The unfolding story of the ill-fated Karuvannur Service Cooperative Bank in Kerala’s Thrissur district, which is politically controlled and directed like similar banks in the state, is a fine example of how not to run a “bank”.
Unlike in other states, Kerala has had a tradition of the Primary Agriculture Cooperative Societies functioning as “service cooperative banks”. In other states, they do not engage so much in financing activities but instead supply fertilisers, seeds, inputs and play a role in procurement. It is a different matter that at the district/urban and multi-state levels, the cooperative banking system is quite strong in other states too.
It is estimated that 80 per cent of the total “banking” business in the country at the “primary” societies level takes place in Kerala with similar structures being reported only in parts of Himachal Pradesh, Punjab and coastal Karnataka.
So, the Karuvannur bank “irregularities” have become a matter of concern across Kerala with questions being raised about the way the service cooperative banks function.
It is indeed a moot point whether the primary societies can even use the word “bank” in their names as the Banking Regulation Act with amendments, prohibits the use of the word unless certain conditions are fulfilled.
Be that as it may, the Karuvannur incident raises three important questions:
1. How should the state deal with both the people failure and the system failure at Karuvannur?
2. What should be done to ensure that such incidents are prevented in the other 1,500-odd service cooperative banks in the State?
3. What are the steps to be taken so that there is no domestic financial contagion in Kerala in the wake of Karuvannur?
Kerala’s robust cooperative banking system has deposits of about Rs 72,000 crore excluding deposits at the credit cooperative societies run by employees/women/staff of various organisations.
This is also the corpus of the Kerala Bank, which is a name used for the amalgamated state and 13 District Cooperative Banks.
Out of the 14 district banks, the Malappuram District Cooperative Bank (controlled by the Indian Union Muslim League, mainly) is yet to merge with the state cooperative bank. The loans aggregate about Rs 50,000 crore.
The primary service cooperative banks which are seen as accessible, service-oriented and enjoy the trust of the people, are the mobilisers of deposits, not so much as the district banks or the State Cooperative Bank.
The difference is that the service cooperative banks are not regulated by the RBI while the State and District Cooperative Banks and even the Urban Cooperative Banks are supervised/regulated by the NABARD/RBI.
The regulation of the primary societies lies with the Registrar of Cooperative Societies under the Kerala Cooperative Societies Act.
It is evident that there has been either a very light-touch or loose regulation of the service cooperative banks. Even when there are powers to act against societies, it is seen that no action has been taken, which may be due to political reasons. It is nevertheless a failure of the Executive, which is in control and also empowered to act under the statute.
In the interest of protecting this vital sector and safeguarding its stability, the State should immediately take the following steps:
1. Quickly identify and punish the guilty in the Karuvannur bank case. Along with that, assess the systemic lacunae which left the problem unattended for so long. It shows a deeper malaise.
The Cooperative “Banking” system under the state needs an independent regulator, which will have to be akin to RBI, though not on the same scale because the primary societies are a parallel banking system, a la Kerala model.
If need be, we need to make new laws.
2. Under the existing Act itself, a Quick Review needs to be done at the major service cooperative banks and corrective action initiated within a maximum of six months. Till then, these banks can work in a consolidation mode, not in an expansion mode.
3. The State Government should unequivocally announce that it will protect depositors money in the cooperative banks. That assurance or announcement itself will work as a guarantee because ultimately any financial system works on trust and confidence.
The government should say we are the backstop, the way depositors’ money was protected in Yes Bank and even in Laxmi Vilas Bank through deft management.
Never waste a crisis, they say. Karuvannur is a reminder for Kerala to take quick corrective action so that the gains of a vibrant and widespread cooperative banking system are not squandered away at the altar of political expediency.
Hopefully, the collective wisdom of the political leadership will decide to give independence to the Supervision and Regulation of our unique “Service Sahakarana Banks” which are at the base of the cooperative banking movement in Kerala.
(S Adikesavan is Chief General Manager with SBI working from Thiruvananthapuram. Views expressed are personal.)