban cooperative banks)

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