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On
Revival Path
Better
days are ahead for the urban cooperative banks as state
governments join hands with the regulator to clear the mess
Finally,
there’s light at the end of the tunnel. The Gujarat
Task Force on cooperative banks, at its second meeting last
month decided to close down four unviable banks in the state.
The
Reserve Bank of India (RBI), which has so far recommended
liquidation of over 300 cooperative banks and stopped issuing
fresh licences for the past two years, would not have been
able to close down these four banks so easily but for a
major change in attitude on the part of the state governments
which have started acting responsibly in tackling the crisis
in the cooperative banking industry.
The
governments of at least three states – Andhra Pradesh,
Gujarat and Karnataka – have signed memorandums of
understandings (MoUs) with the RBI. Maharashtra has also
started negotiations with the RBI and is expected to sign
an MoU soon.
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RIGHT
SLOTS
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|
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No of banks
|
%
|
|
Grade I
|
807
|
43.1
|
|
Grade II
|
340
|
18.2
|
|
Grade III
|
497
|
26.5
|
|
Grade IV
|
228
|
12.2
|
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Total
|
1872
|
100
|
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These
four states along with Tamil Nadu account for 85%
of urban cooperative banks (UCB) in India. Maharashtra
tops the list with 633 banks and 4,232 branches followed
by Gujarat, Karnataka, Tamil Nadu and Andhra Pradesh.The
main problem is that most UCBs are highly politicised
and the situation has been further complicated by
the system of dual control.
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The
RBI has the authority to issue and cancel licences to UCBs,
but the state government (where the bank is located) is
responsible for its audit, appointment of CEO and suppression
of its board.
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CO-OPERATIVE
EFFORT
|
(* in
Rs cr)
|
|
|
No of banks
|
No of branches
|
Deposits*
|
% share
|
Advances*
|
% share
|
|
Maharashtra
|
633
|
4232
|
65,398.00
|
62.60
|
42,194.00
|
62.00
|
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Gujarat
|
308
|
580
|
14,513.00
|
13.90
|
9,053.00
|
13.00
|
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Tamilnadu
|
133
|
180
|
3,022.00
|
2.90
|
2,101.00
|
3.10
|
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Andhra
Pradesh
|
127
|
317
|
2,642.00
|
2.50
|
3,206.00
|
4.70
|
|
Karnataka
|
296
|
729
|
7,887.00
|
7.50
|
5,007.00
|
7.40
|
|
All India
|
1872
|
6990
|
104,482.00
|
-
|
65,005.00
|
-
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In
other words, the regulation is the RBI’s headache,
while the administrative control comes under the Registrar
of Cooperative Societies (RCS). Often the RBI may want to
supersede the board, but the RCS may not play ball and vice-versa.
With the signing of the MoUs, this complication will be
over, and the RBI and the state governments can put up a
coordinated effort.
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Just
how deep the crisis is can be judged best from the
outflow of funds from the Deposit Insurance and Credit
Guarantee Corporation (DICGC).
Individual
bank deposits of up to Rs 1 lakh are insured with
the DICGC, which is paid to depositors when banks
fold up.
Till
2000-01, the total money paid by the DICGC was Rs
262 crore with UCB depositors accounting for a major
chunk.
By
2003-04, this rose to Rs 1,044 crore and by 2004-05
to Rs 1,484 crore. In the last two years, all the
outflows have been to cooperative banks only.
|
Health
check |
- Over
300 urban cooperative banks liquidated
-
Another 228 will have to call it a day soon
-
Rs 1,044 crore spent on covering depositors of failed
banks in 2004
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In 2005, the amount rose to Rs 1,484 cr
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The total deposits of urban cooperative banks is
Rs 1,04,482 crore, while advances are Rs 68,005
crore
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About
39 per cent, or around 725 of the 1,872-odd UCBs in the
country are in a stressed to very stressed condition, in
parameters like capital adequacy and non-performing assets
(NPAs) and they are alive only through a life-support system.
All of them will have to be liquidated sooner than later.
Another 340 can carry on business with some extensions of
deadlines for capital adequacy while a little over 800,
or 43 per cent, of the UCB universe is in the pink of health.
Five
years after its burial, the ghost of the Madhavpura Merchantile
Cooperative Bank of Ahmedabad continues to haunt over 210
UCBs. These banks had parked around Rs 200 crore deposits
with Madhavpura, but with the latter folding up, they will
not get their money back.
In
banking parlance, UCBs’ exposure to Madhavpura (in
the form of deposits) has become bad and they will need
to make provisions for this in their balance sheets. The
problem is that around 100 of the affected cooperative banks
are in no position to make such provisions. However, with
the signing of the MoUs and joint efforts by the regulator
and the state governments, the impact will be far less than
what it would have been otherwise.
UCBs
play an important role as financial intermediaries in urban
and semi-urban areas, catering to the needs of the non-agricultural
sector, particularly small borrowers. The total deposit
liability of urban cooperative banks is Rs 1,04,482 crore,
while advances are Rs 68,005 crore.
With
the signing of the MoUs, the RBI has at last got some powers
to oversee the sector and the state governments now have
no choice but to act responsibly. Things will improve further,
once Tamil Nadu and Maharashtra sign on the dotted line.•
‘We
are encouraging M&As’
RBI
Deputy Governor V Leeladhar on the cooperative banking
sector
 On
revival of the urban cooperative banks
Urban cooperative banks (UCBs) with their huge customer
base are an important segment of the banking industry.
At the same time, our concern is protection of depositors’
interest in the wake of a number of weak entities
in the sector. Our strategy is to strengthen the sector.
One of the main problems has been the system of dual
control – while the RBI is the licensing authority,
the governance and day-to-day management of the UCBs
have been the state governments’ responsibility
(through registrar of cooperatives).
Due
to lack of proper coordination between the two regulators,
problems arise, which could be one of the reasons
for the delay in recognising the weak financial health
of some banks and taking appropriate remedial action.
Since bringing in the requisite legislative changes
to remove dual control was time-consuming, the RBI
has worked to sign memorandums of understanding (MoUs)
within the existing legal frame. It has established
a task force to coordinate, improve governance and
the financial health of UCBs in each state. The RBI
has prepared a medium-term framework for UCBs and
the final version would be ready soon.
On
introduction of prudential norms
We
have segregated UCBs into two categories – tier-I,
operating in one district with a deposit base up to
Rs 100 crore and tier-II, having branches spread over
more than one district and/or with a deposit base
of over Rs 100 crore. The 180-day delinquency norm
for identifying non-performing assets (NPAs) has been
restored for tier-I banks for a period of three years
commencing March 2005. Only those in tier-II will
have to adhere to regulations applicable to commercial
banks (90 day norms).
On
investment valuation
We
had allowed UCBs as a one-time measure to shift SLR
securities to the held to maturity category where
there is no need to mark the securities to market.
Though the shifting was to be done at the lower of
the acquisition cost/book value/market value and book
the loss due to depreciation immediately, the difference
was allowed to be amortised over a period not exceeding
five years in case of scheduled UCBs and over the
remaining period of the maturity of the security in
case of other UCBs.
On
grading of UCBs
The
grading by the RBI and RCS is based on different set
of parameters, and we are trying to synchronise the
audit rating models so that depositors get the correct
position. Some progressive states have already moved
in this direction.
On
mergers and acquisitions
The
RBI is encouraging consolidation through mergers and
acquisitions (M&As) in this sector. Strong UCBs
can take over weak banks and even two strong banks
could come together. The RBI panel takes just 15 days
to clear M&A proposals.
–
Abhijit Lele
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Click
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Business
Standard •
BANKING
ANNUAL •
November 2005
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