Narendra Modi continues with the poor governance of earlier regimes

On 5th November, Union minister Ravi Shankar Prasad was on television announcing a massive Rs2,375-crore infusion of funds into 23 district central cooperative banks across the country. These include 16 banks in Uttar Pradesh, three each in Jammu & Kashmir and Maharashtra and one in West Bengal.

The minister said that the move was aimed at protecting small depositors. A Cabinet meeting that approved this capital infusion at taxpayers’ expense had imposed some meaningless conditions like growing deposits at the rate of 15% and halving bad loans over the next two years. On 30th June, The Mint had reported that 45 cooperative banks were likely to face penal action by the Reserve Bank of India (RBI).

Of these, 23 did not even have licences and would need Rs2,100 crore even to meet the 4% capital adequacy ratio. These 23 seem to be the ones that have received taxpayers’ money.  

The action sets a terrible precedent by ignoring the fact that cooperative banks are in a mess because of dual regulation, political involvement and interference in their management and the fact that large chunks of their irrecoverable loans are usually to politically connected persons who are wilful defaulters.

Consequently, cooperative banks are poorly regulated and fail, with alarming regularity. Unfortunately, most people are unaware of the poor supervision of these banks which usually target small depositors with higher interest rates. Interestingly, while banking decisions are hugely susceptible to political pressure, the government has ensured that deposits of up to Rs1 lakh of all banks, including cooperative banks, are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

It is important to remember that a previous BJP-led National Democratic Alliance (NDA) government (1999-2004) had not hesitated to get a pliant RBI governor and DICGC to bend the rules for Madhavpura Mercantile Cooperative Bank (MMCB) after the Ketan Parekh scam of 2000-01. MMCB’s management had destroyed the Bank by lending nearly Rs1,000 crore to scamster Ketan Parekh. Under DICGC rules, deposit insurance is paid out only after a bank goes into liquidation. An exception was made for MMCB, to appease a powerful BJP minister and several hundred crore rupees were paid out. Those days, a decimated Congress, as the leading opposition party, did not protest. It will be a sad day for financial consumers if history repeats itself and a powerful BJP government decides to protect shady cooperative banks instead of bringing them under the clear and unambiguous regulation and supervision of RBI.