Cooperative Banks: Outright Loot

Almost every month, the Reserve Bank of India (RBI) puts out a brief press release announcing the closure of one cooperative bank or the other. Deposit insurance payment data show that Maharashtra has the highest number of cooperative banks going bust. According to one petition, 165 cooperative banks have been shut down in Maharashtra in the past 30 years. These small banks fail with monotonous regularity because of they are under the dual regulation—that of the RBI and the Registrar of Cooperatives. Cooperative banks are usually set up by politicians or their cohorts and RBI does not bother to block their dodgy advances until it is too late for a rescue. Over the past two decades, the only insurance claims paid out by the Deposit Guarantee Insurance Corporation of India (DGICI), a subsidiary of RBI, are on account of cooperative banks. Their hapless depositors get only Rs1 lakh each paid out after the bank is actually liquidated which can take a few years. Unlike nationalised banks, which are owned by the government and, hence, carry an implicit sovereign guarantee, there is no such protection for cooperative banks from the states or the Centre.

Occasionally, when a bank is politically powerful, or otherwise sensitive, RBI has coerced a quiet merger with a public sector bank. Nobody questions RBI’s secretive dealings; so one never knows when rules are bent or flouted. So pathetic is the supervision of cooperative banks that RBI discovered 23 banks across India were operating without a licence! Ironically, the National Democratic Alliance (NDA) took the unprecedented decision to infuse a massive Rs2,375 crore to revive these shady banks, within months of coming to power.

Let me illustrate, with examples, how this endangers the savings of cooperative bank depositors. Pravin Darekar, chief of Mumbai District Co-operative Bank (MDCB) was booked for alleged embezzlement and causing a loss of Rs123 crore to the Bank by the Mumbai police in 2015. On 3 June 2017, the Maharashtra government issued a government resolution (GR) ordering all school and junior colleges teachers in the state to shift their salary accounts from a safe, nationalised bank (Union Bank of India) to the MDCB from 1st July. The reason? To ‘strengthen’ the cooperative movement in Maharashtra, but more likely to support Mr Darekar, who is now a BJP member of the legislative council; he has continued to head the Bank, despite being under police investigation. Over 30,000 teachers are affected and angry at this decision. MDCB does not even have the same infrastructure as a nationalised bank. But the government is unmoved and even justifies the action. Some teachers are now planning litigation against the order.

Now consider the case of the Bombay Mercantile Cooperative Bank (BMCB). One of the oldest, multi-state minority cooperative banks, BMCB was considered on par with, or better than, the Saraswat Cooperative Bank, at one time. But their growth trajectories have been diametrically opposite in the past couple of decades. Saraswat Bank has gone from strength to strength, kept political interference to the minimum and is the best among a handful of well-run cooperative banks. BMCB, on the other hand, has been systematically looted and mismanaged, despite every effort by a few dedicated whistle-blowers to draw the attention of RBI and the Central Registrar of Cooperative Societies (CRCS) since 1986.

I have been writing about the mismanagement of BMCB since the early 1990s, when I worked for The Times of India. After RBI’s intervention, a former secretary of the government was appointed managing director; but the turnaround was temporary. He was soon co-opted by the cabal that runs the Bank and the rampant loot resumed. In November 2104, I wrote to RBI governor Raghuram Rajan drawing attention to the fact that no action was initiated on the adverse findings of an RBI-ordered investigation by RM Khan, a retired district judge. I have forwarded an extensive letter by the whistleblowers detailing how dubious loans were being disbursed to companies connected with the management. This led to an inspection which, again, yielded negative findings and some curbs on management. But there was no decisive action, even under Dr Rajan. RBI follows a ponderous approval process for those who head the large private and nationalised banks; but it has turned a determined blind eye to the fact that the chairman and two directors of BMCB are facing criminal charges for cheating and fraud at Lucknow. All three have allegedly flouted banking regulations to avail bogus loans, usually by submitting fake documents. These loans, says the whistleblower (producing documents to back his charges), were then transferred to nationalised banks and were later classified as non-performing. Loans to the directors are in direct violation of the Banking Regulation Act.

After whistleblowers learnt that a Union minister has been making calls to support the Bank management, two MPs (Members of Parliament) from the Shiv Sena—Anand Rao Adsul and Gajanan Kirtikar—have taken up the matter with RBI, finance minister Arun Jaitely, and the Central registrar, in August. In a letter to the RBI deputy governor on 16th August, Mr Kirtikar has expressed surprise at RBI’s lack of action, when its own inquiry has established embezzlement of funds by the chairman Zeeshan Mehndi. He has also, among other things, drawn attention to two shell companies—M/s Shah Traders and M/s Universal Enterprises, which were used to route loans to the directors. In June 2017, RBI wrote to the CRCS agreeing that these dubious transactions were confirmed by its investigation. On 1st August, the joint secretary, CRCS, Ashish Kumar Bhutani, issued a bland show-cause notice to the chairman Zeeshan Mehndi and the Bank’s managing director. Nothing further has been done.

Meanwhile, a whistleblower has filed a public interest litigation (PIL) in the Bombay High Court. The petition claims that the directors’ loans, mentioned above, were part of Rs200 crore worth of bad loans sold to an asset reconstruction company, to hide the trail of dodgy transactions. The petitioner says he has received threats, from a dreaded gangster, asking him to desist from exposing the Bank management. In addition, the Bank has slapped a series of charges to discredit the whistleblowers, who are its former employees and trade union leaders. Fortunately, the court issued a notice to RBI and CRCS seeking their response. It is this that has finally led to a show-cause notice on the chairman. Remember, the transaction mentioned here is just one among scores of dubious deals identified by the whistleblower and backed with evidence to establish the charges. But who is listening?

At a time when RBI claims to have initiated corrective action against some nationalised banks, what will shake it up and force it to take decisive action to save BMCB? The Bank continues to sink; the fate of 1,500 employees and innumerable depositors hangs in the balance. Remember, the Bombay Mercantile case is not an exception; it is the norm. The only difference, if any, is that it has had a dedicated set of whistleblowers working to save it.

These are just two examples of how cooperative banks remain in the tentacles of shady politicians, while both the regulators—RBI and the CRCS—continue to remain unconcerned to the shock and frustration of insiders and whistleblowers. Indeed, shady cooperative banks continue to thrive under all governments, even the current one, which claims that it has declared a war against corruption.