Opinion: Cooperative Banks - Safe As Houses Or Dodgy As Casinos?

"..Could thou and I with Fate conspire
To grasp this sorry Scheme of Things entire,
Would not we shatter it to bits -- and then
Re-mould it nearer to the Heart's Desire!"

Rubaiyat of Omar Khayyam

When most of us put money in the bank, we expect three things: Safety, Safety, and Safety. Else, why would we settle for a savings account interest rate of 2.5-3.0%? We could play the stock market with its gyrations, or invest in mutual funds (and become either billionaires or paupers). These are all high-risk, high-return ventures. When we invest in mutual funds, we are reminded "Mutual Fund investments are subject to market risks". Bank deposits are supposed to be 'Safe as Houses', which means riskless.

So, what happens in India to a depositor when a Cooperative Bank's numbers go deep into negative territory either because it has very large NPAs, or there is skulduggery, or acts of sheer incompetence - or a combination of all three?

We are close to the final shameful chapter in the saga of the Punjab & Maharashtra Co-operative Bank Limited (PMC). It is time for us to ask if this is the best the nation can do for bank depositors - particularly those not-so-affluent ones who deal with cooperative banks.

First, a bit about these banks, a large portion of which across the country are controlled by local politicians or their surrogates. What better examples than the sugar barons-cum-politicians of Maharashtra controlling sugar cooperatives and rural Cooperative Banks? There are also some urban Cooperative Banks that are run/patronised by specific castes or communities. These hold deposits of small businesses, small traders, housewives, pensioners, etc.

Some Cooperative Banks are run very professionally; some are not. Cooperative Banks often provide banking services in areas not well-covered by commercial banks. One of their attractions is that they pay a somewhat higher rate of interest than commercial banks.

Until recently, while Cooperative Banks were licensed by the Reserve Bank of India (RBI), they were regulated by the central bank as also state governments. After the Banking Regulation Act was amended in September 2020, these banks were brought under the direct regulation of the RBI.

The PMC went bust in September 2019. The allegation is that the promoters, in league with the Management, got away with around Rs 6,500 crore.

But this story is primarily about its depositors, and how shoddily they have been treated. During the first six months of the moratorium, they could withdraw only Rs 1,000 - later raised to Rs 25,000. No exemptions for emergency medical expenses, weddings, business expenses, expenses concerned with education.

Well - are not deposits with banks insured? Yes, of course they are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a 100% subsidiary of the RBI.

The DICGC is funded by a levy on all banks of Rs 0.10 on every Rs 100 deposited but until last year, the DICGC insured deposits only up to Rs 1 lakh. In 2020, the levy was raised to Rs 0.12 per Rs 100 and the amount insured was raised to Rs 5 lakh.

Two questions arise:

If Rs 1 lakh per depositor was insured when PMC went bust, why were depositors not paid up to Rs 1 lakh right away?

In today's day and age, is Rs 5 lakh insurance cover adequate for banks that claim to be 'safe as houses'?

Now to the grim part of the story. The DICGC pays pretty quickly (in less than a month), but only after all the long-winded bureaucratise has been borne. On average, over the past five years, it has taken 1,028 days between the de-registration of a bank and settlement of the first claim. After an exceptional year (2017-18) among the five, the average still comes to 767 days.

According to media reports, after PMC went bust, there was total chaos and over 50 PMC depositors died within the first year and many have been put through enormous financial stress.

In other words, some depositors may have died because they could not get medical treatment, or of shock from seeing their lifetime's savings frozen indefinitely; many small businesses went bust because they had no cash flow; ambitions for higher education of many young people were shattered; many marriages broke up over money matters; many houses were taken over by banks for non-payment of EMIs, etc., etc. And we call this 'safe as houses'?

The RBI subsequently allowed depositors of PMC to withdraw up to Rs 1 lakh by June 2020. This allowed over 80% of depositors to withdraw their entire balance.

Last week, the RBI unveiled a plan for the PMC. According to the Mint, as far as individual depositors are concerned: "The payout plan will work out like this: The first payment of Rs 5 lakh to all depositors will be made as soon DICGC transfers the funds. The repayment clock starts ticking once the Centre notifies the amalgamation in the official gazette (the so-called appointed date). At the end of the second, third, fourth and fifth years, retail depositors will receive additional Rs 50,000, Rs 1 lakh, Rs 3 lakh and Rs 5.5 lakh, respectively. This means retail deposits up to Rs 15 lakh will be repaid in full by the end of the fifth year. For the next five years, there won't be any repayments. At the end of the 10th year, those who still have residual amounts with the bank will be repaid in full."

Net-net: for some, more than 10 years to get their own money back. Some justice.

If you are an institutional PMC depositor, a bigger bonanza awaits you in the form of a massive haircut. 80% of those deposits will be converted to perpetual non-convertible preference shares at 1% interest for ten years and various scenarios thereafter. And all kinds of complicated stuff for the other 20% - but no cash.

The question is: how does a cooperative housing society repair the building or paint it or pay its employees if its cash is effectively frozen for 10 years? And if you are a small businessman? An invitation to close down your business. And how does a cooperative credit society whose funds are frozen give credit? But who gives a damn.

So, what should the payment mechanism be for the money that has been insured? If I am a cooperative bank depositor, and someone has defrauded the bank, I should be paid the insured sum pronto. What does the depositor have to do with the fraudster? The LIC pays on the nail when a policy-holder drops dead. Should not the RBI ask the DICGC to pay up right away? Why should the DICGC have to wait for two years for the RBI to sort out other issues which have nothing to do with the depositor?

Banks are supposed to be 'safe as houses', so should all deposits not be fully insured?

As per the DICGC's annual report, as of March 31, 2021, 98.1% of all depositors were fully covered by the Rs 5 lakh limit - but only 50.9% of the deposits were covered. Which means that nearly half the deposits are under water in case of scams.

Rs 5 lakh may have been a huge amount at one stage, but it is hardly huge today's day and age. For instance, think of a senior clerk in a company or in the government who has put in 40 years of service and retired. Assuming that his last basic salary was Rs 25,000, his gratuity alone would be Rs 5 lakh. Then there is his PF, which would probably be another Rs 15-20 lakh or more plus his pension. When he puts it in a Cooperative Bank fixed deposit, is it all at risk as in a casino?

The question is: how do we do organise total coverage of deposits?

In 2020-21, the DICGC collected around Rs 17,500 crore as 'premium' from the banks. If it takes Rs 17,500 crore to cover 50% of the deposits, then it would take another Rs 17,500 crore to cover the other 50% of the deposits. So, where can we find that money?

Well, the DICGC, as of March 31, 2021, is flush with funds. It is sitting on Rs 1.16 lakh crore "funds surplus". In the last six years, it has paid out 'net claims' of less than a total of Rs 100 crore, so it could easily carry the can until an alternative scheme is worked out by the RBI.

Another option: What about asking the top cop on the beat? The RBI. If it is the regulator and it slips up, who better to carry the can? After all, as per its annual report for 2020-21, it transferred Rs 99,122 crore to the government of India. Surely the RBI can spare the amount to refund depositors until a scheme is worked out.

There could be several other and better options the RBI can think of. For instance, the interest paid to each depositor could be reduced by 0.1% to pay the additional premium for insurance.

What I am saying is that one way or another, all bank deposits should be fully insured and promptly paid in case of a bank failure, and the depositors should have full faith that banks are truly 'safe as houses'.

I wish this were the end, but the cruellest cut is still to come. Commercial banks and Cooperative Banks are governed by different regulations which have accounted for the step-motherly treatment of cooperative banks. Banks go bust - but it is not only cooperative banks that go bust. Do you recall the stories of those Rs 5 lakh+ crore of NPAs in commercial banks? What happens there?

Well, if it is a public sector bank, don't worry, the government will bail you out. Haven't you heard about all the capital infusions and bank recapitalisations by the government almost every year to meet the capital adequacy ratios of public sector banks saddled with NPAs? Or, if the bank is non-viable, it is merged with another public sector bank. Did a depositor lose a rupee or have to wait 10 years to get the last bit of his money?

And if it is a private sector bank? Well - then the RBI organises a 'white knight' to take care of the bank in trouble. When Yes Bank went into a coma in March 2020 (something a good doctor would have spotted well in advance, as the signs were visible years earlier), the RBI imposed a moratorium on some of the bank's activities. During the moratorium, one could withdraw Rs 50,000 per month but there were exceptions for additional withdrawals for medical treatment, expenses for higher education and weddings, etc. In contrast: remember the rules for the PMC? Initially only Rs 1,000 and no exceptions.

Then we watched with awe, but not surprise, how the State Bank of India-led consortium of banks, prodded by the RBI, came to the rescue of Yes Bank in double-quick time. In just about two weeks after the RBI moratorium, Yes Bank was back in action. For the PMC, the period was 2.5 years.

You tell me: are depositors of cooperative banks fairly treated?

It is true that many cooperative banks are saddled with hidden NPAs and compromised managements. The RBI is now the sole regulator, and it needs, over a period of time, to close some cooperative banks, merge other cooperative banks, etc., but it has to sort out this mess.

All depositors in the country should be able to go to bed with the thought that, when they wake up, their money in banks should not have evaporated and that their banks are truly 'safe as houses'.

(Dorab R Sopariwala is Editorial Adviser at NDTV and writes on political and economic issues.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.