The cooperative banking sector has survived many failures and scams. But it remained untouched, mostly due to political affiliation - a large number of these banks are controlled by politicians.
The power equation is largely responsible for the slow progress in overhauling the regulatory framework for cooperative banks. These banks have poor governance structures, lack professional managements and boards, and have weak risk management systems. Yet, gullible depositors repose their trust and money in these small banks, which is keeping them alive. They account for 3.87 per cent in total banking deposits and 3.20 per cent in advances.
The debacle of Punjab and Maharashtra Bank (PMC Bank) is not the first or last case of misgovernance. There are at least a dozen urban cooperative banks under the RBI administrator. After the involvement of Madhavpura Mercantile Cooperative Bank in the Ketan Parekh scam in 2001, the RBI had strengthened the guidelines pertaining to KYC and money laundering. The consolidation and liquidation has brought down the number of cooperative banks by 375 to 1,551 since early 2000.
Experts suggest the government has to take the first step of overhauling cooperative banks like it did with PSBs by merging many of them. This is the time to amend the regulatory framework to bring these banks under the ambit of the RBI. Similarly, the RBI should nudge large urban cooperative banks (UCBs) to convert into small finance banks for better supervisory control. "We are forming a separate department for supervision and building a separate cadre of officers for supervision," said RBI Governor Shaktikanta Das. That will help, but continuing with the current structure for UCBs is not good for the financial system. In the case of PMC Bank with Rs 13,000 crore balance sheet-which is quite small-the RBI had to twice issue a statement that the banking system is sound and stable. Many a times panic among depositors has disastrous consequences for the stability of the financial system.