The government took an important decision last week to bring the country’s co-operative banks under the supervision of the Reserve Bank of India (RBI). It is a welcome, though belated, step. The ordinance brought 1,482 urban co-operative banks and 58 multi-state co-operative banks under the scrutiny of the RBI, which will now have the same powers of supervision over them as on scheduled banks. There are 8.6 crore depositors in these banks with deposits of about Rs 4.85 lakh crore and many of these are in rural or semi-rural areas. Their low capital base has always made them vulnerable. Many are poorly managed and there have been reports of failure of at least one bank a month. There were reports that the net worth of some of them had turned negative. The crisis that gripped PMC Bank last year is well known. The RBI had to stop its business for six months, cap withdrawals to Rs 1,000 and appoint a regulator. The crisis was a result of fraud and mismanagement. It had lent 70% of its loans to a single firm whose management consisted of the bank’s chairman.
Most co-operative banks are controlled by politicians who use them for power, pelf and patronage. That is why the supervision is lax, and it has been difficult to improve their functioning. Leaders of all parties have their fingers in the pie. The excuse to allow them to operate without effective supervision was that they function in rural areas where banking facilities are inadequate. But this is no longer so. The risk is actually more because the failure of a bank hits people in rural areas harder. Customers lose most of their deposits then. Oversight by the RBI will give better safety and security to the depositors.
With the supervisory powers shifting from state governments to the RBI, the banks’ functioning can be expected to improve. There is likely to be more accountability, adherence to norms and better management practices. They will be required to meet capital adequacy norms strictly. Doubts have been expressed whether politicians would give up their control easily. But the new regulatory regime should be implemented at the earliest, without giving a chance to anyone to scuttle it. The ordinance will have to be regularised with the legislation in Parliament within the next six months. The RBI has sometimes been accused of not taking effective remedial action in a time when cases of malfunctioning of co-operative banks were bought to its attention. Now it has full powers to act and it should use them to good effect.