Ucbs In A Fix Over State, Rbi Gilt Diktat

Urban cooperative banks (UCBs) in Maharashtra are confused following contradictory directives recently issued by the Reserve Bank of India (RBI) and the state government pertaining to transactions in government securities.

The directives once again bring to the fore the issue of dual control exercised by the RBI and the state (via the office of the commissioner and registrar of co-operative societies) even as seven cooperative banks in Maharashtra have been duped by unscrupulous brokers of around Rs 300 crore.

While the central bank has directed the urban banks to follow its 'strict instructions' should they deal with registered brokers to buy and sell government securities, the state has barred banks from dealing with brokers altogether.

"We are all at sea following the confusing directives. Whose instructions are we to follow - the RBI's or the State's? Now can we deal with the brokers or not?" wondered a senior co-operative banker.

"First, the RBI, in its capacity as the banking regulator, issues 'do's and dont's' to UCBs in late April on transactions in gilts. The central bank advises the UCBs to exercise utmost caution in their dealings with the brokers. Next, the state government, via a government resolution (GR) dated May 22, altogether bans the banks from dealing with brokers for purchase/sale of gilts," he pointed out.

He averred that the state should not have issued the GR when the RBI had already done the needful in what is essentially a banking domain.

"A marketable lot in government securities market is of Rs 5 crore. Smaller UCBs make odd lot purchases (of less than Rs 5 crore) as their statutory liquidity ratio (SLR) is lower. As gilts transactions of many UCBs are small, primary dealers and big banks will not touch them. But registered brokers are in a position to meet the UCBs' odd-lot requirements as they are in the business of matching deals," said K Raj Kumar, general manager, Apex Co-operative Bank of Urban Banks of Maharashtra & Goa.

As UCBs are in a bind, the apex state-level co-operative banks could help them with their odd-lot gilt deals, he added.