Why should depositors from better banks pay for cooperative banks' failure?
Why should depositors from better banks pay for cooperative banks' failure?
| 28/05/2013 05:14 PM | 
During 2012-13, about Rs160 crore was paid to depositors of 13 failed co-operative banks. The DICGC used money collected from depositors of other banks under the credit insurance scheme. Not a single rupee was paid on account of any failed nationalised or private banks. This only shows that dual regulation means poor regulation
Maharashtra leads the states for the maximum number of failed cooperative banks that are gobbling up depositors' money. As many as 13 co-operative banks failed to pay customers and have shut down operations in the 2012-13 fiscal. It is reported that theDeposit Insurance and Credit Guarantee Corporation (DICGC), a government-owned entity which guarantees deposits, paid as much as Rs160 crore to deposit holders of the 13 banks during 2012-13. This means deposit holders from other better managed banks and taxpayers have to bear the burden of mismanagement and failure of these co-operative banks.
Maharashtra leads the states for the maximum number of failed cooperative banks that are gobbling up depositors' money. As many as 13 co-operative banks failed to pay customers and have shut down operations in the 2012-13 fiscal. It is reported that theDeposit Insurance and Credit Guarantee Corporation (DICGC), a government-owned entity which guarantees deposits, paid as much as Rs160 crore to deposit holders of the 13 banks during 2012-13. This means deposit holders from other better managed banks and taxpayers have to bear the burden of mismanagement and failure of these co-operative banks.
Under the norms of DICGC, a wholly-owned subsidiary of the Reserve Bank of India (RBI), a maximum of Rs1 lakh is paid to a depositor in case a bank goes insolvent. Last year in August, finance minister P Chidambaram informed the Rajya Sabha that deposit insurance coverage provided by DICGC is also applicable to the eligible deposits held in all eligible co-operative banks.
In the same breadth, Chidambaram said that the DICGC had sent a proposal to increase the deposit insurance coverage limit to Rs2 lakh from existing Rs1 lakh. He had said, "The proposal was examined and to rationalise the deposit insurance premium structure, the government has suggested to the DICGC and the RBI to adopt the Risk-Based DepositInsurance Premium Structure, before the proposal of the DICGC is considered for approval."
Unfortunately, the only beneficiaries of the deposit insurance premium collected by the DICGC are badly-run and politically-influenced co-operative banks. Since its inception, the Corporation has paid out about Rs4,051 crore till August 2011, in claims to depositors after bank failures. As much as a quarter of this—a whopping Rs1,025 crore—has been paid out in the past three years, from April 2008 to March 2011, which was given to 83 banks. And all of these 83 banks were co-operative banks.
The payment is possible because DICGC collects the insurance payment from banks to guarantee deposits up to Rs1 lakh per account holder. The DICGC collects a premium from 2,249 banks, of which a whopping 2,080 are co-operative banks.
Here is the irony. Less than 200 commercial banks account for 88% of the insurance premium collected and co-operative banks account for under 8%. Yet, when it comes to payment because of failures, 100% of the money is paid on account of co-operative banks.
Moneylife Foundation has strongly opposed any attempt to increase the deposit guarantee since this will only ensure that badly run, politically controlled cooperative banks get money for their depositors from the banking system. Moneylife believes that the cost of this high insurance will eventually have to be borne by customers who make smart choice to put their money in better banks.
What is worse, co-operative banks are poorly regulated under the dual regulation of the Reserve Bank of India (RBI) and the Registrar of Cooperatives. It is an open secret that RBI's supervision is completely ineffectual when it comes to co-operative banks, because of the enormous political influence wielded by their promoters.
This year, of the 13 cooperatives, the ones in Maharashtra are the worst offenders, with nine banks from the state defaulted on deposit holders, followed by Gujarat (two co-operatives), Andhra Pradesh and Odisha (one each). According to media reports, the DICGC paid the maximum amount of Rs54.88 crore to Bhandari Co-op Bank of Maharashtra. This was followed by another Maharashtra-based lender Solapur Nagari Audyogik Sahakari Bank whose depositors were paid Rs45.76 crore. Depositors from two other failed banks, Siddhartha Sahakari Bank and Bhusawal Peoples Co-op Bank were paid Rs23.99 crore and Rs10.05 crore, respectively during 2012-13. A year ago or during 2011-12, the DICGC paid Rs277.31 crore to depositors of 18 co-operative banks that were closed.
Moneylife had carried a prescient story more than two years back (Co-operative banks are in terrible shape; account-holders will be at the receiving end. RBI should act decisively, and soon), written by Prof Anil Agashe, that co-operative banks were in terrible shape and that the Reserve Bank of India (RBI) badly needed to tighten its screws, so to speak, and act boldly to protect deposit-holders. Unfortunately, the RBI did not act fast enough. Not only did co-operative banks default on deposit holders but, unbeknownst to Indiancitizens, they were used for far more sinister purposes.
RBI recently discovered, albeit too late, that the money-laundering racket, discovered by Cobrapost, had spread to cooperatives too, and appeared to be the main conduit for the private sector banks to launder money. Shockingly, it was also discovered that cooperative banks happily accepted fake PAN cards and dodge detection by opening hundreds of accounts without proper KYC with each deposit carefully under Rs50,000. Moneylife had written about this story here: RBI money-laundering probe shows cooperative banks as the key facilitator of shady deals.
Regulation of co-operative banks is appallingly poor. One of the worst offenders is Maharashtra State-Co-operative Bank (MSC Bank), which had reported over Rs1,070 crore loss, mainly due to non performing assets (NPAs). Not only did it suffer losses but, according to advocate Vinod Sampat, the bank was "window dressing" its accounts. This prompted the RBI to swiftly act and highlighted the need to bring all co-operative banks, a majority of which are controlled by politicians, under the central bank's direct control.Moneylife had written about it over here (MSC Bank: The RBI finally steps in to clear the mess in Maharashtra's apex co-operative bank)
Unfortunately, it still isn't clear who really regulates co-operatives because there are actually two regulators: the Registrar of Co-operative Societies (RoCS) and the RBI. Because of this dual set-up, there is little regulation, accountability and willpower to take action against errant co-operative banks.
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