Monday, June 21

The Co-op crisis: How 1,500-odd urban cooperative banks are being run and regulated

Last Friday, no one turned up to deliver milk at Avillion Greenfields, a cooperative housing society in Mumbai. The delivery boys were apparently unable to withdraw enough cash from their bank to buy milk supplies.

Their savings are currently stuck at Punjab Maharashtra Cooperative (PMC) Bank, which has been put under restrictions by the Reserve Bank of India for refusing to recognise its bad loan situation. Withdrawals from bank accounts have been restricted.

It’s not just the milk boys. Raju Agarwal, civil contractor who lives in Avillion Greenfields, has fixed deposits of nearly Rs 50 lakh in the same urban cooperative Bank. Even the two Avillion Greenfields housing societies at Jogeshwari East together have deposits of nearly Rs 3.5-crore in the crisis-hit lender. “Nearly 200 residents in our complex have deposited money in PMC Bank. And for the last few days, there has been a pall of gloom all around,” Agarwal, 57, tells ET Magazine.

The lender, with deposits in excess of Rs 11,000 crore, appears not to have adequately reported the size of its non-performing assets, especially a Rs 2,500 crore exposure to real estate company HDIL Group, which has been taken to the bankruptcy courts by creditors.

Under Lens

The plight of PMC Bank depositors across Maharashtra, Karnataka, Goa, Gujarat, Andhra Pradesh, MP and Delhi and the impunity with which its officials flouted norms raises questions about management of all 1,500-odd urban cooperative banks with total deposits of nearly Rs 4.5 lakh crore.

Urban cooperative banks are divided into two tiers based on their area of operation. While only 31% of them are in tier-2 category, they account for more than 85% of deposits and advances.

Many small cooperative banks and cooperative societies also keep their deposits in large urban cooperative banks. Agarwal says the urban cooperative banks often offer slightly higher interest rates than state-run banks and aggressively seek deposits from housing societies.

“The biggest worry is that this [crisis at PMC Bank] can have a cascading effect,” says Arvind Khaladkar, who during his time as chairman of Pune-based Janata Sahakari Bank, was credited with turning around the cooperative lender.

He says nearly 130 smaller banks have deposits at PMC Bank, and if the lender is unable to return their money, all these small banks will have to mark their deposits as NPAs. “Cooperative banks operate on thin margins and this NPA will mean they will all be in loss, triggering a wider crisis,” the retired banker told ET Magazine.

Demand for Answers

Soon after the RBI appointed an administrator for PMC Bank last Tuesday, angry depositors gathered outside different branches to get their money out. By Thursday, RBI increased the cash withdrawal limit from Rs 1,000 to Rs 10,000.

Meanwhile, several first information reports have been filed against the bank’s top management. On Friday, even as the bank’s deposed managing director Joy Thomas held a press conference in Mumbai, assuring safety of deposits, many of the depositors met near a branch in Andheri to discuss how to bring the management and the board to book.

ending Mistakes

While all the focus is now on PMC Bank, Khaladkar refers to a larger issue — of how cooperative banks struggle to invest the funds raised as deposits and end up extending risky loans. “At one time, PMC Bank had lower deposits than Janata Sahakari. But they overtook us. When you grow fast, you need to also deploy that cash fast. That is when mistakes happen.”


The bank’s books also show a sudden spurt in term deposits. While its term deposits grew by 11.6% in FY17 and 10.96% in FY18, in FY19, the deposits jumped by 18.9%, crossing Rs 9,325 crore. Thus, the real growth in FY19 was double that of FY18. In this period, the bank’s total deposits grew by 16.89% to Rs 11,617 crore.

Former BJP MP Kirit Somaiya, who first registered a police case against PMC Bank and also met RBI deputy governor NS Vishwanathan over the issue, says: “This is a horrible situation — a clear financial fraud. The main borrower of PMC, HDIL, is already insolvent. There has to be an immediate relief for depositors and rehabilitation for the bank.”

Urban cooperative banks are caught in a time warp, he says. “They have assets like branch networks, but today when banks are going fully online, what is the value of the branches?”

The PMC Bank crisis has also broken out at a time when most cooperative banks and cooperative housing societies are rushing to hold their annual general meetings (AGM) before the September 30 deadline.

Though the AGM of PMC Bank has been postponed amid the ongoing crisis, fireworks are likely at meetings of other urban cooperative banks.

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