Rbi Proposal For Dual Control Hanging Fire

The Reserve Bank of India's proposal to do away with the dual control over the co-operative banks by setting up a separate supervisory board is still hanging fire though the central bank submitted it to the finance ministry about four months ago.

The trigger for the proposed change in dual control was the Madhavpura Mercantile Co-operative Bank fiasco which went bust following its unbridled exposure to the capital markets, throwing prudential norms to winds.

The RBI wants a clear line to be drawn as far as control of the co-operative banks, which focus on local population and micro-banking among the middle and low income strata of the society, goes as duality of control has adversely affected their functioning.

 

The central bank has suggested that the state governments, which exercise control on these banks through the registrar of state co-operatives, should restrict themselves to only registration while it (the RBI) will assume the overall responsibility for their bank related functions and regulation.

Right now, there is an overlap in the functioning of the RBI and the registrar with the latter giving directives like the central bank on investments norms, non-performing assets, conducting inspection, deciding on branch licensing/ opening, looking into operational problems and monitoring targets and achievements through MoUs.

"The co-operative banks as purveyors of micro-credit and as custodians of public money need to be strengthened and made financially viable. However, many of them suffer from the twin malaise of lack of accountability and professionalism," a senior central bank official said.

In many of the co-operative banks the board's have turned into 'borrowers board' with loan proposals being pushed through with impunity without so much as undertaking due diligence and taking adequate collateral. He said that since many of these banks were run with political patronage there was lot of interference in credit decisions.

"Unless the government acts fast there is no way of stemming the rot that has set in the co-operative banking system in the country. Given the fact that co-operative banks are offering fabulous rates of interest on deposits ranging from 11 to 14 per cent per annum while on the assets side they are able to disburse credit only to second and third rate business enterprises, there are more Madhavpuras in the making," the official warned.

The need for vesting the RBI with complete control of bank related functions of the co-operative banks has arisen because presently it does not have the powers to supersede the board of a bank and appoint an administrator if a bank goes under or the management is found to be violating regulatory norms prejudicial to the banks financial health.

Since the RBI does not have the manpower to supervise the functioning of the 2,500 odd co-operative banks, it has suggested to the ministry the setting up a separate board that will be a statutory body for supervising them.