RBI duty to protect depositors: Ensure refund of money

The Reserve Bank of India (RBI) unleashes a plethora of measures whenever a bank goes bust. But knee-jerk reactions won’t repair the damage already done.

Recently, about a dozen of the Punjab and Maharashtra Cooperative Bank (PMC) depositors died unable to stand the shock of the bank’s failure. No better barometer is needed to size the enormity of damage.

The steps RBI took as a sequel to Madhavpura Mercantile Cooperative Bank (MMC) failure in 2001 could not stop further catastrophes — the number of Urban Cooperative Banks (UCBs) fell from 1,926 in 2005 to 1,551 by 2018.

Reorienting the UCBs’ functioning strictly to their establishment goals and learning lessons from MMC failure would alone have pre-empted the PMC debacle.

The PMC had apparently followed all the regulations in toto and posed to be a robust banking institution, a role-model for other banks. This UCB started in 1984 as a single branch bank in Mumbai, later became a multi-state bank with 137 branches across seven states - Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh.

It was one of the country’s top 10 co-operative banks. It maintained a capital adequacy ratio of 12.62% - more than the RBI’s fixed 9%. It has shown high profits (Rs 100 crore last year), and a low net NPA, of 2.19%. Auditors gave an ‘A’ rating to this bank.

But all the dazzle of the PMC was a window dressing — it came to the fore in the recent RBI inspection following an insider tip-off. More than 70% of the bank’s advances were actually NPAs. The bank advanced to one single group - the promoters of Housing Development and Infrastructure Ltd - a huge amount of Rs 4,635.62 crore – equal to 55% of the bank’s outstanding deposits of Rs 8,383 crore. It helped the swindler through 21,049 fictitious accounts.

The depositors were shocked when the RBI on September 24, issued a notification restricting their withdrawals to Rs 1,000 for six months. Of course, the limit was gradually enhanced to Rs 50,000 from November 5. It is surprising how the UCB could draw wool on the eyes of the mighty RBI and the Government of India and could indulge in such a mammoth fraud.

People can’t be blamed for selecting the wrong bank as it is hard to know which type of banking institution among the myriad types around them is safe.

At one level, there has been a valid complaint that the number of commercial bank offices in the country - 1,45,871 (June 2019 figure) - is too few to meet the needs of India, a country with a huge population of 135 crores. That the share of rural branches has come down from a high 58.20% in 1992 to 35.43% now, is another story.

At another level, there are innumerable types of institutions which include SBI and its Associates (with 22,033 branches), nationalised banks (65,493), foreign banks (301), Regional Rural Banks (21,835), local area banks (93), private sector banks (32,083), small finance banks (3,238) and Payment Banks (795); all these are commercial banks.

The co-operative sector has another 98,163 branches. Of them, 1,551 are urban co-operatives comprising two types: scheduled UCBs (54) and Non-Scheduled UCBs (1,497). Remaining 96,612 are rural co-operatives consisting of Primary Agricultural Credit Societies (PACS - 95,595), State Cooperative Banks (StCBs - 33), District Central Coop Banks –(DCCBs 370), State Cooperative Agriculture and Rural Development Banks – (SCARDBs - 13) and Primary Cooperative Agriculture and Rural Development Banks (PCARDBs - 601).

The RBI imposes several restrictions like Statutory Liquidity and Cash Reserve Ratio on the banks and assesses their performance through CAMELS (Capital Adequacy, Asset quality, Management, Earnings, Liquidity and Systems and controls).

In other words, it expects banks to have not less than certain minimum of own capital, wants the banks to follow strict lending norms and recover the loans as scheduled. It expects banks’ management to be efficient, with proper systems and controls in place. It wants to avoid leakages in earnings and to maintain optimum liquidity to meet the customers’ requirements.

Rural co-operatives

The RBI’s control with all these restrictions gives confidence to the people on banks and encourages them to deposit their savings. The public deposits in the commercial banks add up to Rs 125,73,772 crore (equal to about 66 % of the GDP) by end of 2018-19. The rural co-operatives have accrued another Rs 5.72 lakh crore deposits by end-March 2017 (there is a one-year lag in RBI’s compilation) and the UCBs, Rs 4.56 lakh crore by the end of 2018 financial year.

The failure of the PMC raises the question on the need for UCBs doing deposit business. The goal of the cooperative world over right from their beginning – since the first-ever cooperative, a group of 28 weavers started in 1844 in Rochdale, England – is organising the collectives for the mutual benefit of the members, not the collection of deposits from non-members.

Unfortunately, the cooperative banks including urban cooperative banks, do the deposits business with the RBI’s permission. The fraud-hit PMC Bank had 51,601 members by March 2019 whereas it had collected deposits from 16 lakh depositors who are not its members.

It is paradoxical that the RBI, which protects public interest, while not easily allowing setting up new banks, permits the primary urban cooperatives to transform into urban cooperative banks – a backdoor entry into banking. It is high time RBI introspected its policy on UCBs after the present PMC crisis.

Having permitted the UCBs to accept deposits, it is the responsibility of the RBI and the government to fully protect the depositors and to ensure immediate refunding of their entire money. The RBI has never cautioned the people against depositing money in the UCBs. So, it has the duty to go to their rescue when the UCB, the bank it regulates, fails.

(The writer is a development economist and commentator on economic and social affairs)