Banking: How the Cookie Crumbles

BANKING
How The Cookie Crumbles

LÉ AffairÉ MMCB is the tip of an iceberg. The co-operative bank sector in Gujarat is headed for one big fall.

By Suveen K. Sinha

Fun for some; serious business for others: A protest against MMCB in Ahmedabad

When Bhalerao Bhamare retired as a superintendent with the Gujarat Transport Department three years ago, he put his lifetime earnings-Rs 4.5 lakh-in fixed deposits with Madhavpura Mercantile Cooperative Bank, the second largest cooperative bank in Gujarat and a scheduled one at that -a status accorded by the Reserve Bank of India that gives a high degree of credence to its cheques, demand drafts, and pay orders. Today, all he has, is a pay order issued by MMCB, which the drawee bank, Dena Bank, refuses to cash.

The teachers and other employees of Anand Niketan, a school in Ahmedabad, may have to go without pay next month. The school had parked all its funds with MMCB and has no money to pay salaries. Jitendra Shah, an Ahmedabad-based edible oils trader, was in Gandhinagar on April 9, when a friend called to say that there were rumours that MMCB was in trouble. Shah, whose association with the bank goes back to 1985, thought it was just that, a rumour. But when he came back to Ahmedabad, he, like everyone else, panicked. Shah was standing in the queue when the bank opened next on March 12 and managed to withdraw Rs 5 lakh of his total deposits worth Rs 11 lakh. March 12 was the last day MMCB was open for business.

Bhamare, Shah, and Anand Niketan are just three of MMCB's depositors who have no idea what will become of their monies parked with MMCB, and with the other 339 cooperative banks in Gujarat. Shah has since formed the Nav Gujarat Banks Customer Protection Council, whose membership has swelled to 500. Along with a clutch of depositors, he has been knocking every door in Ahmedabad and Gandhinagar: Chief Minister Keshubhai Patel; V.S. Das, who heads Reserve Bank of India's regional office; cooperatives Minister Ramanlal Vora; State Finance Minister Vajubhai Vala; Ahmedabad Police Chief P.C. Pande; the state registrar for cooperatives; and just about anyone else who may be able to help.

Like Shah, this correspondent had no luck when it came to meeting with Vora despite sustained efforts over four days; his mobile phone remains switched off round the clock. According to Bhupendra Mehta, a trader in iron and steel, Vora denied any knowledge of MMCB being in trouble when a group of depositors met him at 4:30 on the evening of March 14. And Das, who had been addressing press conferences till a week ago, refused to comment on the story.

Passing the buck


"There should be minimum interference from the registrar of co-operatives" N.PATEL, Vice Chairman, GUCBF	"There is a lack of professionalism in co-operative banks" N.P.MANKAD, GM, Co-op Bank of Ahmedabad	"We don't have an authentic estimate of Madhavpura's liabilities" AMBUBHAI PATEL, MD, Kalupur Co-op Bank	"All problems will be solved if we revive MMCB" ATMARAM PATEL, Chairman, GUCBF

Atmaram Patel, a Congress MP from Mehsana and Chairman of Gujarat Urban Cooperative Banks Federation (GUCBF), uses and re-uses the word Katibaddh (Gujarati for committed) when he talks of efforts to revive Madhavpura. ''All problems will be solved if we can manage to revive Madhavpura and keep it running.'' The problem is, no one knows how it can be done or whether it is doable at all. Rumours abound. Every two hours, 'information' comes from Gandhinagar, the state capital 30 km away, of a press conference being called to announce a vital breakthrough, or of some fresh date for a crucial meeting in New Delhi. ''We don't even have an authentic estimate of Madhavpura's liabilities,'' moans Ambubhai M. Patel, Managing Director of Kalupur Commercial Cooperative Bank, the largest cooperative bank in Gujarat.

Of course, committees have been set up. The central registrar of cooperatives has constituted no less than three: one to revive MMCB, another to advise its administrator (S. Ramachandran, a former Bank of Baroda GM pulled out of retirement), and a third to go into its irregularities and mismanagement. All hopes are now pinned on the Union Government as the State Government has refused point blank to extend any finances on the pretext that MMCB has branches in many states, bringing it under the purview of the Multi-State Cooperatives Act.

The onus is, therefore, on the Centre. The Gujarat Urban Cooperative Banks Federation wants the Centre to provide Rs 500 crore and the RBI to release money from its arm, the Deposit Insurance and Credit Guarantee Corp. The fledgling depositors' association wants the liabilities to be met thus: 25 per cent each by the Central and State governments, another 25 per cent through possible recovery of dues, 15 per cent by withholding the payment of deposits of other cooperative banks by 50 per cent, and 10 per cent through the insurance scheme.

Yet another formula doing the rounds has been proposed by Bhuj Mercantile Cooperative Bank Chairman M.H. Morabia. Bhuj Mercantile happens to be one among the 168 smaller cooperative banks that have substantial funds with MMCB. The deposits were made as RBI allows these banks to meet their SLR requirements by investing 10 per cent (of their deposits) with scheduled cooperative banks and the remaining 15 per cent in government securities. Morabia wants cooperative banks with deposits in MMCB to forego interest for three years and contribute additional funds worth 50 per cent of their respective deposits to revive it. Even the Wholesale Fruit Merchants Association, which has 140 members, has come out with a proposal.

All steak; no potatoes

The proposals have all been met with the same scepticism. ''What on earth can be the possible rationale for the Centre providing Rs 500 crore to save a cooperative bank,'' asks a local analyst. The RBI has said nothing about releasing money from the deposit insurance scheme. Chief Minister Keshubhai Patel has written to the Centre to guarantee the amounts private parties may raise to save Madhavpura, but State Finance Minister Vala candidly says he doesn't expect North Block to oblige.

The guarantees are crucial. Kalupur, for instance, had provided MMCB Rs 25 crore in call money market just before trouble broke out and Rs 5 crore after it. It is ready to provide Rs 15 crore more, but only if it is guaranteed by either the State government or the Gujarat State Cooperative Bank, the apex bank of the sector. While the 168 smaller cooperative banks that have funds parked in MMCB want to revive it, the 150 bigger cooperative banks, who are actually MMCB's rivals, are hoping it will be liquidated. Doubts are also expressed over GUCBF's sincerity as its Chairman Atmaram Patel happens to be a Congress veteran, while the state government is run by the Bharatiya Janata Party. Curiously, Atmaram Patel's deputy, Natwarlal Patel, known all over Ahmedabad as Nattu Mama (Uncle), used to be a business partner of MMCB Chairman Rameschandra Nandlal Parekh. Together they built the Madhavpura marketing complex in 1984. But Parekh usurped the front portion of the complex and made it MMCB's head office. An incensed Nattu Mama walked out and set up his own bank, Bhagyodaya Cooperative Bank. They have been sworn enemies ever since.

A breach of trust

The MMCB imbroglio seems to have eroded public confidence in the cooperative banking system. Which is why merely reviving MMCB will not be enough. Satish Mehta, who runs a small printing press in Ahmedabad, and was lucky enough to extricate his Rs 60,000 the day the run on MMCB began (March 8), has deposited it in the local post-office. He has sworn not to put his money in a bank. Jitendra Shah is more liberal. He is prepared to deal with nationalised banks.

There is also a growing suspicion that the government could not have been entirely unaware of the goings on. ''There is clearly a collusion between the managements of cooperative banks, the urban cooperative bank division of the RBI in Mumbai, its regional office in Ahmedabad, and the registrar in the state cooperative department,'' says Rama Reddy, President of the Hyderabad-based Cooperative Development Foundation. He points out how MMCB flouted CRR and SLR norms, limits on lending to individuals and business groups, and the limit on lending against shares.

Today, nationalised and private banks do not accept cheques issued by cooperative banks and are steadfastly refusing to provide them letters of credit. Cooperative Bank of Ahmedabad, which has a deposit of Rs 1 crore with ICICI Bank, has been trying in vain to get an loc of Rs 30 lakh that it is entitled to. ''They (ICICI Bank brass) have told me that I am free to withdraw the deposit but no loc would be given,'' says the bank's General Manager, Naishadh P. Mankad. And Mankad's is one of the healthier banks with its deposits of Rs 300 crore exceeding its advances by a comfortable Rs 100 crore.

RBI's handling of Lé Affairé Madhavpura hasn't helped. ''Bank of India (which has taken a hit of Rs 150 crore) immediately started proceedings (against Madhavpura). Why couldn't the RBI do the same?'' asks Bhupendra Mehta. Mankad has another complaint: ''I believe MMCB's current account with RBI was overdrawn only to the extent of Rs 23 crore on March 13. Instead of squaring it, the Central Bank suspended clearing of all cooperative banks in Ahmedabad. RBI could have started dialogues on March 10, itself, which was a holiday, instead of waiting till March 13.''

The Madhava Rao Committee, set up by the RBI, had suggested as far back as 1999, that the current framework of cooperative banks being under two masters-the RBI and the registrar of cooperatives-should be done away with. Further, cooperative banks with branches in more states than one fall under the central registrar and those confined to one state fall under the state registrar. All this gives enough room for the buck to be constantly passed around from one office to another. Incidentally, no action has been taken so far to implement the committee's recommendations. Two other committees-the Khokhani Committee and one under Atmaram Patel-were set up by the Gujarat government to reform the state's cooperative laws, but no one quite recollects what happened to their reports.

Crude cooperations

When talking to BT, Patel took a while to recall that he had indeed headed such a committee but offered that his government headed by Shankarsinh Vaghela fell before the committee's recommendations could be studied. Abolishing the current structure to simply bring the cooperative banks under the Companies Act could be a solution. But the immediate need is to ensure proper implementation of the existing norms, all of which were flouted by MMCB.

Mankad also points to the lack of professionalism among cooperative banks. Most of these banks started when a bunch of small time traders, unable to get finance from the banks that had been nationalised in 1969, set up their own banks. They were helped in no small measure by the traditionally strong cooperative movement in Gujarat. MMCB, for instance, was born in Ahmedabad's Madhavpura spices market.

Over time, in their zeal to raise deposits, these banks forgot the basic tenet of dealing only with full-fledged members that had voting rights and acquired a legion of nominal and associate members that easily outnumbered the voting members. The legacy of this origin is strong, almost incestuous, links across cooperative banks as directors of one freely avail of funds from another. The fact that most bank founders have also been active in politics has added another angle to it.

The state government often turns to cooperative banks for cash. In 1998, the cooperative banks of Gujarat invested as much as Rs 270 crore in Narmada Bonds. The cooperative banking sector is, thus, no longer viewed as representative of the cooperative ideology and is seen to have become the fiefdom of a few. Sums up Reddy: ''They are non-cooperatives under the camouflage of cooperatives.'' Not that these ills are new. At least 12 cooperative banks-among them Relief Merchantile Cooperative Bank, Bhagyalakshmi Cooperative Bank, Sahyog Cooperative Bank, and Harsiddh Cooperative Bank-are said to be in various stages of liquidation, though the process has been stalled in some cases due to political pressure or litigation. In a recent letter to the Union Finance Minister, Bharat Gariwala, Convenor of BJP's economic cell in the state, wrote: ''The recent fraud committed by MMCB is just a tip of the iceberg... The cooperative banks in Gujarat have surplus funds of Rs 10,000 crore and, hence, many unscrupulous elements as directors of these banks have started manipulating such money fraudulently...''

For the moment, everyone is waiting with bated breath to see what happens when the RBI's current 45-day moratorium on breaking deposits before they mature ends by month-end. ''There is no clarity even about the date on which this moratorium would end-April 26, April 28, or May 1,'' says Ambubhai Patel of Kalupur, as he recalls how his bank worked round the clock on March 12 and 13, to pay a total of Rs 250 crore to depositors. To avoid a recurrence, he has continued to pay those breaking deposits even during the moratorium. Kalupur's deposits, share capital, and free reserves provide a Rs 1,000 crore surplus over its advances of Rs 650 crore.

Not every bank has this buffer. And a second run on the cooperative banks appears imminent whenever the RBI's moratorium comes to an end. ''We will all be lining up,'' hollers a group of depositors camping outside MMCB headquarters. Katibaddh is the word that comes to mind.

Issue Contents Write to us Subscription Syndication