Co-operative banks are in terrible shape; account-holders will be at the receiving end. RBI should act decisively, and soon

Source :Money life: Prof Anil Agashe:April 12, 2011 03:16 Pm

A number of co-operative banks in Maharashtra are saddled with bad debts. Political interference seems to have silenced the banking regulator. It is high time the RBI, and the shareholders & depositors of these beleaguered entities woke up  

Recent news reports suggest that there are nearly 28 co-operative banks in Maharashtra which are having large NPAs (non-performing assets) and negative net worth and are in a bad financial state. 

However, there is nothing new about this situation. A lot of such banks have collapsed in the recent past, and no doubt many more will in the future. The RBI (Reserve Bank of India) seems to be inactive instead of being proactive in making sure that these banks close down and are acquired by other banks to safeguard the interests of the depositors. 

There is a strange argument doing the rounds that if the RBI takes action (like declaring a moratorium on sick banks) there will be a run on most banks that are sick. If this happens, it will actually be a good thing. Instead of protecting weak banks for 'safeguarding' depositors, let the RBI merge them. 

The banking regulator seems to have forgotten the Vaidyanathan and Madhavan Committee recommendations. Most state governments have signed MoUs (memorandums of understanding) with the RBI and have given the regulator all powers for supervision of co-operative banks as far as banking regulations are concerned, though state governments still have powers over these banks as these banks are under the control of their respective Registrar of Co-operatives (ROCs). 

Now it seems that the RBI needs the consent of these ROCs for placing these sick banks under a moratorium. However, if such consent is not forthcoming due to political pressure-as many such banks are controlled by politicians-then the apex bank should go ahead and suspend the banking licenses of these banks unilaterally.

There is also the curious case of Pune-based Rupee Co-operative Bank. There was a run on this bank sometime in 2002 and the board of the bank was dismissed, and it was put under an Administrator. According to some banking professionals who were advising the administrators, they were appalled that no proper records were available and the bank was unable to prepare its financial statements. The bank needed to be put under moratorium at that time itself. 

After five years under the 'supervision' of these administrators, fresh elections were held for the board of directors and many who were responsible to get the bank into trouble in the first place were re-elected! 

Today the bank claims that it has made a profit of Rs28 crore for the year ending March 2011. It also claims that no loan granted over the last two years is an NPA. However, the fact remains that almost 46% of its advances are classified as NPAs and the bank has in the process negative net worth and thus has a negative Capital Adequacy Ratio which has to be 12% of weighted risk adjusted assets of a bank! 

It is high time the RBI took action instead of watching the situation "closely" and giving more time to the management.

The depositors of the bank have cause for worry. If the bank is put under moratorium for a long time like the Suvarna Sahakari Bank which remained under moratorium for two years before it was finally acquire by IOB (Indian Overseas Bank), then all the money of the depositors will get locked in the bank. Last time when there was a run on the bank, the depositors had panicked and stood in long queues to take out their money. 

However, as the RBI assured liquidity support and said there was no need to panic, the same depositors stood in long queues to re-deposit their money as the bank announced increased interest rates to lure the customers back. 

The simple rule in finance is a bad borrower is forced to pay an interest rate higher than the market rate as a reward for higher risk that an investor requires. However, most depositors do not even understand that when they put money in a bank; the bank is a borrower. Even today I am afraid that most depositors in this bank are unaware of the risk that they are facing!

And what about the shareholders? They too seem to be an ignorant, callous and ignorant lot. They have received no dividend for the past many years. Their shares have absolutely no value today. Even if the bank is merged with another bank, shareholders are not going to get any money as had happened in the case of Global Trust Bank.

It will be worthwhile to see what security the bank is holding against the accepted NPAs of Rs500 crore, and what is the value of these securities. My guess is that not much value can be realised. It will also be pertinent to find out if the bank has used the provisions of the SARFAESI Act, 2002, against its willful defaulting borrowers. This Act gives enormous powers to banks in recovering bad loans.  

We must force the RBI to give answers to these questions in the interest of shareholders and depositors.

However, let us also not have too much sympathy for the shareholders and depositors because they have not pressurised either the management or the regulators, for protecting themselves. Even God helps those who help themselves! 

Financial ignorance is not an insurance cover against getting your fingers burnt.

---Prof Agashe teaches at Symbiosis and other management schools in Pune