Recently, the Reserve Bank of India (RBI) gave approval to the proposed Kerala Bank on condition that the bank would fulfill some criteria laid down by the RBI. The conditional approval from the RBI might be helpful in overcoming many legal obstacles standing in the way.
Various expert panels on banking have favoured consolidation in the banking structure to create adequately capitalized, automated, technology-oriented banks through mergers and acquisitions. The formation of the Kerala Bank is along these lines. The new bank would replace the three-tier system of primary societies, District Co-operative Banks and the State Co-operative Bank with a two-tier system of primary societies and the State Co-operative Bank. District Co-operative Banks would be merged with the State Co-operative Bank. When the new bank becomes reality, it would be the largest banking network in Kerala with around 850 branches.
Let us hope for the best. However, it would be good if the architects of the proposed Kerala Bank learn some lessons from the recent collapse of Punjab Maharashtra Co-operative (PMC) Bank.
PMC Bank, with more than Rs.11,000 crore of deposits spread over 137 branches in seven states, is one among the 10 large co-operative banks in India. Interestingly, RBI Officers Co-operative Society has deposits of Rs.105 crore with the crisis-ridden multi-state PMC Bank.
Why did the PMC Bank, which optically had sound indicators like net NPAs of 2.19 per cent and capital adequacy of 12.62 per cent for FY 2019, suddenly collapse? It appears to be a classic case of incredibly terrible management aggravated by regulatory and control failures. The bank with a loan book of around
Rs. 8300 crore lent almost 70 per cent of this to a single real estate entity – HDIL – that has now gone bankrupt. Why did the bank resort to this incredibly imprudent lending? Waryam Singh, the former chairman of the bank and former director of HDIL, and Joy Thomas, the MD of the bank, were hand in glove with the HDIL promoters Rakesh and Sarang Wadhwans who made PMC the captive bank of the realty group. The scam ultimately caused huge losses of Rs. 4335 crore to the PMC Bank when HDIL defaulted.
Apart from incompetent and manipulative management, the failure of internal control systems and regulation also contributed to the collapse of the PMC Bank. It is alleged that the statutory auditors, who have been investigated by the Economic Offences Wing and now under custody, have links with HDIL. Reserve Bank of India, the financial regulator of the bank, also failed to unearth the massive irregularities.
Co-operative banking has some serious structural deficiencies. The dual regulatory system – RBI doing the financial supervision and State Governments in charge of management supervision – is grossly ineffective. The boards of co-operative banks, elected by the banks’ members, are far from professional. Politicians, who control most co-operative banks, game the system to suit their vested interests.
Depoliticise and professionaliSe
In a market economy characterized by intense competition, the preference of majority of customers would be to choose a bank that provides a vast array of products with excellent service. The emotional connect with the ‘State’s own bank’ alone would be grossly inadequate to attract customers. A bank cannot grow without attracting the young generation customers. The tech-savvy younger generation would prefer technologically sophisticated modern banks that provide vast array of banking services on advanced technology platforms. Also, the new generation wants modern services like depository services, stock market trading services, services relating to new investments like mutual funds, portfolio management services, insurance services etc. Providing these services efficiently with modern technology platforms would be a real challenge. New generation modern private sector banks are leaders in providing these services. The new Kerala Bank is likely to face serious challenges in this regard. Also, if the new bank is to succeed, the curse of the co-operative movement in Kerala – excessive politicisation – should not be carried to the new bank.