Is The Cooperative Banking Sector Losing Its Philosophy Of Cooperation?

“You are allowed to withdraw only Rs.1000 from your bank account for the next six months,” this was a message received, a few weeks back, by the customers of Punjab and Maharashtra Cooperative (PMC) bank – one of the top five urban cooperative banks in India. The limit of withdrawal was later increased to Rs. 10,000. PMC has branches across seven Indian states and carries a deposit of Rs. 11,600 crores.

The above mentioned shocking message from the bank was sent as per the directions of the Reserve Bank of India (RBI) to stop all lending, investment, and business operations. The message was just the beginning. Soon a scam unfolded, which has again pointed to the ‘much-discussed’ loopholes in the governance of the cooperative bank sector.

What Is The PMC Scam All About?

The top management of PMC bank and real estate company Housing Development and Infrastructure Limited (HDIL) are connected in this matter. The chairman of the bank was one of the founders of a real-estate company, too.

The builder had great political connections in Maharashtra as well and was sanctioned a loan of Rs. 2,500 crores by PMC. HDIL defaulted the loan repayments and even bank auditors didn’t point it out. Ultimately, RBI had to take punitive action by announcing the debt amount as a “complete loss“.

Cooperative Bank Scams Are Becoming A Matter Of Routine

The scam like PMC is not “once a while event,” but it is just another shocking urban cooperative bank scam revealed in the past two decades. Yes, “one more in the series.” The failures of urban cooperative banks are alarmingly regular, as per RBI data

The number of banks has decreased from 1926 in 2004 to 1551 in 2018, as poorly governing banks were closed down by RBI.

Cooperative banks stemmed from the concept of cooperative credit societies. This means community members extend loans to each other at favourable terms.

Although their scale is smaller than commercial banks, they are often popular in households or small scale businesses as they offer high-interest rates.

Their connection with the rural economy also makes them important in the overall banking sector. Urban cooperative banks were encouraged to proliferate by RBI post-1991 reforms, but after cases of poor governance and regulations, RBI stopped license for new banks from 2005.

For example, the Rao committee (1998) pointed out the weak health of cooperative banks due to lack of professionalism, lack of corporate governance, and low-entry barriers. Similarly, various committees post-2005 have timely reported weak financial status and have guided to improve the monitoring of cooperative banks. 

RBI also started a board of management system to monitor these banks, but PMC is a classic case which shows how a bank can easily escape from RBI regulations. Political motivations for lending money, frauds in accounting and diversion of funds have been the reasons behind many scams of commercial banks revealed in the last decade.

Duel monitoring problems and auditing issues were evident in the present PMC’s case too, for example, data shows how PMC’s vital indicators, like capital position and profitability, did not hint the worsening situation unless restrictions were posed by the RBI.

The Way Forward

The banking sector experts opine some generalised key actions resulting out of PMC scam reportage: 

  • Punitive actions to those who are guilty in present PMC scam to demonstrate a lesson for the future.
  • More power and stringent regulations by RBI as they are in case of commercial banks.
  • Scrutiny in bank auditing based on vital data indicators to monitor the progress of the bank.
  • Quality improvement in the function of banks like trained human resource, a mandated professional board of management, structural reforms in board etc.

On one hand, it’s a matter of the hard-earned savings of the people. The mess of the cooperative banking sector increases the economic vulnerability of households and ultimately the society, by and large. Economic vulnerability poses stressors on other vital aspects of one’s life like medical care, housing, and education.

On the other hand, cooperative banks suffer from weak governance, for example, there are 9 more cooperative banks in the queue under the direction of RBI actions. Hence, the banks have no option but to transform themselves with improved governance. 

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