Sunil Kedar: The Political Link

Sunil Kedar: What was his role in it all? Meet the political face of the scam. Sunil Kedar, the Chairman of Nagpur District Central Co-operative Bank, is the son of veteran co-operative movement leader and Congress-stalwart Babasaheb Kedar. In 1995, denied a ticket by his father's party, he contested the Nagpur district assembly elections as an independent, won-consider that a coming-of-age party-and joined the Sena-BJP government in Maharashtra to become the Minister for Energy. In 1996, he switched allegiance to Sharad Pawar's Nationalist Congress Party (NCP). Kedar, the buzz goes, was close to Pawar, the veteran politico who enjoys close relationships with the several hundred co-operatives in the state. Kedar, now the main accused in the NDCCB scam, is alleged to have invested Rs 150 crore of the co-op's money in G-secs. With his ability to push the right political buttons, he enjoyed the support of almost the entire board of 26 directors of the bank with the possible exception of a small group led by Ashish Deshmukh. That meant he could flout RBI norms with impunity and invest in gilts through private brokers like Home Trade. Then, out of the blue, he lodged a complaint with the Nagpur police on April 25, 2002, alleging Home Trade, Gilt Edge, Indramani and Century, and Syndicate Services never delivered G-secs that had been paid for by the bank. That was the spark that started the unravelling of the one of the biggest G-sec scams in Indian history. Although, the main accused in the NDCCB case, it is politics that will eventually decide Kedar's fate. -Roshni Jayakar

They have names like Junglee Maharaj, Rupee, and Friends. Started with capital as low as Rs 12.5 lakh, their management is often nothing more than a motley band of money-hungry political appointees and interested borrowers. They violate every conceivable banking guideline with impunity, yet hold in their grasp deposits of over Rs 170,000 crore. Welcome to the bizarre and dangerous world of co-operative banks.

If there's one state where they can be watched at work it is Maharashtra. As many as 650 of the 2,000-plus co-op banks in India operate here; some of these stand accused of joining hands with disgraced brokerage Home Trade to pull off a daring scam in 'gilts' or government securities.

In recent memory, cooperative banks first hit the headlines last year when an obscure Ahmedabad-based bank, Madhavpura Mercantile Cooperative, discovered it had a Rs 900-odd crore hole in its balance sheet. Money that was probably meant to buy new seeds and tractors for farmers-co-operative banks were traditionally set up to service the rural credit needs of agricultural communities-had amazingly found its way to the country's stockmarket.

"The Madhavpura incident is a definitive example of reckless lending," says Shailesh Haribhakti, Managing Partner of Mumbai-based chartered accountants, Haribhakti & Co, and co-author of a recent paper on the evolution of scams.

As irate depositors lined up outside Madhavpura to withdraw savings, shivers ran down the spines of 164 other cooperative banks, many of whom had taken advantage of a special concession offered to co-op banks-till last year they were allowed to invest 10 per cent of their SLR (a reserve that every bank is required to maintain in the interests of liquidity and safety) in other cooperative banks. Any long-term run on Madhavpura would have set off a chain reaction that could have hurt the entire system. To prevent a recurrence, the RBI clamped down and ordered that in future co-op banks should invest the entire 25 per cent in G-secs. Oops.

WHAT AILS CO-OP BANKS

Rupee Co-op Banks: Once an NPA-paradise GOVERNANCE: Borrowers, not depositors, are members of co-op banks. They have free use of the funds of these banks. ASSET-QUALITY: Most co-op banks comprise members from a single industry. If that industry suffers, so does the bank. REGULATION: There is no single regulator. Urban co-op banks are regulated by RBI; rural ones by the state registrare of co-operatives. LOW PENALTIES: Fines are ridiculously low. Even for the nastiest of scams, the penalty can be a maximum of Rs 200 a day. LIQUIDATION: Co-op banks can't be liquidated. Even if tehy go under, liquidators can't be appointed. INTERFERENCE: Politicos want to be chairman so that they can distribute money without being held accountable for it.

DIRT, DIRT, AND MORE DIRT Since early 2001, co-operative banks have been in the news and for all the wrong reasons.

March 2001 Classic Co-operative Bank, AHMEDABAD The bank issues payorders in favour of bullion merchant Kantilal Choksi that are later dishonoured. Offices of the Chairman of the bank, Suresh Gadecha, searched by CBI; cases have been filed by bank against him. Amount involved: Rs 53 crore March 2001 Madhavpura Mercantile Co-op Bank, Ahmedabad Chairman Rameshchandra Nandlal Parikh connives with bull Ketan Parekh and exceeds authorised lending limits. Run starts on bank. RBI supersedes the board and the government infuses fresh capital. Amount involved: Rs 900 crore August 2001 Krushi Co-operative Bank, Hyderabad Directors are accused of siphoning off funds to relatives and of flouting lending norms. Bank has been under RBI administration since October and is waiting to recover funds. Deposit base: Rs 60-odd crore February 2002 Rupee Co-operative Bank, Pune RBI report on non-performing assets and improper lending norms causes a run. RBI supersedes board and appoints administrator. Deposit base: Rs 2,000 crore February 2002 Charminar Bank, Hyderabad Bank accused of misusing funds and Chairman Syed Alamdar Hussain Sajjad Aga, of nurturing underworld connections. He shoots himself on February 25. RBI has barred the bank from business and depositors are waiting to recover their money. Deposit base: Rs 300 crore April 2002 Nagpur District Central Co-op Bank Irregularities in gilt investments surface (bank fails to take delivery of gilts). Chairman Sunil Kedar is arrested. Amount involved: Rs 150 crore April 2002 Wardha Co-op. bank Part of similar gilt scam as NDCCB. Board is superseded by the Registrar of Co-operatives for violating banking norms. Amount involved: Rs 25 crore April 2002 Osmanabad Central Co-operative Bank This co-operative bank's case-sheet reads the same as Nagpur District Central Co-operative Bank and Wardha Co-operative Bank. The bank's board has been superseded by the state's Registrar of Co-operatives for having been found violating banking norms. Amount involved: Rs 30 crore

PSST. WANNA START A CO-OP BANK?

All it once took to start a co-operative bank was eight willing people (promoters), Rs 500,000 in start-up capital, a letter from the State Registrar of Co-operatives, and a banking licence from RBI. The central bank played spoilsport last year by hiking minimum capital requirement to Rs 25 lakh, and minimum membership to 500. And if you're bothered by the RBI's punctiliousness in ascertaining the financial standing of the promoters, never mind, a little political-play could set things right. Congratulations, now you have your bank. Contrast this with the frisking private bank applicants are put through: a minimum capital of Rs 100 crore, a scrutiny of the promoters' background and track record, and an inventory-audit of infrastructure and tech-support.

There's More To Home Trade

The Home Trade scam may involve a mere Rs 600 crore, but its ripples are being felt across the country too. Even far-away Kolkata has not been spared. Ashok Bandopadhyay, the Chairman of the West Bengal State Cooperative Bank, is a worried man. With three district units and 32 branches across the state, he's busy trying to figure out enough checks and balances to do a post-Enron audit proud. "With deposits in excess of Rs 1,000 crore, we have to be very careful in our investment pattern," says Bandopadhyay.

It's the same apprehension down South. In the pro-reforms Chief Minister Chandrababu Naidu's Andhra Pradesh, two bombs have already exploded. Charminar and Krushi, two major urban cooperative banks, have downed shutters, leaving depositors in the lurch. Some half-a-dozen others-Bhagyanagar, Aryan Cooperative, Sravya and Praja-have become inactive over the last one year. And everyone is waiting for the next one to go bad. Says V.K. Taori, Managing Director & CEO, A.P. Mahesh Co-operative Urban Bank Ltd, "The level of confidence among depositors has definitely reduced."

It is not just recent frauds that are causing this confidence crisis. The co-op banking system is inherently flawed; lax systems, lack of accountability, and constant political interference make these banks a hothouse of corruption.

For one, it is easy to start a co-operative bank (See Pssst...Wanna Start A Co-op Bank?). Then there is the issue of regulation or rather lack of it. Urban cooperative banks (UCBs) are regulated not just by the Reserve Bank of India but also by the Registrar of Cooperative Societies of the state where they are located. District and state-level co-op banks also report to NABARD (National Bank for Agriculture and Development). And even RBI's reach, rues Ashvin Parekh, a partner at Andersen (now merging with Ernst & Young), isn't adequate. "Did you know a cooperative bank cannot be liquidated? Nor can its management be changed in the normal course. All RBI can do is fine them for irregularities."

The central bank, for its part, is defensive. "We've already tightened entry norms for UCBs," says a RBI spokesperson in what is clearly a so-there-it's-not-our-fault tone.

While regulators play passing the buck, investors continue to bear the brunt of the scam. Their only recourse is the Deposit Insurance Credit Guarantee Corporation under which all bank deposits are insured up to Rs 1 lakh (provided the banks have been paying their premium). And getting that succour, as depositors at Charminar and Krushi will vouch, isn't easy.

The Death Of Innocence

As rumours fly on the possible involvement of regional rural banks and provident funds in the gilts scam, the question top-most on everybody's mind is, "What happens if there is a run on deposits?" No bank can sustain a full-fledged run; certainly not a weak cooperative one, says S. Venkataraman, Director (Financial Sector Rating), Crisil. "A run on deposits is much more difficult to contain in a cooperative bank as depositors tend to be concentrated in a single geographical pocket and often belong to the same community or trade group."

Hopefully, that won't happen. RBI reiterates that the system is robust and will survive the Home Trade debacle. It has concluded a survey of 23 urban cooperative and four district and central banks and certified that there is nothing that could set off a domino-effect within the system.

Meanwhile, healthy cooperative banks brace themselves for the backlash. When RBI clamped down on NBFCs in the nineties-after allowing them to mushroom-the sector all but choked to death. For many co-operative banks the nightmare has begun. The 83-year-old Saraswat Co-operative Bank, with a capital adequacy ratio of 14 per cent and Rs 400 crore reserves is one. "All banks, public and private, are refusing to deal with us," laments S.R. Shirodkar, the bank's Managing Director.

And to think it all started innocuously with Home Trade facilitating the purchase of government securities by some co-op banks.

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