The Reserve Bank of India (RBI) has given in to the demand of private, foreign and state co-operative banks to allow them to offer the constitutent securities general ledger (CSGL) account facility to co-operative banks.
These banks wanted the RBI to restore this facility, which was withdrawn last April following the Madhavpura Bank debacle, as it was a good source of free float of funds and they could earn a fee on every gilt transaction routed through them by the co-operative banks. However, recently, the central bank communicated the change in its stance to the banks.
The central bank had, on April 19, issued a circular directing all scheduled urban co-operative banks and non-scheduled urban co-operative banks, with net demand and time liabilities of Rs 25 crore and above, to maintain investments in government securities only in the SGL accounts with the RBI or in CSGL of state-run banks and primary dealers (PDs).
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The directive was issued after the Ahmedabad-based Madhavpura Mercantile Co-operative Bank went belly-up in March.
Nearly 160 co-operative banks and institutions in Gujarat held deposits amounting to around Rs 600 crore in Madhavpura Bank.
The banks, especially the state co-operative banks, perceived the directive as discriminatory and petitioned the union government as well as the RBI to reverse it as the CSGL account was a good source of income for them.
Urban co-operative banks (both scheduled and non-scheduled) wanting to buy or sell government paper route their transactions through the bigger banks and PDs having CSGL account with the RBI. The money deposited by a co-operative bank in a bigger bank's CSGL account, which is akin to a current account, is a source of free float of funds and is at its disposal as long as a transaction does not take place.
Moreover, a bank putting through G-Sec transactions on behalf of a co-operative bank earns a commission and is also able to attract other business from the smaller banks.