Banking Central | 2021 is no different from co-operative banks, where is the end of this mess?

The eradication of the RBI on co-operative banks continues in 2021.
After the gap, cooperative banks are back in the news. Last week, the Reserve Bank of India (RBI) canceled the license of United Co-operative Bank Ltd, in Bagnan, West Bengal, citing its poor financial situation. However, the good news at this time is that all investors will receive the full amount of their deposits from Depot Insurance and Credu Guarantee Corporation (DICGC).

The bank does not have enough money and opportunities to earn, the RBI said the bank’s continued conduct undermines the interests of its investors. In addition, public interest will be affected if the bank is allowed to continue its banking business, the RBI said.
Earlier, on May 11, the RBI imposed fines on two cooperative banks – Siddheshwar Sahakari Bank, Latur and Shankar Nagari Sahakari Bank Limited – and cited violations of the rules.
The story is not new. The RBI has reduced the number of banks it operates over the years due to violations of the law or cited financial collapse. On April 22, the RBI revoked the license of Bhagyodaya Friends Urban Co-operative Bank Limited in Maharashtra due to insufficient funds. In February, RBI imposed a Rs 1,000 withdrawal limit on Deccan Urban Co-operative Bank customers for a period of six months ‘subject to the current position of the bank’.

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This has been the second largest example of RBI’s major performance in partner banks this year. In the case of the Deccan bank, the regulator clarified that punitive measures should not be ‘taken’ as the cancellation of a bank license by the RBI, while also stating that 99.58 percent of depositors were fully covered by the Deposit Insurance scheme.
By 2020, the RBI had already exploded a major overhaul of co-operative banks. In the past, the central bank had revoked the license of four co-operative banks. These are Vasantdada Nagari Sahakari Bank, Karad Janata Sahakari Bank, CKP Co-operative Bank and Mapusa Urban Co-operative Bank of Goa.

In fact, 2021 is no different so far from co-operative banks. In 2020,
the RBI had issued almost 106 orders either to restrict their business operations or to extend the period of available indicators. About 60 of them were in the second half of the year. In some cases, the regulator has imposed a fine. As the above data shows, the eradication of the RBI on co-operative banks continues into 2021. In most of these cases, the findings point to mismanagement and questionable issues.

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While the RBI was quick to take action against co-operative / failing co-operative banks, decisions are not as quick as expected in most cases. In the case of PMC Bank, there is no decision yet. In a recent affidavit in the Delhi High Court, the RBI said the financial position of PMC Bank continues to be at risk and the position of its assets. The RBI has been holding back the majority of investors in the PMC Bank. However, the fact is that there are still a lot of people who have invested in waiting for a solution. This in particular puts them at a higher cost.
It is enough to write about the plight of co-operative banks. Poor governance, light regulation, local political interference and changes in the structure of the banking industry leading to strong competition all affect the co-operative banking industry. Banks operating in rural areas, large in number, are experiencing difficulties during the delivery of the PMC, Urban-affiliated banks, of which hundreds, have received legal attention (the RBI now has more control over these banks). But the issue of the two laws pertaining to small banks is still ongoing.

Refunds and licensing cancellations have eroded the trust of regular investors in co-operative banks. These banks have played an important role in financial consolidation over the years and need help. In addition to the campaign, the RBI will do well in developing an app that will restore customer trust in cooperative banks. The RBI may consider merging or converting non-performing cooperative banks with well-functioning lenders wherever there is a partnership. The RBI can also promote appropriate options for small financial banks.

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There are successful examples. On January 6, 2020, the RBI issued a formal authorization for Shivalik Mercantile Co-operative Bank Limited to be transformed into a small financial bank under the “Scheme on transitional voluntary of Co-operative Bank into a small financial bank” issued on September 27, 2018. -26 April, the RBI stated that Shivalik Small Finance Bank has been operating as a small financial bank since April 26, 2021. The Reserve Bank has issued a banking license under Section 22 (1) of the Banking Act, 1949 to conduct business of small financial banks in India, the RBI said. This is a good example to follow because SFBs are tightly controlled by the RBI compared to co-operative banks.

In the current regulatory framework, the future of the co-operative banking sector does not look bleak. There needs to be a change in approach and no one, except the RBI, can take a big step. (Banking Central is a weekly column that keeps a close eye and links the dots on the most important student sector events.

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