Issues and challenges in supervision of Cooperative Banks for RBI

In a move aimed at protecting the interest of depositors, Parliament passed amendments to the Banking Regulation Act, thus bringing cooperative banks under the supervision of the Reserve Bank of India. 

The Banking Regulation (Amendment) Bill, 2020, which replaces an ordinance promulgated on June 26, was passed by a voice vote in Rajya Sabha. The amendment was approved from Lok Sabha on September 16. 

The Government has clarified that the amendment is only for cooperative societies engaged in banking activities. The bill comes in the backdrop of the PMC Bank Scam and seeks to strengthen cooperative banks by increasing their professionalism, enabling access to capital, improving governance and ensuring sound banking through the RBI.

Currently, RBI is responsible for the overall supervision of the banking sector which comprises the following-

  • 12 Public Sector Banks
  • 22 Private Banks
  • 44 Foreign Banks
  • 44 Regional Rural Banks

There are 1,540 cooperative banks with a depositor base of 8.60 crore having total savings of about Rs. 5 lakh crore. The proposed law seeks to enforce banking regulation guidelines of the RBI in cooperative banks, while administrative issues will still be guided by Registrar of Cooperatives. 

Currently, the deposits with bank (i.e., public sector banks, private banks, foreign banks, small finance banks, payment banks, regional rural banks, local area banks, state co-op banks, district central co-op banks, urban co-op banks) are insured and fully covered up to Rs. 5 lakh for each depositor (for both principal and interest) . 

Total number of bank accounts 2174 billion  Number of bank accounts Fully protected under insurance 92%  Number of bank accounts partly protected under insurance 8%
Total amount of bank deposits Rs.120051 billion  Amount of protected deposits under insurance 28.1% Amount of unprotected deposits under insurance 71.9%

(Data as on 31st March, 2019, Source- DICGC) 

As can be inferred from the above data, 92% of the account holders are fully protected for their deposits which is obviously not more than Rs. 5 lakhs whose share in the total bank deposits is 28.1%. However, the greater financial risk of the banks is in the form of mounting NPAs. 

The scheduled commercial banks (SCBs) have gross NPAs of Rs.9.49 trillion out of which the Bharatiya PSBs have gross NPAs amounting to Rs. 8.06 trillion in March, 2019. However, the NPAs of PSBs in March, 2020 has come down to Rs. 6.44 trillion. The gross NPAs of SCBs is estimated to be around Rs. 10 lakh crores in March, 2020. Post Covid, analysts are estimating that the NPAs of Bharatiya banks may see an increase of Rs. 7 trillion –Rs.10 trillion by March, 2021! 

Under these circumstances shifting the overall supervision of cooperative banks to RBI is though inevitable the issue of how will RBI manage this additional load and still does not dilute the quality of supervision is a major problem that needs a solution. 

Increasing NPAs and Bank Frauds

The NPAs of the Bharatiya banks, particularly of the PSBs has been increasing over the years (Rs. 2.16 trillion in 2014 to Rs. 8.06 trillion in 2019) and for this both the RBI and government of Bharat, the major shareholder in the PSBs, have to collectively own the responsibility.

Total value of bank frauds where the amount involved was more than Rs. 1 Lakh in each case, has increased from Rs 1,542.8 crore in 2008-09 to Rs. 22,469.6 crore in 2017-18. 

In seven out of these ten years, nationalised banks have accounted for more than two-third of the total amount involved in these frauds. While around 65% of the number of fraud cases were technology related frauds, major portion of the amount of frauds (64%) were advances related frauds.

During the period FY 2014-FY 2018, the number of fraud cases have been consistent at an average of 12 a day but the cumulative amount of frauds has gone up to Rs. 1,00,718 Crore.

In terms of the relative share of frauds, public sector banks have a disproportionate share of over 85 per cent, significantly exceeding their relative business share of about 65 to 75 per cent,” said the RBI in its Financial Stability Report of June 2018.

Major frauds like that of Nirav Modi in PNB and the financial crisis in PMC Bank only indicate that the frauds in PSBs and financial mismanagement in cooperative banks are on the rise.

At this juncture, adding the portfolio of 1540 cooperative banks under the supervision of RBI will undoubtedly create additional stress on the banking regulator. Cooperative banks come with less capital, large shareholder and depositor base from rural areas saddled with local political interference cum influence. 

Though the recent Banking Regulation Act 1949 Amendment bill has been passed by both the houses of parliament and submitted to the president for his assent, which proposes to bring the cooperative banks under the supervision of RBI, also has a provision for appointment of external auditors to conduct the audit of the cooperative banks.

In the current scenario as mentioned above, how far RBI will be able to effectively monitor the conduct of the cooperative banks and exercise its supervisory function to improve the cooperative banking system is a point that is to be debated by the banking experts. 

Nevertheless, everyone will agree that there is a need to strengthen the central banking institution (RBI) with adequate infrastructure and manpower in order to take up the additional burden of extending its supervisory arm to cover the cooperative banks.

Mounting NPAs of the banking system, decline in economic growth followed by the Covid effect has led to lot of uncertainties in the economy at both micro and macro level and as monetary authority RBI has a complex situation to face and resolve. Therefore, there is a need to restructure the existing banking supervisory model to meet these challenges head on.

In this context the author suggests the following measures.

  1. The current agricultural refinancing functions of NABARD can be transferred to a separate entity which is floated for this purpose. 
  2. NABARD can take up the primary inspection and direct supervision of the cooperative banks.
  3. RBI may retain the overall supervisory function of the cooperative banks and exercise the option of conducting random inspections as and when it deems fit on an ongoing basis. 
  4. People with political back ground to be disqualified from becoming the board members of cooperative banks and suitable guidelines to be framed to induct professionals into the board. 

Unless a serious thought is given to restructuring the existing banking supervisory model there is a danger of the proposed cooperative banking supervision adding to the woes of the banking regulator resulting in weakening the financial sector which the country can ill afford in the current economic scenario.

Let us hope both the government and the banking regulator will deliberate, discuss and decide a suitable course of action to steer the banking sector to safer shores sailing through the current economic tsunami. 

References:

https://www.rbi.org.in/scripts/AboutUsDisplay.aspx?pg=RegionalRuralBanks.htm.

https://www.dicgc.org.in/FD_A-GuideToDepositInsurance.html#q1.

https://www.cenfa.org/wp-content/uploads/2020/07/Titanic-Moment_-NPA-study-FINAL-1.pdf.

https://www.dicgc.org.in/.


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About the Author

Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]