Why The Modi Government Decision To Bring All Cooperative Banks Under RBI Control Is A Huge Reform

On 24 July this year, the Narendra Modi government decided to bring all urban cooperative and multi-state cooperative banks under the supervision of the Reserve Bank of India.

Giving details of the Cabinet decision to come out with an ordinance for the RBI supervision, Union Minister for Information and Broadcasting, Prakash Javadekar, told the media that bringing 1,540 cooperative banks under the supervision of the apex bank will safeguard the interests of 8.6 crore people who have deposited their money in these banks.

The deposits of these 8.6 crore people has been projected at around Rs 4.84 lakh crore.

The 1,540 banks include 1,482 urban cooperative banks and 58 multi-State cooperative banks and this will enable RBI’s writ to apply on these banks just as to other scheduled banks in the country.

This is a huge reform, since the RBI, till now, did not have adequate powers to control the cooperative banks, which came under the purview of the states.

In view of this, depositors were at risk if there were any irregularities in these banks.

For example, the net worth of multi-state Punjab and Maharashtra Cooperative (PMC) Bank had turned negative last year following financial irregularities, especially by misreporting on loans extended to real estate developers.

The RBI had to intervene due to the fraud running into crores of rupees, restricting depositors’ withdrawal and barring the bank from either lending or accepting deposits.

Following the bitter experience, the Centre introduced a Bill in Parliament to amend the Banking Regulation Act to give RBI more regulatory powers over cooperative banks.

The outbreak of the novel Coronavirus pandemic proved to be a hurdle in getting the amendment Bill passed.

One of the drawbacks that the RBI had suffered till now in dealing with cooperative banks is that there are many types that come under the Union as well as State governments.

The RBI has no powers to either supervise their accounts or approve the appointment of these banks’ chairpersons or chiefs.

Cooperative banks are in large numbers in states such as Maharashtra, Gujarat, Andhra Pradesh and Tamil Nadu.

This is one reason why some regional political parties such as Dravida Munnetra Kazhagam (DMK) and All-India Anna DMK (AIADMK) have protested against the Centre’s decision.

The hold of politicians in these banks is the major reason why the RBI is not able to impose its writ on them.

Also, the posts of chief of such cooperative banks is used as some sort of reward or compensation to some loyalists in political parties.

For example, in Tamil Nadu, if there are two strong contenders in a party for a ticket to Assembly or Parliament elections, one of them is asked to yield with the promise of a post such as that of a cooperative bank chairman.

As a result of these politicians taking over as the chief of these banks, usually, party members and their family members with poor credit records are extended loans.

In fact, some of the beneficiaries even take the liberty of not paying back the loans, thus creating problems for the state governments and their finances.

For example, the Supreme Court asked the Maharashtra government to pay Rs 1,000 crore for providing guarantee to sugar factories, textile mills and some agricultural produce manufacturing units that were controlled by politicians.

The Centre’s move will now put a full stop to all such political manoeuvres, especially in foiling political appointments.

It will also stop these banks from providing loans to those with poor track records as loan beneficiaries.

The RBI will have to act since it will now be held responsible in case of any of these cooperative banks landing in a mess.

Interestingly, the Bharatiya Janata Party had, in November 2014, injected nearly Rs 2,400 crore to revive 23 unlicensed district central cooperative banks.

In September last year, the cooperative banks were provided an opportunity to convert themselves as small finance banks.

Just one bank came forward and got the in-principle approval from the RBI.

Probably, this response triggered the Modi government into action and crack the whip on political control of the cooperative banks.