Irregularity cost Surat banks clearing house berths

Why are co-operative banks in Surat being suspended from the clearing house, a step seen as the precursor to the bank being placed under RBI supervision and finally liquidation?

If officials of the clearing house and those in the banking industry are to be believed, it is sheer mismanagement and an utter lack of accountability that have left depositors of these banks high and dry.

In the last one and half months, the Surat Bankers' Clearing House has revoked the membership of four co-operative banks of the city. This includes Royale Co-operative Bank Ltd, Vitrag Co-operative Bank Ltd and Metro Co-operative Bank Ltd.

According to industry experts, there are various reasons for this severe action, but the main being the mismanagement, which has resulted in erosion of customer confidence.

"It has become very clear that these banks were run more like a private firm than like a bank. In all the cases, the directors and chairmen were guilty of misusing their authority and shelling out loans indiscriminately, leading to liquidity problems," Setu Madhavan, the chairman of the Udhna Citizens Co-operative Bank Ltd told Business Standard.

"There are over three dozen co-operative banks in Surat, but only a few have been caught in a crisis. These banks were run in an unprofessional manner, and hence the trouble was only expected. We are also running a co-operative bank, but we have ensured that it is managed in a completely professional manner, and hence we have not faced any problem. The only way to stop more banks from collapsing is to start managing them in a professional manner," he added.

Narahari Rao, president, Surat Bankers' Clearing House, said, "Mismanagement and blatant misuse of authority by the banks' boards are the sole reasons for collapse co-operative banks in the state. None of these banks were managed in a professional manner. There was no transparency in functioning. It was just natural that the depositors lost confidence and rushed for withdrawals, which led to weakening of the banks."

An industry expert blamed Reserve Bank of India (RBI) for the problems in co-operative banking sector. "Until a few years back, banking licences were issued to very few people, and that too after proper verification of the promoters. Around five years back, the policy was changed and RBI started issuing licenses to just about anyone.

"As a result many ineligible persons managed to secure licences and start banks. These banks were managed like a private firm and hence could not survive for long. I believe RBI needs to review the licence issuing system, so that the unprofessional people are unable to enter the sector," he said.

Another industry expert attributed the crisis in the co-operative banking sector to the loss of faith among depositors. "The co-operative banking sector of Surat was believed to be one of the strongest in the country. But it seems to be collapsing like the house of cards."

The problem started with collapse of Diamond Jubilee Bank, and has continued with Suryapur Bank, Vikas Bank, Century Bank, Royale Bank, Vitrag Bank and now Metro Bank," the expert said.

"The people of Surat have lost more than Rs. 250 crore because of collapse of these banks. Problems have also gripped some other co-operative banks too. So it is natural that the depositors no longer trust the co-operative banks. They have simply lost the confidence of co-operative banks. This is not good for the co-operative banking sector and steps need to be taken to rectify the mistakes at the earliest or else more co-operative banks would follow suit soon," he added.