oppn parties Cooperative Banks Must Be Fully Regulated By The RBI

News Snippets

  • The government decides to decriminalize more than two-thirds of penal sections in the Companies Act
  • Muslim groups tell the Supreme Court that they want the Babri Masjid to be restored
  • Muslim groups claim that while they were asked questions in court, Hindus were not questioned
  • Postpaid mobile services restored in Jammu & Kashmir from today, but still no internet
  • Abhijit Banerjee, an Indian-American currently a professor at MIT, wins the 2019 Noble prize in economics jointly with two others
  • Industrial output slumps in August as the IIP shrinks by 1.1%
  • Prime Minister Modi and Chinese President Xi Jinping watch a cultural show at the Shore Temple in Mamallapuram
  • J&K administration lifts the ban on entry of tourists in the Valley, but it remains doubtful how many will visit without being able to use mobile phones and internet
  • After Sena asks members to support the BJP candidate in Kalyan, 26 party corporators and 300 members resign setting off a crisis
  • The Centre sets up a 12-member committee to suggest systemic changes in the GST structure to improve compliance and collection, prevent misuse and evasion and rationalize rates and slabs
  • In line with the RBI outlook on the Indian economy, rating firm Moody's also downgrades growth forecast from 6.8% to 5.8% this year, saying the economy is experiencing a pronounced slowdown
  • HDFC chairman Deepak Parekh says the financial system in India does not offer foolproof security for misuse of the savings of the common man
  • Shivinder Singh and Malvinder Singh, promoters of Ranbaxy and Fortis, arrested for their role in Religare Finvest scam
  • Supreme Court says marriage can be dissolved if it has broken down irretrievably
  • DA of Central government staff hiked by 5% to 17%
Sourav Ganguly is the new president of BCCI, says conflict of interest is a big concern
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Cooperative Banks Must Be Fully Regulated By The RBI

By Linus Garg

About the Author

Sunil Garodia Linus tackles things head-on. He takes sides in his analysis and it fits excellently with our editorial policy. No 'maybe's' and 'allegedly' for him, only things in black and white.

The Madhavpura Mercantile Cooperative Bank (MMCB) scandal in 2002 was a clear signal that cooperative banks should not remain outside the strict regulatory purview of the Reserve bank of India and should embrace core banking to integrate with the banking ecosystem. But apart from canceling the banking license of MMCB in 2012, the RBI did little else to include these banks under its regulatory fold. Hence, it is not surprising that the Punjab and Maharashtra Cooperative Bank (PMCB) is now in deep trouble.

In the case of MMCB, the bank had loaned substantial amounts to the rogue stockbroker Ketan Parekh who used the funds to rig stocks and initiate a bull run on the bourses. It had lent Rs 1500cr to Parekh when other banks were not allowed to lend more than Rs 15cr to a single stockbroker at that time. When the bubble burst, the bank found that its capital was wiped out. PMCB is suffering the same fate. It has under-reported bad loans and is now not in a position to recover the money.

Due to political compulsions (most cooperative banks are directly or indirectly controlled by influential state politicians), cooperative banks have always been regulated with a soft hand. On paper, both the state government and the RBI have regulatory powers over these entities. But since they are not following core banking, their reporting systems are outdated and cross-verification is very difficult. Hence, these banks indulge in all kinds of malpractices.

But since they accept public deposits, they should be regulated like all other banks. The RBI should apply all its normal banking norms to these banks and immediately bring them under core banking. It is wrong to think that they cannot bring any harm to the system since they are very small banks. The cooperative societies' laws must be synced with other laws such as the Banking Regulation Act to give the RBI the powers to regulate these banks like all other banks.