The Reserve Bank of India introduces certain measures whenever a bank collapses. But the kneejerk reactions cannot repair the damage already done. Recently, about a dozen depositors of the Punjab and Maharashtra Cooperative Bank (PMC) died of shock in the aftermath of the bank’s failure. The tragedy denotes the enormity of the damage. Nor could the RBI’s prescriptions target the primary factors behind the crisis to guard against recurrence. The steps that it took as a sequel to the Madhavpura Mercantile Cooperative Bank (MMC) failure in 2001 could not stop further catastrophes.

The number of Urban Cooperative Banks (UCBs) dropped from 1,926 in 2005 to 1,551 by 2018, which signifies that the purported remedies were ineffective. Redirecting the functioning of urban cooperatives to their objectives, learning lessons from the MMC failure, would have pre-empted the PMC debacle. All the regulations and damagecontrol measures, howsoever stringent, cannot be of any use as long as the UCBs are allowed to mobilize the public deposits. The RBI, having allowed such operations that are beyond the cooperatives’ purview, cannot absolve itself later of the responsibility of protecting the depositors, by simply putting in place a ‘strong regulatory framework’ and limiting depositors’ relief to a maximum Rs one lakh from the Deposits and Credit Guarantee Corporation of India.

PMC had apparently followed all the regulations and had even posed to be a robust banking institution, a role-model for other banks. The Urban Cooperative Bank, started in 1984 as a single branch bank in Mumbai, later became a multi-state bank with 137 branches across seven states ~ Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh. It is one of the country’s top ten cooperative banks. It maintained a capital adequacy ratio of 12.62 per cent, more than RBI’s fixed 9 per cent. It has a high deposit base of Rs.11,617 crore and outstanding loans of Rs.8,383 crore as of March 2019 and earned a net profit of about Rs.100 crore for 2018-19.

It has shown a low NPA, lower than the commercial banks; its Gross NPAs were only 3.67 per cent and net NPAs (obtained after deducting the provisions set aside for bad loans from the Gross NPA) were 2.19 per cent. Auditors gave an ‘A’ rating to this bank. But all the dazzle of the PMC was sheer window dressing. This came to the fore in the recent RBI inspection following an insider tip-off. More than 70 per cent of the bank’s advances were actually NPAs. The bank has accommodated one single group, the promoters of HDIL (Housing Development and Infrastructure Ltd) to the tune of a huge sum of Rs.4,635.62 crore. It helped the swindler through 21,049 fictitious accounts.

The depositors were shocked when RBI on September 24 issued a notification restricting their withdrawals to Rs 1,000 for six months; of course, the limit was gradually enhanced to Rs 50,000 from November 5. They were perplexed how the UCB controlled by the RBI and the Government of India through the Central Registrar of Cooperative Societies could indulge in such a mammoth fraud drawing wool on their eyes. People can’t be blamed for selecting the wrong bank. It has become just impossible for them to know which type of banking institution among the myriad types around them is safe and which is not; they trust the control mechanism of the RBI and deposit their hardearned money in their convenient bank.

At one level, there has been a valid complaint that the number of commercial bank offices in the country, 1,45,871( June 2019 figure) are too few to meet the needs of a country with a huge population of 135 crore. That the share of rural branches in total has come down from 58.20 per cent in 1992 to 35.43 per cent now, is another story. At another level, there are many institutions, which include SBI and its associates (with 22,033 branches), nationalised banks(65,493), foreign banks (301), regional rural banks (21,835), local area banks(93), private sector banks (32,083), small finance banks (3,238) and payment banks (795). All these are commercial banks. The cooperative sector has another 98,163 branches.

Of them, 1,551 are urban cooperatives comprising two types: scheduled UCBs (54) and Non-Scheduled UCBs (1,497). The remaining 96,612 are rural cooperatives consisting of Primary Agricultural Credit Societies or PACS (95,595), State Cooperative Banks (33), District Central Coop Banks (370), State Cooperative Agriculture and Rural Development Banks (13) and Primary Cooperative Agriculture and Rural Development Banks (601). RBI places several restrictions on the banks to protect the depositors’ money. It wants banks to maintain a Statutory Liquidity Ratio (SLR) ~ in other words, to set aside a portion of their deposits as cash, cash equivalent and in government and other approved securities. The SLR at present is 18.5 per cent.

In 1990, it was as high as 38.5 per cent. RBI can raise it to a maximum of 40 per cent. Similarly, it wants the banks to deposit another sum under Cash Reserve Ratio (CRR) which at present stands at four per cent; at its maximum it was 15 per cent in 1991. There are no floor or ceiling rate CRR restrictions now. The RBI assesses the banks’ performance through CAMELS (Capital Adequacy, Asset quality, Management, Earnings, Liquidity and Systems and controls). In other words, it expects banks to have not less than a certain minimum of capital; fixes the ideal limit for it in tune with Basel (of the Committee on Banking Supervision at Basel in Switzerland) norms, at times, higher than the Basel limit.

It wants the banks to follow strict lending norms and recover the loans as scheduled. It expects bank managements to be efficient, with proper systems and controls in place. It wants to avoid leakages in earnings and to maintain optimum liquidity to meet the customers’ requirements. The RBI’s control with all these restrictions encourages people to deposit their money in banks with full confidence in terms of safety. The public deposits in the commercial banks add up to Rs.125,73,772 crore (equal to about 66 per cent of the GDP) by the end 2018-19. As for the cooperative sector, the rural cooperatives had Rs.5.72 lakh crore deposits by end- March 2017 (there is a one-year lag in RBI’s compilation) and the Rs. 4.56 lakh crore by the end of 2018 financial year.

The failure of the PMC raises the question on the need for UCBs doing deposit business. The goal of the cooperative sector ever since the first-ever cooperative, a group of 28 weavers started in 1844 in Rochdale, England, is to organise the collectives for the mutual benefit of the members, not collection of deposits from non-members. Unfortunately, the cooperative banks including urban cooperative banks, are engaged in the deposits business with RBI’s permission. The fraud-hit PMC bank had 5,1601 members by March 2019, whereas it has collected deposits from 16 lakh depositors who are not its members. Since RBI is conscious of the safety of public deposits, it doesn’t allow easy entry into the banking business.

So, some unscrupulous persons seek an easy backdoor entry into banking ~ first by organizing an urban cooperative and then converting it into a UCB and luring the government with offers of financial inclusion and improving the poor branch/population ratio. The fraudsters in control of the UCBs management are skilled enough to make their controllers and others believe that they adhere to all norms of RBI. The audits and inspections including those of the RBI could not prevent the mischief as the failed UCBs have clearly shown; things come to the fore after considerable damage.

So, the RBI should introspect without any hesitation and review the prudence in allowing the cooperatives to do business in deposits , and also examine the possibility of working out a foolproof method, over and above the existing norms, to prevent fraud. It is the responsibility of the Reserve Bank of India and the government to fully protect the depositors and to ensure the immediate refund of the entire money of the depositors. The RBI has never cautioned the people against depositing money in the UCBs. So, it has the duty to go to their rescue when the UCB or the bank it regulates fails.

(The writer is a Development Economist and commentator on Economic and Social Affairs)