Is govt out to control urban co-op banks via nominees?

JAIPUR: The decision by the Rajasthan co-operative department to freeze elections to governing councils of urban co-operative banks and to appoint government nominees in their place as administrators has not only undermined the functional autonomy of these micro lenders but also thrown into uncertainty their ability to conduct core businesses like lending to new customers.
The department has already taken control over nine urban cooperative banks (UCBs) in various districts of the state by appointing administrators and the prospect of about 16 UCBs doesn't look to be any different.
As per the Co-operative Society Act, these banks hold elections once in every five years to elect board members and the chairman who run the operations. In 2016, the tenure of governing councils (GCs) in about 25 UCBs are due. But citing amendments to the Act made in April this year for which rules are yet to be framed, the government has rejected their requests for elections.
Multiple sources in the UCBs said the decision to appoint administrators will impact the very purpose of their existence - that is to lend to needy people. "As per the extant rules, these banks can only lend to people by making them members. But according to a Supreme Court order, the administrators are not empowered to enroll new members. Their presence in the UCBs now makes it difficult for the banks to lend to new customers which is their core business," said a source preferring anonymity.
Moreover, he said, putting in administrators will create potential governance issues as they are empowered to take decisions single-handedly unlike the governing council where the 13-member committee including the chairman decide on advances, capital mobilization, recovery, etc collectively.
There are 37 UCBs in Rajasthan with more than 200 branches having deposits of Rs 6,000 crore and advances of Rs 3,600 crore (2015-16).
When TOI spoke to Abhay Kumar, secretary, cooperative department, Rajasthan, he said the government is currently working on new guidelines and after their notifications, elections will be held to the UCBs' GCs. However, he didn't give a definite timeframe.
The UCBs have now started protesting against these appointees and allege that they only serve the purpose of their political masters. "Instead of making efforts to conduct elections, the politicians now want to control these banks through administrators of their choice. Though appointed by the cooperative department, these administrators will be serving the interests of the political lobby," said an official at one of the UCBs, requesting anonymity.
Despite several attempts, TOI could not reach cooperative minister Ajay Singh Kilak.
Governance in cooperative banks is a big challenge for policy makers because of the dual control system. These entities not only come under the regulatory provisions of the state governments but also have to follow the RBI norms because of their deposit-taking and lending nature of business.
In July this year, RBI governor Raghuram Rajan had said, "There are some very successful cooperative banks, on par with any universal bank, but far too many suffer from governance problems. The RBI has been engaged in bringing stronger governance to urban cooperative banks, but split supervision with state authorities limits how much it can do."
The lack of uniform criteria behind the appointment of the administrators has also cast aspersions on the motive of the government.
"There is a complete chaos in the way the administrators are put in place. Even inspectors are appointed as administrators. Malviya Urban Co-operative Bank with a business size of Rs 180 crore is now headed by a non-gazetted administrator. What would happen to such institutions if they are not governed by an efficient administrator," said another source.
There are also instances of political decisions on whether to appoint an administrator or not. "The Jhalawar Nagrik Sahakari Bank in chief minister Vasundhra Raje's constituency does not have an administrator even though the tenure of the UCB's governing council has expired," said one of the sources cited above.
Although the UCBs come under the regulatory supervisory of the state cooperative department, the ownership lies in multiple individuals who have put in equity.
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Urban co-operative banks cater to a niche segment of people who cannot open accounts in regular commercial banks, which require a much higher minimum balance. While the government doesn't have any stake in these entities, it regulates them under the provisions of Co-operative Societies Act. Administrators are appointed in these banks when there is fraud, financial irregularities or issues related to governance. But in the current situation, the reasons are related to new rules, which are yet to be formulated and notified even though amendments have been made to the Act in April. An administrator can only help the bank perform its bare minimum duties. Sometimes, not even that. For example, a bank cannot attract new customers as the administrator doesn't have the power to provide membership. That's why appointing government nominees should be the last resort.