ooperative Bank scams in India is on rise and it gives an insight into the various scams and malpractices in cooperative banks and their implications on the Indian financial sector. The case begins with a history of cooperative banking in India. Cooperative banks have once again come under the scanner with Karad Janata Sahakari Bank. RBI has specified that the bank will also not be able to grant or renew any loans and advances, make any investments, incur any liability including borrowed funds and acceptance of fresh deposits, disburse or agree to disburse any payment and sell, transfer or otherwise dispose any of its properties or assets, without its approval. The investors are cheated and their funds are stuck. Bank only gives verbal assurance but no one wants to do justice to depositors. Rajesh Patil, the chairman of the bank assured that they would soon hold an auction to sell its assets worth Rs 70 crore. They have a share capital of Rs 850 crore. Since bank’s business had grown beyond expectations and the plans for the next few years suggest that the development will continue. Their attempt is to take corrective measures and take their bank from C to A category.
It may be recalled that on July 16, the RBI had imposed a penalty of Rs 5 lakh on the bank for violating guidelines on shifting of a branch without approval. The bank had violated RBI instructions by shifting its Sangli market yard branch from 94/A, Market Yard, Sangli-416416 to Rajratna Heights, Miraj Sangli Service Road, Chandani Chowk Corner, Sangali-416416. This involved change in municipal ward number 35 to 50, for which no prior permission was obtained from RBI.
However, the RBI restrictions have fixed its depositors in a fix since their money is locked up in the bank. The bank set up on October 22, 1962, has 29 branches and its area of operations includes Mumbai, Navi Mumbai, Satara, Sangli, Pune, Solapur and Kolhapur. It offers all type of loans, including home and education loans, on attractive interest rates, with a minimum processing fee.
Apart from FDs, what caught the attention of sleuths is the issuance of a series of demand drafts of Rs 49,900 or around, without any payee’s name written on the face of it, according to a senior I-T official. These DDs, most of which are purchased by textile traders, as per the initial information available, get exchanged during the purchase of goods, which then get circulated within their fraternity until the last holder encash the draft a day before the three-month expiry date.
The department believes dubious FD practices are not limited to cooperative banks. A probe would reveal that most foreign banks, private banks and even large public sector banks have been indulging in gross misspelling at one end, while dodgy practices to help powerful politicians and launder black money at the other end.
In January, this year, the RBI had directed all primary (urban) cooperative banks to set up a special committee for monitoring and following up cases of frauds of Rs 1 crore and above. In the notification, it said that there was a need for paying attention to monitoring frauds at the highest level, ensuring staff accountability, and reviewing the efficacy of remedial actions taken to prevent recurrence of frauds. It was observed that there has been a delay in various aspects of frauds such as detection, reporting to regulatory and enforcement agencies and action against the perpetrators of the frauds that was causing concern.
While attention is focused on the mammoth, bad loans of public sector banks (PSBs), one of the worst managed segments of Indian banking continues to fly below the radar. Cooperative banks, under the dual regulation of RBI and the Registrar of Cooperatives (RoC) and systematically mismanaged by politicians and political parties, are a source of big losses to innocent depositors, mainly senior citizens, who are attracted by the higher interest pay on term deposits.
Cooperative banks fail with scandalous regularity and end up duping depositors who often get just 10-15 per cent of their money after a decade-long liquidation process. Often, they only get Rs1 lakh each through the Deposit Insurance Guarantee Corporation (DIGC). In the past 30 years, 165 such banks have been shut down in Maharashtra. In most of the cases, RBI’s role as a regulator is highly callous and questionable. In May 2012, RBI superseded the bank’s four-month- old board and appointed an administrator with no powers to conduct banking operations. It could only pay salaries, recover loans and pay depositors in pre-decided driblets.
Mumbai District Central Cooperative Bank is another bank that made news for the wrong reasons. Mumbai Mirror has published detailed reports about how this bank, which has Rs 4,300 crore of deposits, plans to write off over Rs 250 crore borrowed by powerful, politically-connected sugar mill owners. The bank’s management is defiantly insisting that it is only cleaning up the books by purging irrecoverable loans. Government rules compel over 18,000 cooperative housing societies to deposit their sinking funds into such banks.
While CKP Bank plans to go to court, RBI’s tardy and disinterested supervision is blamed for the problems of Bombay Mercantile Cooperative Bank too. This bank also has stringent constraints imposed on its operations by RBI, while a new management, which has been voted in, just a few months ago, is spending more time battling the ousted board. RBI watches this in silence. But, as we have seen with CKP Bank, appointing an administrator would only be a death-knell.
Ironically, cooperative banks and regional rural banks ought to have ensured financial inclusion over the decades; instead, they are political tools. Worst scenario is, the burden of financial inclusion has been passed on to large nationalised banks, which are themselves reeling from over Rs 8 lakh crore of bad loans to industry and need a frequent transfusion of capital by the exchequer. Apart from appointing the Bank Board Bureau to clean up the appointment process for bank directors, the government has made no move to make the top management at banks more accountable or give it more autonomy.
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