Cooperative Banks Regaining its Lost Confidence

N B Shaikh
NB Shaikh, Joint Registrar (Inspection), Commissioner of Cooperation and Registrar of Cooperative Societies, Gujarat State, Gandhinagar

Having seen a bad patch following a major scam, the cooperative banks have once again regained the past glory, thanks to the right decisions and corrective measures taken by both the State Government and RBI. NB Shaikh, Joint Registrar (Inspection), Commissioner of Cooperation and Registrar of Cooperative Societies, Gujarat State, Gandhinagar, analyses the causes and effects.

The urban cooperative banks (UCBs) have played very significant role in the economic development of the people of Gujarat State. The working of the cooperative banks is different from that of commercial banks. The urban cooperative banks have extended their full support to the socio-economic growth of small-time traders, artisans and labour class of the society. Thus, UCBs have made a noteworthy contribution towards the removal of poverty of the nation as a whole.

The infamous Madhavpura Mercantile Cooperative Bank scam of 2001 came as a major jolt to the cooperative banking industry in the State of Gujarat. Total deposits with UCBs in Gujarat dipped by over `3,000 crore within a few years from the day scam surfaced. Six banks got into a troubled situation and weakened. Over a period of time, situation further worsened and the number of banks going for liquidation increased to 82 by the year 2012.

To regain the lost confidence and to improve working system of cooperative banks, a number of steps were taken by the Government of Gujarat. A new Chapter 10B was added to the Gujarat Cooperative Societies Act 1961, and stringent norms were prescribed with reference to punishment in case of any misdeeds, and restrictions were imposed on the term for holding the office of a bank. This resulted in increasing the transparency in working of the cooperative banks.

For having a proper audit of the cooperative banks with more than `50 crore deposit, a quarterly audit by Chartered Accountants from a panel was introduced.

To have better recovery of the dues, powers were vested in the hands of the cooperative banks under Section- 159 of the Gujarat Cooperative Societies Act 1961.

Cooperative banks were also vested with the power on the lines of nationalised banks for better recovery under the Securitisation Act.

     Role of Cooperative Banks
  • Encourage savings amongst public
  • To fulfil small financial requirements of people
  • To provide notable and proper banking services

TAFCUB formation

An MoU was signed between the RBI and the Government of Gujarat in June 2005, and the Task Force on Urban Cooperative Banks (TAFCUB) was formed the next month.

A meeting of TAFCUB is held once every three months. As a result of which, the licences to 22 unlicensed cooperative banks were issued and 39 weak cooperative banks have been merged with financially strong cooperative banks of the State or with multi-state cooperative banks.

As a result of creation of TAFCUB, the total numbers of weaker banks got reduced to 10 per cent in 2014, which was around 43.02 per cent of the total in 2005. Following the merger of 39 weak banks, the financial condition of rest of the banks has improved.

Status of Urban Cooperative Banks (till 31.03.2014)
Total Banks 226
Multi-state Cooperative Banks 05
Scheduled Cooperative Banks 07
Women Empowered Banks 10
Total Deposits 31,285.00 crore
Total Advances 15,952.00 crore
Liquidated Banks 82
Merged Banks 39
Total Members 27.88 lakh
Total Depositors 91.38 lakh

In the regular meetings of TAFCUB, discussions take place on the future of the banks affected by the Madhavpura Bank scam. During the scam, there were some 203 banks out of a total of 296 banks connected in some or the other way with the Madhavpura Bank. The net worth of some 29 banks was negative, which were not even involved with the Madhavpura Scam. Also, there were some 32 banks, whose net worth was positive, but were about to turn negative under the effect of the scam.

After looking at the observations of RBI and several rounds of discussions by TAFCUB, it was required to have continuous monitoring of the banks affected due to the scam. Therefore, weaker banks, along with the stronger ones, were put under continuous monitoring at state level, and a series of discussions were held to form a model of merger of weaker banks with the stronger banks. And, as a result, some 39 weaker banks were merged with stronger ones.

As on 30.03.2003, there were 351 cooperative banks and 762 branches in operation. Total deposit stood at `16,506 crore and advances `11,004 crore. Total members were 32.05 lacs and the number of depositors was 1.09 crore. But, due to the Madhavpura scam, total deposit of these banks was reduced to `14,804 crore and advances down to `9,198 crore, which was further reduced to `8,420 crore in 2006.

    Organisational Structure of TAFCUB
  • Regional Director of RBI is the Chairman and Registrar of Cooperative Societies is the Co-Chairman
  • Representatives from the Government are on the board
  • Chief General Manager is from the central office of RBI
  • There are representatives from NAFCUB, and
  • A representative from the State’s urban cooperative banks federation

But, after the intervention and corrective steps taken by the State Government as well as RBI, the total deposits as on 31.03.2014 increased to `31,285 crore and advances to `15,952 crore. The number of members also went up to 27.88 lakh and that of depositors went up to 91.38 lakh.

Role of DICGC

At this stage, the role of Deposit Insurance Credit Guarantee Corporation (DICGC) was equally significant, as it sanctioned insurance claims of depositors of liquidated banks up to `1 lakh within the shortest possible time. The Corporation acted as a trouble shooter to solve the issue of the hard earned money of small depositors, whose money was at stake due to cancellation of licences of such banks and were recommended for liquidation. The Corporation provided strength and support to the cooperative banking sector, which has regained the confidence of public in these banks.

The cooperative banks are today contributing significantly to the economic growth of Gujarat. The new provision of inspection has been added under Section-84(8) to the Gujarat Cooperative Societies Act 1961, whereby inspection of UCB is conducted. Of course, all the UCBs are not being covered due to shortage of manpower, but it helps keep the Board of Directors of these banks awake. Now, one expects the leadership of these banks to take appropriate decisions in the interests of their members, and act as per the norms defined by the State Government and the directives of RBI, and contribute to the economic growth of the State by adopting new technological tools in this competitive age.

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