Road ahead for co-operative banks

Distressed depositors of several Urban Co-operative Banks (UCBs), including Punjab and Maharashtra Co-operative (PMC) Bank, Sri Guru Raghavendra Sahakara Bank, Rupee Co-operative Bank and Kapol Co-operative Bank, have been at their wits end.

With their hard-earned money stuck in these banks, which got into trouble for various reasons – deterioration in financial position, irregularities and deficiency in governance – the depositors have been desperately looking to the banking regulator for succour.

But the wait to get their money back is becoming excruciatingly long and arduous as the Reserve Bank of India (RBI) keeps extending its directions to these banks (ironically seeking to protect depositors’ interest) by three to six months. Depositors of Mumbai-based PMC Bank and Bengaluru-based Sri Guru Raghavendra Sahakara Bank have taken to the streets in the last one year or so amid the raging pandemic to draw the attention of the authorities to get their money back.

They have moved courts, written to the RBI Governor, Finance Minister, and Prime Minister’s Office. However, the uncertainty regarding the fate of their deposits, persists.

Faster resolution agenda

In its 2019-20 Annual Report, released on August 25, 2020, the RBI set for itself an agenda for “faster resolution of weak UCBs which are under All-Inclusive Directions” in 2020-21.

Also read: Tax query: What’s the taxability of interest on FD credited by a co-operative bank?

So, in a way, the clock is ticking for the regulator as it has to disclose the ‘implementation status’ with respect to the aforementioned agenda in its 2020-21 Annual Report, which is likely to be released in May-June 2021.

With the Banking Regulation (Amendment) Act 2020 handing the RBI powers to regulate and supervise UCBs on par with commercial banks, aggrieved depositors are hoping that the central bank will exercise the newly conferred powers to tackle some of the ills afflicting UCBs. Under the Act, the RBI now has powers relating to voluntary/compulsory amalgamation and preparation of scheme of reconstruction .

Once a UCB is placed under direction, deposit withdrawals are severely curtailed, acceptance of fresh deposits is prohibited, and grant or renewal any loans and advances are disallowed, among others.

‘No remedial measures’

Jyotindra Mehta, President, National Federation of UCBs and Credit Societies, alleged that while the government and the RBI take swift and timely action when public sector and private sector banks get into trouble, no remedial measures are initiated when UCBs find themselves in a similar predicament.

“On the contrary, penalties and directions are heaped on such banks in the name of safeguarding depositors’ interest,” he said, adding that this only hastens the deterioration of these banks’ health, paving the way for cancellation of licence, and resulting in a section of the depositors losing their deposits.

Mehta emphasised the need for a time-bound resolution of UCBs that can help restore depositors’ trust in these banks. Financial soundness of the UCB sector has been a matter of concern for the RBI over the last few years. According to the RBI’s latest Report on Trend and Progress of Banking, since April 1, 2015, 52 UCBs (till December-end 2020) have been placed under Directions.

As of March-end 2020, there were 1,539 UCBs operating in the country, with total business (deposits₹5,01,208 crore, plus advances ₹3,05,453 crore) aggregating ₹8,06,661 crore. Of the total claims settled by the Deposit Insurance and Credit Guarantee Corporation (DICGC) since inception, around 94.3 per cent of claims pertained to co-operative banks that were liquidated, amalgamatedor restructured, the report said.

UCBs’ deposit and loan growth

The RBI observed that as UCBs faced competition from small finance banks (SFBs) and non-banking financial companies (NBFCs) in recent years, and also had to reaffirm their credibility to depositors, their balance sheet growth has moderated.

It underscored that the recent collapse of a large UCB (PMC Bank) due to fraud and deficient corporate governance has dented public confidence in UCBs. Since 2017-18, the deposit deceleration in UCBs was starker than in scheduled commercial banks (SCBs), pointing to the difficulties faced by the former in raising resources, according to the RBI. In FY20, UCBs’ deposit growth was at 3.50 per cent year-on-year (y-o-y) (6.1 per cent in FY19). SCBs recorded a 8.44 per cent growth in deposits in FY20 vis-a-vis 9.26 per cent in the preceding year. Supervisory data available with the RBI suggest continuation of deceleration well into 2020-21, the report said.

Regulator tightening the screws

The central bank has tightened the screws on UCBs. However, it has also dangled sort of a carrot in front of them – conversion into a small finance bank (SFB) with lower capital requirement to begin with. UCBs have to comply with priority sector lending (PSL) target on par with SFBs –75 per cent of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher–by March 31, 2024.

Further, these banks have to ensure that 50 per cent of loans comprise loans of up to ₹25 lakh or 0.2 per cent of Tier I capital, whichever is higher, subject to a maximum of ₹1 crore per borrower or party by March 31, 2024.

Also read: Govt to soon initiate Bank Investment Company

UCBs with deposits of ₹100 crore and above have been asked to constitute Board of Management (BoM), in addition to the Board of Directors (BoD). Following the amendment to the BR Act, Mehta said the requirement of constituting a BoM becomes redundant as BoD is now under complete RBI control.

Referring to the RBI dropping enough hints about its preference for the larger UCBs to get converted into SFBs/commercial banks, the NAFCUB President wants the central bank to abandon its push for UCBs to become private banks in view of the full regulatory control it now has over co-operative banks.

In this regard, the NAFCUB is of the view that changes in regulations should be made taking the UCB sector into confidence and without diluting their co-operative character and democratic functioning.