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Recently, the Indian President Ram Nath Kovind approved an ordinance by the Union cabinet that seeks to amend the Banking Regulation Act of 1949. The amendments are applicable to urban cooperative banks (UCBs) and seek to bring the UCBs under the supervision of the Reserve Bank of India (RBI).

There are three types of cooperative banks - namely state cooperative banks, district cooperative banks and urban cooperative banks. The first two are already under RBI supervision and now the third category is also being brought in under RBI.  As a result, a huge number of depositors in the UBCs will be benefitted. There are 1,540 UCBs and 58 multi state cooperative banks in the country with 8.6 crore depositors with total savings of about `4.85 lakh crore.

Why are the UCBs being brought under RBI?

The demand to bring UCBs under RBI supervision is not a recent phenomenon. It was first demanded by All India Reserve Bank Employees Association (AIRBEA) in the late nineties following the Madhavpura Mercantile Cooperative Bank scam in Gujarat. Samir Ghosh, General Secretary, AIRBEA and former Chairman, West Bengal State Cooperative Bank, told BE, “At last our demand for bringing UCBs under RBI supervision is going to be a reality. We have been demanding this for more than three decades.”

This decision received more significance after the scam (last September) of the Punjab and Maharashtra Cooperative bank (PMC) came to light. PMC is one of the biggest UCBs of the country with branches spread over many states. After that scam got exposed, lakhs of customers faced difficulties in withdrawing their money due to restrictions imposed by the RBI.  

UCBs did not follow many banking rules and they lacked transparency in almost all aspects ranging from recruiting employees to recovery of loans. Additionally, political interference allowed corrupt practices. In 2009, in West Bengal, the then Finance Minister Ashim Dasgupta decided to systematise the workings of the UCBs in the state. A committee was formed to look into the matter and submit a report.

Rajat Dasgupta, a former SBI official and then an advisor of the West Bengal Industrial Development Financial Corporation was in that committee. He told BE at that time, the UCBs of the state were in an awful condition. Many times, loans were sanctioned without security, no proper loan policy was maintained and digitisation was almost absent in those banks. In many cases, the loan-deposit ratios were very high. It was also experienced that political connections were needed for a comparatively high amount of loan. Many people believed that the personal choices of the bank managing directors (MDs) were the only determining factor for granting credit. Many of the leading cooperative banks of the state could not check many of the weaknesses of the UCBs. However, this was not the case only in West Bengal. The picture was more or less the same around the country.

Can the change be able to regulate the UCBs?

The instant reaction of many observers regarding this change was not positive. A big section reportedly expressed their doubts about the success of the policy change as politically vested interests were involved in controlling a high amount of public money deposited in the UCBs. A section of observers also had doubts about the capacity of the RBI to supervise another area of finance which is already in a mess.  

Ghosh said that they were aware of the need for increased manpower. But AIRBEA had recently written a letter to the RBI Governor, assuring him of its members’ support to make the move successful. The organisation also welcomed the move of the Union cabinet in this regard. In the letter to the Governor, the organisation has pointed out to the recent problematic experience in the PMC bank. The issue could have been avoided with proper RBI surveillance.

In the letter to the Governor, AIRBEA has reiterated that highly qualified, computer savvy and energetic class III staff of the bank can be gainfully deployed for the purpose after proper training. Ghosh also pointed out that the old mechanism of banking supervision by RBI had been wrong. Even in the case of the last PNB scam, it was found that the bank conveyed many wrong information to the RBI and the central bank did not physically examine that information. A more efficient method of supervision is necessary to avoid such scams in future.