Shield co-op banks from political influence

In the aftermath of the PMC Bank scam, RBI came out with stricter regulatory norms for urban cooperative banks in 2022.

Image used for representational purpose only.

The Reserve Bank of India may have averted the collapse of yet another cooperative bank by taking over control of Mumbai-based Abhyudaya Cooperative Bank. The banking regulator’s action came after the cooperative bank’s net non-performing assets rose to 12 percent and its cost-to-income ratio touched 80 percent. With over 2 lakh depositors and ₹10,000 crore in deposits, Abhyudaya is too big to be allowed to sink. The regulator’s timely action might have stopped another Punjab & Maharashtra Cooperative Bank (PMC)-like situation from emerging. But RBI will have to do more to address governance issues in cooperative banks, which continue to be controlled by politically connected people.

When RBI issued a statement on Friday announcing the suspension of the existing board of Abhyudaya Cooperative Bank, it brought back memories of the PMC fiasco in 2019, when RBI had to clamp restrictions on withdrawal of more than ₹1,000 from the bank. However, in the case of Abhyudaya, the regulator has only suspended the management led by chairman Sandeep Ghandat, who is known for his political connections; RBI’s taking over will not affect the bank’s day-to-day operations. At Abhyudaya Cooperative Bank, RBI has found certain material concerns emanating from poor governance standards. Though the details of these ‘concerns’ have not yet been made public, media reports suggest that the bank was hiring aggressively to win over voters ahead of the crucial state polls and general elections next year.

In the aftermath of the PMC Bank scam, RBI came out with stricter regulatory norms for urban cooperative banks in 2022. Under these guidelines, cooperative banks with over ₹100 crore in deposits have to maintain a minimum capital of 12 percent of the risk-weighted assets. They also have to maintain a net worth of at least ₹5 crore. While these rules may inject a sense of confidence in the long-term financial health of urban cooperative banks, they don’t ensure protection from political influence over the normal functioning of banks. Despite their many flaws, cooperative banks have played an important role in furthering the government’s financial inclusion target. But, there is a need for enhanced governance standards in these banks, and the banking regulator must keep a close tab on the functioning of cooperative banks to check any future mishaps.