State, RBI in spat over SICB

Central bank upset over removal of ex-banker as administrator by Maharashtra government.

The Reserve Bank of India (RBI) and the Maharashtra government are at loggerheads over the management of Mumbai-based South Indian Co-operative Bank (SICB), which was put under a moratorium in 2004.

The state government has removed a retired public sector bank official as administrator, appointed on the recommendations of the central bank.

It has instead named a deputy registrar of societies as the new administrator, banking sources said. RBI had recommended a retired bank as the administrator to expedite recovery of loans, including bad loans.

The Maharashtra government replaced the administrator without consulting the RBI, which partly regulates the co-operative banks to protect depositors' interests.

Incidentally, the Maharashtra government has so far not signed a memorandum of understanding with the RBI on the regulation of cooperative banks as recommended by the Vaidyanathan committee, which was appointed to suggest ways and means to rejuvenate the cooperative banking system.

The Vaidynathan committee report had suggested that state governments should enter into MOUs with RBI for mutually sorting out issues concerning co-operative banks.

This was one of the ways suggested to bring about a unified control over cooperative banks. The current regulations create dual control of state governments and the RBI over co-operative banks.

The RBI has now engaged in a dialogue with the Maharashtra government urging it to review its decision on the replacement of administrator for SICB. The central bank has argued that an experienced banker is well equipped for recovery of loans.

The RBI has conveyed to the state government that continuation of a deputy registrar as administrator may hamper loan recoveries and consequently, the central bank might have to cancel the licence of the bank, said an informed source. If SICB's licence is cancelled, the state government will have to appoint a liquidator.

On liquidation, SICB depositors may have to forgo money in excess of Rs 1 lakh. The Deposit Insurance and Credit Guarantee Corporation provides insurance cover for up to Rs 1 lakh per depositor only. Sources said 35-40 per cent of SICB depositors had invested funds in excess of Rs 1 lakh.

The RBI had put SICB under moratorium on August 9, 2004, following a run on deposits on fears about the state of health of the bank on revelations that it had huge non-performing assets.

Moratorium restricts a bank from any fresh lending and renewal of loans and capped withdrawals from savings and current accounts at Rs 1,000. SICB had 13 branches and extension counters.