FM recipe for co-op banks revival divides sector

Union finance minister P Chidambaram while delivering his budget speech on Monday said that co-operative banks in India, with a few exceptions, are in a shambles.

But he was also quick to prescribe remedial action in a three-pronged strategy that included providing special assistance to wipe out accumulated losses of co-operative banks, bringing in institutional restructuring and effecting changes in the legal framework to empower the Reserve Bank of India to enforce prudential financial management.

However, the Gujarat co-operative banking sector, perhaps the worst hit, is divided over the proposed Rs 15,000 crore fund, to be put together with 31 per cent share of states, 60 per cent share of the central government and banks providing the remaining amount.

While some say that just pumping funds into weak co-operative banks is not a realistic solution and it is plain unfair for strong banks to pay for the misdeeds of weak banks, others say that being conditional (funds will be provided on condition that banks improve their condition), the scheme is perhaps the best the co-operative sector can ask for.

The finance minister said that he proposes to call state governments for consultations and begin the process of implementing the recommendations of the task force in states who are willing to accept the recommendations.

The Gujarat Urban Co-operative Banks' Federation has stated that just pumping money into co-operative banks will not help. Instead, if the state or central government provides money to banks, control would be more in the hands of the governments rather than in the hands of the regulatory authority.

"Just pumping in funds into weak co-operative banks will not help much. And the finance minister has suggested that financial assistance should be given either by the state or central government. The fact is that irrespective of whether it is a co-operative or commercial bank, the government must consider it is depositors' money that is involved and it is its duty to safeguard it," said R S Patel, president of Gujarat Urban Co-operative Banks' Federation (GUCBF).

Commenting on the task force recommendations on co-operative banks that Chidambaram referred to in his Budget speech, Patel said that the finance minister has accepted the recommendations in principle, but the process of consultations with respective state governments will begin.

"The question that needs to be asked is that although the task force has recommended changes in the legal framework to empower RBI to enforce prudent financial management, these institutions, the RBI and the central government, were already monitoring the banks till date. It appears that not enough was done to ensure prudent financial management in the past in the case of co-operative banks," Patel felt.

The federation has also contended the 0.1 per cent transaction tax on monetary withdrawal, stating that it appears as if this will apply to demand drafts as well.

"I do not think this is a correct step, at least for depositors of co-operative banks," Patel said.

Nutan Nagarik Sahakari Bank chairman Parthiv Adhyaru said that earlier too, he had opposed the state government decision to seek funds from stronger co-operative banks to support weaker ones.

"I do not think this is the solution. If the state governments are asked to provide their share in the proposed fund, they will turn to the banks, which is definitely not fair and viable," Adhyaru said.

"If one textile mill goes bust, will shareholders of another textile mill pay for the losses. Then how should one expect other co-operative banks to pay for the problems of a particular bank," he asked.

Gujarat State Co-operative Bank chairman Jairambhai Patel, however, says that the new model act that will come into force will prove to be a remedy for the co-operative banking sector.

"Yes, it is true that state governments are reluctant to put in their share of 31 per cent in the fund to be created for revival of the co-operative banking sector, but this is essential to remove dual control. But I believe that this is the most realistic solution to the mess that the co-operative banking sector is presently in," Patel told this newspaper.

Gokul Bakshi, chairman, The Prime Co-operative Bank, said, "The announcements by the finance minister in the Budget are related to the rural banks, not the urban co-operative banks. The urban co-operative banking sector is caught in a mess, and needs government support at this critical juncture. We are extremely disappointed that the sector has been totally ignored in the Budget."

"It is also disappointing that the state government, which governs the co-operative banks, has not taken any steps for reviving the sector. The state government should take the initiative, and along with the Reserve Bank of India, take collective measures to support the co-operative banking sector," he said.

Consolidation of urban co-operative banks through an appropriate package, integration of such banks through viable mergers, and proper monitoring, are the steps that need to be taken at the earliest, Bakshi added.

Thakore Naik, chairman, Surat District Co-operative Bank, said, "The various announcements in the Budget are on the basis of the report of the task force. I am not in a position to comment on the issue as I am yet to study the report in detail."

"At present, all powers related to the co-operative banks lie with the state government. The task force has recommended that more powers should be given to the Reserve Bank for dealing with the co-operative banks. However, it is highly unlikely that the states would agree to diluting their own powers, and give more powers to the RBI," said the chairman of an urban co-operative bank to Business Standard requesting anonymity.

The task force recommendations Special financial assistance to wipe out accumulated losses and strengthen capital base of co-operative credit institutions Institutional restructuring to ensure democratic institutions Changes in the legal framework to empower RBI to enforce prudent financial management.