Tax benefit to cooperatives should go

Return to societies from cooperative banks is almost double that from commercial banks

Recently, when the Finance Minister was asked about the mess in the PMC Co-operative Bank, she said that the Reserve Bank of India was responsible for regulating all banks, including cooperative banks. Of course, she said that a committee would be formed to look at changes in laws required to ensure such a mess doesn’t happen in the future. Even the Maharashtra chief minister made a televised promise that the depositors will not pay for this fiasco, and his hands were tied as the code of conduct was operational. Meanwhile, the number of deaths due to this mess has risen to five.  

The RBI, on its part, has raised the withdrawal limit raised to Rs 40,000, which will cover around 77 per cent all depositors (about 1.6 million). But for the balance approximately 400,000 depositors, their lives’ savings are still stuck. The insurance money from DICGC will take its own sweet time coming. 

How seriously is the government taking this matter? When the Satyam fraud shook the markets, the government appointed a three-member board headed by HDFC Chairman Deepak Parekh. When the IL&FS issue cropped up, it appointed a board headed by Uday Kotak, managing director, Kotak Mahindra Bank. It also included other marquee members like Tech Mahindra head Vineet Nayyar. But when the PMC scandal broke out, it is headed by a retired chief general manager of the RBI. This is not meant as disrespect to the person. But if reports are to be believed, the police took four days to register a first information report in this case. Admittedly the money involved in PMC bank is a fraction of the money involved in IL&FS case, but I believe that a common man’s rupee is worth at least Rs 1,000 of institutional money. By that measure, the PMC mess is several times the IL&FS mess. 
 

It deserves a better quality response, both from the government and RBI in terms of speed of decision making and the kind of people appointed to find a solution.  

Second is the case of unwarranted tax incentive being given to cooperative banks that induce parking of money with them. Section 80P of the Income Tax Act provides for exemption of interest income on deposits kept by cooperative societies with cooperative banks. Thousands of cooperative societies (especially housing societies) have kept their entire corpus with cooperative banks induced by such tax exemptions. 

A cooperative bank offering interest of 7.50 per cent (to other cooperative societies) effectively offers 7.50 per cent post-tax return, as compared to say a 6.50 per cent pre-tax return from a nationalised bank, which drops to 4.5 per cent after tax. There is absolutely no case for such tax subsidy. This essentially gives an unwarranted lifeline to cooperative banks.  

The least that the government can do when it looks to overhaul the laws relating to cooperative banks is to remove this unwarranted tax subsidy. The RBI has recently promised that a solution will be found and communicated by October 27, 2019. Let’s hope it’s done.

The writer is a Sebi-registered investment advisor