Letter to BS: How to stem the rot that plagues Cooperative banks

Cooperative banks were formed and encouraged to facilitate financial inclusion. While they fulfil this role partially, they are governed by elected members of borrowers who may have limited vision of furthering their own business interest. The Reserve Bank of India’s (RBI) role as a regulator comes in with the intention of safeguarding public deposits as Cooperative banks are allowed to mobilise public deposit. Its supervision lends credibility to Cooperative banks and its absence brings a dent in the safety image.

Cooperative banks thrive in the ecosystem of small business, traders, petty service providers. They have also carved themselves a niche of local stronghold and knowledge, personalised customer-friendly services, face-to-face banking in an increasingly fin-tech world. So how can one mitigate the pain of loss of public deposits in the face of practical realities? One, restrict the size. The larger a Cooperative bank, the larger the risk of public loss. The RBI may decide a threshold business after crossing which the Cooperative bank has to mandatorily convert itself to a commercial bank or small finance bank. Alternatively, it may be given the option of receding back to non-scheduled status that will attract limited RBI supervision and also restrict it from accepting public deposits.

Two, restrict senior citizens' deposits. Senior citizens are a vulnerable section who have no means of recouping lost capital and therefore, they should be prevented from placing deposits over Rs 1 lakh with Cooperative banks. Three, have representation of depositors in the board of directors. Cooperative banks, by their founding principles, are largely borrower’s banks. The borrowers hold membership and are hence represented in the board by elected members. To ensure depositors representation on the board, depositors holding fixed term deposit over Rs 1 lakh should be made regular members thereby giving them an opportunity for representation on the board. Four, Cooperative banks approaching the threshold limit of business mix must compulsorily adopt core banking solutions that cannot be manipulated. It will also prepare them for stepping into a larger role of a commercial bank.

Madhuri Argade, via email

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