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Gujarat's urban cooperative banks

After Madhavpura scam, banks fight to regain customer confidence

Rutam Vora & Abhijit Madhav Lele  |  Ahmedabad/ Mumbai 

On June 1, the Reserve Bank of India (RBI) cancelled the banking licence of (MMCB), bringing the curtains down on the most controversial bank in the history of (UCBs). Though it’s been more than a decade since it was taken for a joyride by former big bull Ketan Parekh, many UCBs in Gujarat are still struggling to regain the lost trust and confidence of depositors.

But is an exception. Owned by the Gujarat Co-operative Milk Marketing Federation, it has grown leaps and bounds to become India’s largest brand of milk and milk products. Its turnover rose to Rs 11,688 crore in 2011-12, from 2,745.74 crore in 2002-03.

Otherwise in the pink with Rs 17,500 crore of deposits, things took an ugly turn when MMCB’s multi-crore stock market scam surfaced in 2001. It all started when MMCB, which got the banking licence on August 19, 1994, and later on became a multi-state cooperative bank from April 1996, resorted to indiscriminate lending to stock broking firms during 1999-2000. It not only violated lending norms set by RBI, but the top management colluded with select share brokers to lend unsecured loans for their investments. The bank’s exposure to the stock market through Mumbai-based share broker Parekh was to the tune of Rs 1,200 crore.

The period from April 1999 to February 2000 saw the Bombay Stock Exchange’s Sensex soaring from 3,325 points to 6,150 points. But the rally proved to be short-lived and a year later, after the scam by Parekh and his aides surfaced in March 2001, the Sensex tanked to a low of 3,096 by April 2001.

The news of Parekh’s heavy losses in the stock market created panic among MMCB customers, who rushed to its 28 branches in Gujarat and Mumbai. With over 50,000 depositors, MMCB held about Rs 800 crore worth of inter-bank deposits from 250 other banks. This included a large number of UCBs from Gujarat and Maharashtra, three public sector and two private sector banks, and two financial institutions.

Name of the Bank Total deposits* Total advances* Branches
Kalupur Commercial co-op Bank  2,23,729.11 1,35,691.10 32
Rajkot Nagarik Sahakari Bank  1,58,309.66 1,11,217.60 27
Surat People Co-op Bank  1,17,375.47 82,180.20 23
Mehsana Urban Co-op Bank  1,13,113.04 68,676.84 26
Co-operative Bank of Rajkot  87,172 51,420.42 20
Sutex Co-op Bank Ltd, Surat 63,573.78 41,856.46 15
Ahmedabad Mercantile Co-op Bank  60,649.22 27,760.63 26
Nutan Nagrik Sahakari Bank  56,514.93 31,477.73 21
Prime Co-op Bank Ltd, Surat 50,059.26 25,514.91 27
S.B. Pardi Peoples Co-op Bank  36,228.01 18,949.56 -
*Figures in Rs lakh; Source: Gujarat Federation, banks' websites
Status of in Gujarat as on March 2011
Total No. of UCBs in Gujarat 244
Total deposits with UCBs in Gujarat (Rs Crore) 21,668
Total advances by UCBs in Gujarat (Rs Crore) 12,057
Total No. of depositors with UCBs
*As on March 31, 2011                                               Source: Gujarat Urban Cooperative Banks Federation

also sought assistance from other cooperative banks in the state to provide funds to enable MMCB meet its payment obligations. However, it did not bring much relief to the ill-fated bank. The bank’s financial conditions deteriorated and its net worth stood at (-) Rs 1,316.50 crore, with gross NPAs at Rs 1,126.55 crore or 99.99 per cent of its gross advances, as on March 31, 2011.

The MMCB scam came as a major jolt to the cooperative banking industry, especially in Gujarat. Total deposits with UCBs in Gujarat dipped by over Rs 3,000 crore within a few years from the scam. In July 2003, Visnagar Nagrik Sahakari Bank, another scheduled co-operative bank with a deposit base of over Rs 450 crore, was given liquidation orders by The bank was the second-largest after MMCB in terms of deposits. also put two more large-sized scheduled co-operative banks, and General Co-operative Bank, for liquidation, with deposit base of Rs 270 crore and Rs 67 crore, respectively. The ripple effects were widespread, with close to 100 UCBs shutting shops over the past decade.

“The board of directors and the chairman colluded with Ketan Parekh and associates to make huge unsecured lending for their short-term stock market requirements. The bank was the largest UCB in the state before the scam surfaced. However, the bank had paid about 50 per cent of the deposits to the public, while about Rs 127 crore of deposits still need to be paid to over 10,000 public depositors,” said B K R Maruti, chief executive of MMCB.

A senior RBI official associated with regulation of UCBs said the prudential norms to regulate these banks were very much in place then. But the apex bank was much liberal. There was a sharp rise in the deposit bases of UCBs and many banks were unable to manage the sudden growth. Some crooks took the advantage of gaps. Taking a leaf from that episode, RBI put freeze on any expansion in activities by UCBs, till they brought their houses in order. It banned opening of new branches.

The dual control (UCBs come under the regulatory oversight of RBI and the registrar of cooperative societies) has always hampered effective regulation. RBI formed state-specific task forces to deal issues of UCBs. It identified weak but viable banks and firmed up their revival plans. If that failed, road was open for merger with stronger UCBs. In extreme cases, it could go for liquidation.

Following the MMCB episode, RBI clamped restrictions on funding of UCBs and their exposure to capital market transactions. It prohibited UCBs from extending financial assistance against securities of shares and debentures. The banking regulator also banned loans for financing initial public offering and increased frequency of inspection of books to once a year from once in two years.

A Parliamentary panel formed to investigate the stock market scam revealed that activities of some UCBs were manipulated by virtue of their nexus with broker-entities. In the absence of careful regulation, such broker-entities used large funds provided by UCBs to manipulate the stock market.

Since then, quality of regulation and financial health of UCBs have improved. ‘‘We have travelled much distance now, though some gaps remain. With strong checks and balances, RBI has allowed UCBs to open new branches and is even looking at permitting them to set up new urban banks,” added the RBI official.

The cooperative banking sector in the state seems to be back on track with a rise in deposit mobilisation. Market estimates suggest total deposit rose to Rs 21,500 crore in March 2011, from a record low of Rs 14,300 crore in 2004-05.

  • Sep 27,’68: (MMCB) Ltd was registered as a cooperative society
  • 1999-00: The bank management resorted to indiscriminate lending, particularly to stock brokers, including Ketan Parekh
  • Feb ‘01: Stock exchanges see a sharp rally with broker Ketan Parekh charging up the index
  • Mar ‘01: The stock bubble bursts, leaving Ketan Parekh, other brokers with heavy losses
  • Mar ‘01: Sudden run on the bank following rumours of its large exposure to Ketan Parekh
  • Mar 13,’01: RBI restricts bank’s operations; asks Central Registrar of Cooperative Societies to supresede MMCB’s board
  • Mar 14,’01: The Central Registrar supersedes the board and appoints an administrator to oversee the affairs of the bank
  • Mar 31,’01: RBI's inspection found MMCB's networth at (-) Rs 1147.13 crore, deposit erosion was 90.9%, gross NPAs formed 88.2%
  • Mar 31,’01: The inspection also revealed the bank had net loss of Rs 1192.81 crore, and did not have adequate assets to meet its liabilities
  • Aug 23,’01: Scheme of Reconstruction for MMCB was made applicable.
  • Mar 31,’11: RBI's inspection found MMCB's net worth at (-) Rs 1316.50 crore, CRAR at (-) 1941.1 per cent, gross NPAs formed 99.99% of its gross advances
  • Mar 31,’11: The inspection also found MMCB had accumulated losses at Rs 1357.41 crore and deposit erosion was 100%
  • Aug 23,’11: Section 35 A was applied to the bank. The Scheme of Reconstruction expired
  • Sep 7,’11: Govt of India forwarded modified reconstruction scheme proposed by the RBI
  • Dec 26,’11: RBI advised Govt of India to liquidate the bank as there was no other option left
  • Apr 18,’12: Responding to the notice, MMCB accepted that the precarious financial position, attributing it to the Rs 1200-crore fraud
  • Jun 1,’12: RBI issued order cancelling MMCB's banking licence

“The MMCB episode came as a big storm to the cooperative movement. However, the movement withstood and overcome the storm and for past few years, cooperative banks are seen doing fairly well. The regulator, too, has taken a note of the operations of UCBs,” said H K Patil, chairman of the National Federation of Urban Cooperative Banks & Credit Societies Ltd.

Industry players welcome the revival. “Over the years, the sector has gone through a lot of learning. The regulator has a role to play and we can see an improvement in compliance, mainly due to technological advancement, competition and professional approach,” said Jyotindra Mehta, chairman of the Gujarat Urban Cooperative Banks Federation, an industry body representing about 240 UCBs.

Recommendations by an RBI-appointed committee under Y H Malegam have opened doors for opening new urban cooperative banks.

“There is no financial device other than the cooperative banking sector that can meet the desired goals of financial inclusion. It reaches the grass root levels, which no other commercial bank would have. Under the Malegam Panel’s recommendation, the future looks bright for the cooperative banking sector,” said Mehta.

After the scam was exposed, MMCB filed 225 cases against defaulters. However, in 71 cases, charge sheets were filed by investigating agencies. Defaulters paid debt in some cases, so legal action against them was dropped. “Over 40 cases against defaulters in Mumbai are still pending as of today,” MMCB’s advocate Ajitsinh Jadeja said.

To make matters worse, the trial against the main conspirator and the mastermind behind the multi-crore scam, Parekh, who is out on bail, has not even commenced.

First Published: Wed, July 04 2012. 00:39 IST