NEW DELHI: Friday, the 13th (August 2021) lived up to its infamy of being an unlucky day, at least for Karnala Nagari Sahakari Bank of Maharashtra. The Reserve Bank of India (RBI) cancelled its licence on that day for not having adequate capital and hence being unable to pay its depositors in full.
Consequently, the cooperative bank ceased to carry on banking business.
While Karanala Sahakari Bank can blame its misfortune to the mythical Friday the 13th, co-operative banks at large, however, face uncertain future for many other reasons. In 2021 so far, the central bank has issued at least 48 directives to UCBs either imposing fresh regulatory measures or extending the existing ones and cancelled six licences. Besides, there have been 75 cases when UCBs have been penalised over non-compliance as compared to just 23 in 2020 and just seven in 2019, shows an Express analysis.
Most co-operative banks sit uncomfortably in the heterogeneous banking structure. While big banks continue to gain all the attention, the cooperative banks which play a significant role in credit delivery to the rural population and contribute to financial inclusion remain confined in an unglamourous state.
As on May 31, 2021, there are 1,531 urban cooperative banks (UCBs) and 97,006 rural cooperative banks, with the latter making up 65% of the total asset size of all cooperatives taken together.
Despite the crucial role played by the cooperative sector, its asset size was only around 10% compared to that of scheduled commercial banks (SCBs) at end March-2020.
Share of rural cooperative lending in total agricultural lending has considerably diminished over the years, from as high as 64% in 1992-93 to 11.3% in 2019-20. Although the RBI had initiated consolidation among these banks and has been tightening the straps on UCBs over the past few years, the financial soundness of the sector has been of concern reflecting operational and governance-related impediments.
NPA rises, losses balloon up
The proportion of gross non-performing assets (NPA) of urban co-operative banks rose to 11.3% in FY21 as against 10.8% in FY20 and 7.3% in FY19, according RBI. The financial health of rural cooperatives too, remains fragile amid stiff competition from niche players like non-banking financial companies and small finance banks. Growth in deposits, which constitute about 90% of their total resource base, plunged in the year ended March 2020. The average growth rate in deposits fell from 13% in the first decade of consolidation drive to 8% between FY15 and FY20.
Data from RBI signals deposit deterioration trend to continue well into 2021. The UCBs reported a cumulative loss of `4,806 crore for FY20 as against a profit of `3,544 crore in FY19 mainly because of high NPAs and lower investments. The major crisis at Punjab and Maharashtra Cooperative (PMC) Bank in 2019 can be attributed to the mammoth quantum of NPAs.
Secondly, the credit demand remains anaemic. After growing at an average rate of 7.8% since 2015-16, loans and advances of UCBs almost stagnated in 2019-20. The health of cooperative banks is likely to worsen in post Covid-19 days.
Anil Gupta, vice-president and sector head (Financial), ICRA, says, UCBs, like other cooperatives, depend on their members for their equity capital requirements or their internal profits to fund their growth. “Apart from this, the area of operations for most UCBs are also restricted to the state where these UCBs are incorporated. Hence in absence of sufficient ability to grow, the scale and service offerings for most UCBs has remained constrained,” he added.
Lax governance
For years, such banks have escaped scrutiny despite failures and frauds. In FY21, for instance, UCBs reported 323 frauds, while state cooperative banks witnessed 482 frauds much higher than FY19.
There have always been questions over who controls cooperative banks in India -- states or the Centre. As banking laws were made applicable to cooperative banks, the RBI was able to exercise some control over them, but the regulation of the management of the cooperatives remained under the purview of states. Where state funding is involved, political entanglements and corruption tend to follow. For instance, the BJP has tremendous clout over them in Gujarat, the Congress and the NCP in Maharashtra while the cooperatives in Kerala have been dominated by the left parties. This led to the dual control of the sector, resulting in supervisory and regulatory lapses and many such banks bleeding.
However, the sudden collapse of once cash-rich PMC Bank last year forced the government to bring about legal changes. In June 2020, the government amended the laws governing cooperative banks. The power of RBI over a cooperative bank will now override the power of the state registrar of cooperatives. That said, the central bank’s failures in detecting scams in Yes Bank and several other big banks, where it had the power to do so, means that there will still be many challenges.
Lastly, the newly formed Ministry of Cooperation with Amit Shah at its helm is said to fix the co-operative sector in the country. Shah is no stranger to the cooperative sector. He became the chairman of the Ahmedabad District Cooperative (ADC) Bank in 2000 seizing control from the Congress. Under his leadership, the loss-making ADC Bank made a profit of `6 crore within a year. Today, ADC Bank is the strongest bank in Gujarat.
Then after the collapse of the scam-hit Madhavpura Mercantile Bank, Shah came up with a revival plan for the bank and managed to save 160 cooperative banks in Gujarat from sinking in 2003. However, the bank became defunct and lost its licence in June 2012 after it was unable to pay back the money it owed public depositors.
There is hope that the new ministry will help resolve problems in cooperative banking even as many suspect it to be a political move. “The ministry, along with recent RBI reforms shall improve the functioning of UCBs and could further deepen the cooperative model across other states,” Gupta added.